Monthly Archives: October 2008

Inventory Management Softens Tough Times

With greater supply chain instability, driven mostly by the soaring price of oil, but exacerbated by the rush to outsource manufacturing, comes a growing need for leaner, meaner, inventory management, as pointed out in a recent Supply Chain Brain / Global Logistics & Supply Chain Strategies article that was taking another look at inventory planning and optimization.

The article points out that solid inventory management strategies are an important component of your overall risk mitigation plan, which hopefully you are working on considering a recent Aberdeen survey found that 99% of companies have experienced a supply chain disruption in the last year and that over half of suffered a financial loss because of it. To that end, the article highlighted a number of strategies that you should be exploring.

The first strategy it highlighted was the practice of inventory swaps between nominal competitors who help each other out in regions where supply suddenly becomes low or demand spikes unexpectedly. Most raw materials are used for multiple purposes in multiple industries, and it shouldn’t be too hard to identify companies that are not direct competitors that you can hammer out inventory swap agreements with.

The second strategy it recommends is my personal favorite, inventory optimization. However, it’s important to note that you need to do multi-echelon inventory optimization across your supply chain, as pointed out by this Supply Chain Digest article, because you need to see the big picture. Otherwise, you’ll overstock some locations, understock others, and lose out on real cost savings opportunities.

When you have multiple locations, you have to see the big picture and remember that you do not need as much safety inventory at a set of locations that are all in the same region as you might think you need. It’s often a better decision to risk having to ship inventory between warehouses than to risk an overstock that will result in obsolescence and a material loss in addition to the losses incurred by unnecessarily tying up too much working capital.

The third strategy, brought up in both articles, is better forecasting. The best inventory plan in the world is useless if the forecasts are way off. Be sure to pull in sales data regularly and revise your forecasts at least monthly to account for unexpected demand spikes, demand reductions, competitor new product introductions, seasonal demand shifts, and other unexpected variables that can require a forecast update to prevent unexpected losses from overstocks or understocks.

The fourth strategy is to consider network re-design. If you have too many warehouses, or too few, you could be losing money on the associated warehouse overhead or on extraneous transportation costs.

A fifth strategy, if you have excess inventory, is to donate it. As per this recent S&DC Exec article, the benefits of donating excess inventory are fourfold. It helps you reduce taxes (under section 170 (e)(3) of the U.S. Internal Revenue Code), it frees up warehouse space to store more inventory of products that are in higher demand, it avoids liquidation problems (that will appear down the road), and it can fulfill your company’s philanthropic goals while generating goodwill.

Just remember, inventory is cash. Too much, and you’re tying up too much of your precious working capital. Too little, and you’re losing the cash that results from sales. So get your inventory in order, and in addition to reducing your risk, you’ll probably save quite a bit of cash in the process. Like Home Depot, who estimates that better inventory management could save them 1.5 Billion a year. That’s a lot of bling.

Are the Only Opportunities for SMEs Opportunistic?

I recently came across an article in Chief Executive titled opportunities for SMEs in the downturn, which I thought would be a good read. I don’t know if it was good, but I was shocked by what I read. Although everything the author said was true, I was shocked at how the entire article focussed on gains that come solely from the losses of others. I know some people think business is ruthless cut-throat every man for himself, but I believe that it is possible to make gains without slitting your competitor’s throat and possible to get a good deal without forcing your supplier to the brink of bankruptcy. Maybe it’s naive of me, and that’s why I’m just a blogger and not a CEO of some big tech company … but for now, I’m going to think that way because the alternative isn’t very attractive.

Basically, the author laid out the following opportunity “gold mine” opportunities for SMEs:

  • Scoop up the nuggets of talent among the layoff streams
    There will be some really capable and talented people coming onto the job market over the coming months. … Grab them if you can and augment your current team. If necessary replace a ‘5’ with a ’10’ … and score big despite the global talent shortage.
  • Swoop in and steal your competitors’ customers who fall by the wayside during a downsizing or restructuring.
    Some of your competitors will likely cut back on sales and support as a reaction to slowing sales and adjusted-downward financial projections. When this happens, likely the support level for a few customers will drop noticeably and you’ll have a chance to lure them away with better customer service.
  • Swoop in and steal your competitor’s customers who need better applications your competition can no longer provide.
    Some of your competitors will likely cut back on development as a reaction to reduced sales. New product development will fall by the wayside. This is your chance to steal your competitor’s customer from under their nose.
  • Look for ways to add value to your existing product or service.
    Then up-sell your customers to extract every last penny they own.

I know this is classic, and rock-solid, business strategy, but what I’d like to know is why these strategies weren’t promoted:

  • Reduce your cost of operations, and your prices accordingly.
    Everyone wants a great deal, and in a down economy, everyone needs a great deal. If you can cut your operating costs, by applying good supply and spend management practices, and then reduce your prices, the customers should come to you.
  • Increase your efficiency, and increase your support level.
    Have multiple tiers? Unexpectedly promote your bronze customers to silver, your silver customers to gold, and your gold customers to platinum if they have been with you for two years. They’ll appreciate that and you’ve just gained customer loyalty … at no cost to you if you’re operations are more efficient.
  • Innovate.
    Better products. Better services. How can you go wrong?

Because these strategies work if the market is up or down, and, to me, that’s better for the long-term health of your business.

Web 2.0 is Dead! Good thing B2B 3.0 Takes Business Intelligence Out of IT’s Hands and Into Yours

Loren Feldman of 1938 Media is right! Web 2.0 is Dead! Good thing there’s B2B 3.0 to pick up the slack!

Scanning through the past few months of ZDNet’s Tech archives, I came across this commentary by Sid Probstein, CTO of Attivio, one of the many companies popping up in the “semantic web” and “enterprise search” spaces that is likely a competitor to Endeca, a company you’ve probably read about on Spend Matters. While I’m not going to comment on either solution, both of which appear to me to be a merger of traditional OLAP BI engines with better rules engines (which give the user more flexibility in both the definition and application of business rules for data segmentation and reporting), I definitely agree with the premise of the commentary, that IT’s involvement in Business Intelligence (BI) will diminish in time as business users adopt new technologies to quench their thirst for information, and believe that it will happen as these users adopt more and more B2B 3.0 technologies.

I really liked how the article got straight to the point.

Today’s mainstay BI tools are extremely good at tracking raw transactional numbers like sales figures and profit margins. What they fail to adequately address are the root causes, or drivers, of trends in those numbers. Moreover, they are typically able to tell what happened — but not explain why (unless it is evident in some other numeric data), let alone alert the business as a change emerges. … Answering these types of questions with the average BI tool is challenging: at best, it takes a great deal of time to gain even one additional level of insight.

Furthermore,

The cost of these investigations is often high. Large numbers of IT staff must collaborate to extract, transform and load the data into a warehouse, update data dictionaries and then reconfigure the layers of OLAP, summarization, reporting and dashboarding. Despite these efforts and a slew of recent corporate acquisitions, many questions remain beyond the reach of such systems.

Thus,

To provide greater value, BI tools must evolve in two ways. They must enable users to answer deeper … questions about the enterprise. Then they must make it possible for general business users to easily obtain information.

Hear, hear! I couldn’t have said it better myself!

Real BI allows you to aggregate all of the relevant information that you need to make a decision into a single coherent view, just like Vinimaya does for procurement professionals who need a single integrated catalog; real BI allows you to build the spend cube you need, on the fly, with derived dimensions, on multiple data sources, in real time, just like you can with BIQ; real BI gives you access to the global trade rules and global trade systems in real time, like Integration Point; and real BI lets you inspect, classify, and take actions on your transactions in real time based on rules you define, which the new search-based BI engines like Attivio allow you to do.

And finally, B2B 3.0 Simplifies B2B for Suppliers and this enables buyers!

The Truth About RFID … as the doctor Sees It

I recently encountered yet another RFID article that took a look at how RFID will impact supply chain optimization and control and decided that I just can’t ignore the subject any longer. As you have probably guessed from that first sentence, I’m not a big RFID fan. It’s yet another technology that greatly over-promised and greatly under-delivered, and it did this for two reasons. ( 1 ) The promises were outlandish with respect to what the technology actually does and ( 2 ) the technology, by nature, is not as “plug and play” as the vocal proponents would have you believe.

RFID, which is short for Radio Frequency IDentification , is a method of “automatic identification” that relies on storing and remotely retrieving data using RFID tags or transponders. These tags generally contain an integrated circuit for radio-frequency signal processing and an antenna for signal receipt and transmission, however some tags are read-only and do not contain an integrated circuit for signal processing.

RFID proponents promote the use of RFID tags for supply chain use because they improve the quality of material location/movement data versus current data collection technology and this provides more accurate data delivered to existing ERP systems that drive supply chain optimization systems. As a result, forecasting, master production scheduling, and distribution resource planning can produce better, timelier and more granular outputs based on more accurate, near real-time inventory and/or material movement. In addition, RFID allows manufacturers to keep in contact with, or at least “hear” from, their material as it moves through the supply chain.

The idea is that since the tags can automatically be read by readers at each checkpoint in the supply chain, the data is immediately available for processing and immediate transmission to your systems. And even though real-time data is valuable, and the benefits of this real time data that RFID proponents promote are significant, the fact of the matter is this: you don’t need RFID to know where your goods are in a supply chain and when they hit a checkpoint. You can just as easily slap a plain-old fashion barcode on every box and get the same results. Of course, you’d need someone at each step of the supply chain to scan every box, but as long as the systems are properly configured, the data could still flow automatically up and down the chain. The advantages of RFID are efficiency and human-error reduction, and that’s it. It’s more efficient because, as long as the scanners are properly configured, and the goods properly passed through the scan points, the tags are automatically read for the whole pallet simultaneously. It’s less prone to human error, because, as long as the tag is properly attached to each box on the pallet, it will be read automatically at each point and you don’t have to worry about a human missing a barcode or two each time the pallet is supposed to be scanned in full.

Therefore, RFID is valuable if, and only if the savings that result from increased efficiencies and reduced human error outweigh the costs of its implementation, which not only include the up-front equipment and installation costs, but continued costs associated with maintenance and each and every RFID chip. But it’s not going to save you a fortune … its the systems that you buy to take advantage of that extra data and optimize your chain that are going to generate significant savings, and, as a I pointed out above, they don’t care if the data comes from an RFID chip, a scanned barcode, or, if you want to go back to basics, a human operator typing in a box or pallet number into a terminal that automatically propagates the data up and down the chain.

I guess what I’m saying is, before jumping on the RFID bandwagon, see it for what it is, talk to your industry peers about the increased efficiencies they saw, and do the TCO calculations before committing to it. For most operations, I doubt it’s the best thing you can do to save money.

IT Enables Big Savings

A recent article on managing IT in a downturn in the McKinsey Quarterly had a couple of great points.

1. In some instances, IT investments deliver more value to a company’s top and bottom lines — by creating new efficiencies and increasing revenues — than any savings gained from traditional IT cost cutting.

2. The impact on run-rate EBIT from optimizing supply-chain processes with streamlined systems is 3 to 4 % … which is 6 to 8 times the impact on run-rate EBIT from transactional IT cost reduction which tops out at 0.5%.

In other words, you get more bang for your buck from process improvements than from reactionary across the board budget cutting. The reality is, as the article points out, simplistic cuts, applied across the board, may endanger critical business priorities from sales support to customer service and could cripple your IT and supply chain operations.

Where do you start? With your data of course! As the article notes, few companies have successfully capitalized on the explosion of data in recent years. Often this information, residing in separate IT systems or spread across different business units, has never been mined for insights that could add value. So you start with a spend analysis and opportunity assessment. Then you tackle the opportunities with the largest savings potential first.

Then what do you do? You implement the right systems to streamline your operations. This will allow you to get more of your spend under management and tackle more of the savings opportunities that you identify.

Then you see real savings. And while your understaffed competitors are running around like chickens with their head cut off, because they foolishly cut across the board and lost key people and resources, you’re growing your market share.