As indicated in yesterday’s post, this week will explore the four levels of Value Focussed Supply (VFS) as put forward in CAPS recent research report on Linking Supply to Competitive Business Strategies and the holistic approach put forward by CAPS to get more value out of your Supply Management Association.
According to CAPS, this starts with the elimination of value leakage, and, for the most part, SI is in full agreement (with the disagreements being around where an organization starts plugging the holes). In CAPS’ view, this starts by focussing on four primary components of the balance sheet — revenue, cost, assets, and intangibles — in an effort to find ways to improve them such that the overall corporate position is improved. At this first level of VFS, this means that a company would:
- Protect Revenue
by improving quality and stability of supply
- Reduce Cost
by reducing unit cost and managing demand
- Reduce Working Capital Requirements
by improving working capital management
- Protect Corporate Reputation
by taking steps to prevent the media fiascos that would result if
tainted food or dangerous products were released into the marketplace
and CAPS goes on to give the following examples of:
- working with key suppliers,
- looking at alternate fee arrangements,
- adding better inventory management strategies or early payment discounts, and
- improving testing and quality inspection process.
These are all valid, and great ways, of eliminating value leakage, but, at least in SI’s view, there are some basic steps a company needs to take before it starts these processes. In particular, SI feels that a company needs to start by:
- Identifying Key Revenue Streams
Before revenue can be protected, it has to be identified. Start with a sales analysis to identify the products that are generating the most revenue and then do a cost analysis to determine which of these are, or could be, the most profitable and then focus on these categories as improvements to key revenue streams will be the most effective.
- Understanding Current Cost, Demand, and Actual Spend
Before cost can be reduced, it has to be baselined. Do a spend analysis to determine where money is being spent, what the current demand is, and how much the demand is costing you. This will help you identify which categories need the most effort and which suppliers are really key to your success.
- Understanding and Optimizing Working Capital
Before working capital requirements can be reduced, they have to be understood. What is the current level of working capital required? Why? And how long is it being tied up for, on average? If capital is moving quickly, inventory optimization might not buy the organization much in terms of working capital reduction, in which case it will have to focus on early payment discounts or baseline cost reduction. But if significant amounts of working capital are tied up in inventory, that is the only thing the organization should focus on until the product is fixed.
- Identifying the Risks to Corporate Reputation
If the primary risks aren’t identified, they can’t be protected against. Depending on the type of product being produced, quality might not be the biggest risk to corporate reputation. So a batch of cleaning solution was accidentally watered down by 10%. Is anyone going to notice? Probably not. But if the chemicals used may pose a danger to the environment, then the company has to focus on finding safer alternatives.
SI feels that an organization cannot effectively stop value leakage until it has a good handle on its current situation and has identified where the greatest leakages are. Otherwise, its efforts will likely find only limited success (as the chance of a category having minimal value leakage is just as great as the chance of a category having high value leakage when a category is chosen at random). And even then, there are a few more basic steps a company might have to take but these will be discussed in subsequent posts.