Daily Archives: February 4, 2010

Another Way Supply Chain Optimization Increases Profits

A recent article in Supply Chain Brain on Planning and Managing Demand: A Modern Supply Chain Imperative provided a great example of how you could use scenario-based what-if optimization to slash costs and increase profit at the same time.

Another approach [to maximize the profitability of a given inventory investment] is for operations to look at the sales pipeline and see that a customer is currently in the pipeline and is expected to order 50 widgets. What if sales approached that customer with an offer of $1/widget price reduction on 20 widgets if they made a decision within two weeks? Assuming the customer accepted the offer, how much does it impact revenue and profitability?

[Let’s say that] in the original factory order, total revenue would have been $1,500 (100 at $15/widget). Cost of the factory order is $630 (90 at $7/widget) plus $90 (10 at $9/widget) for a total of $720. Margin is thus 52 percent [because a widget costs $5, a $60 container holds 30 widgets and a partial container cost $4 a widget].

[But] what is the situation if the discount offer is accepted? Total revenue for the order would be $1,500 (100 at $15/widget) plus $280 (20 at $14/widget), or $1,780. Total cost of the order would be $840 (120 at $7/widget). Margin increases to 53 percent. By cutting prices the company ends up making more money. Furthermore, it does not impact total demand (since the customer would have made the purchase anyway), but rather it affected profitability and cost, since the customer saved $20, and the company saved an equal amount.

And this is something you could easily figure out with a good scenario-based what-if decision optimization solution that allowed you to adjust prices to see what offers you could make that would benefit you and your customer(s).

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What’s Really At Risk This Year?

The recent SCMR article on Supply Chain 2010 addressed the following as what’s at risk in 2010.

  • currency-driven inflation
    Especially for U.S. based companies … because that’s what happens when you start flooding your local economy with government paper.
  • lengthy recovery
    I thought this was pretty much understood … especially with every major publication running a story on the “jobless recovery” on a weekly basis.
  • more financial crises
    The article refers to the large block of bonds, notes, credit lines, and other paper assets scheduled to mature in early 2011. Then you have all of the government debt, including the 56 Billion in Dubai World that just said it needed to delay payments on the 29 Billion of that in Nakheel for at least six months, and potentially worse situations in Greece or Italy.
  • interruption of supply
    the risk that the supplier will go out of business, cut off the buyer’s contract, or simply run out of product is still there
  • black eye” risk
    is your supplier sustainable, responsible, and fair … or is your supplier producing your products in a sweat-shop in a third world country? (for example)
  • compliance issues
    a government regulator could come knocking down your door if a supplier or manufacturer runs afoul of the law

But these are essentially the same risks we saw in 2009. So what should you really be looking out for? I’d start with a focus on these often ignored risks:

  • lack of global trade visibility
    there’s already 106 steps to global trade, it’s only going to get worse before it gets better, and missing even one of them could cost you Millions in fines (especially since we’re now in the penalty phase of 10+2)
  • lack of flexibility
    you need to be demand driven, on short production cycles, and constructing scenario-driven long term plans which you can tweak at least quarterly as it’s likely going to be a long, rocky recovery to the Old Normal
  • lack of education
    to do more with less, your people need to know how to do more with less, and that means they need to be better educated; fortunately, supply chain is the one area where education can deliver returns in excess of 100:1 so make sure your people get at least a week’s worth of education every quarter

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