In Monday’s post, we brought your attention to Tompkins Associates‘ recent white paper on Leveraging the Supply Chain for Increased Shareholder Value which nicely complements CAPS Research and A.T. Kearney’s study on Value Focussed Supply: Linking Supply to Competitive Business Strategies and echos our cry for Next Generation Sourcing methodologies. A cry which has been taken up not only by The MPower Group (and spearheaded by Dalip Raheja who has declared that Strategic Sourcing is Dead and invited you to the The Wake for Strategic Sourcing) but by BravoSolution (who are rallying the battle cry for High Definition Sourcing and who have given us A Futuristic Look at High Definition Sourcing). We told you how they declared the need for a new Supply Chain Value Creation Framework and a renewed focus on business value in the supply chain, outlined three supply chain objectives — Profitable Growth, Margin Improvement, and Capital Efficiency, and described six primary types of value enabling actions to achieve the objectives before telling you that we would spend the next four posts discussing some of these actions and why Tompkins Associates‘ white paper on Leveraging the Supply Chain for Increased Shareholder Value should definitely be on your reading list as you outline your Next Generation Sourcing strategy.
So, today, we are going to discuss the objective of Margin Improvement.
There are three fundamental ways that a company can improve margins:
- Reduce COGS (Cost of Goods Sold)
- Improve Speed and Productivity
- Practice Tax Effective Supply Chain Management
Reducing COGS involves taking cost out of the supply chain mega process of Plan – Buy – Make – Move – Store – Sell – Return. Thus, the supply chain has lots of opportunities to reduce cost as each stage has multiple costly inputs.
While the white-paper skips over this step, there are lots of opportunities to take cost out in the planning stage. Without going into much detail they are:
- Understand true spend
and identify where the organization is spending money and ask if it needs to be spending money there? Maybe it’s paying for twice as much warehouse space as it ever uses, maybe it’s buying office supplies off-contract at double the contract rate, and maybe it hasn’t even analyzed it’s energy spend.
- Understand true demand
as better forecasting takes cost out of spend across the board, as the organization won’t overbuy (and tie up working capital in inventory) and won’t underbuy (and lose marketshare to the competition)
- Understand true 3rd party needs
and know exactly what skills and equipment are needed by the third party component manufacturers, 3PLs, etc.
Not only can the organization reduce cost by designing the supply chain for the optimal goal — be it lowest TCO / highest TVM, best quality, greatest availability, or maximum agility — depending on the product or service being sourced, but it can should-cost model before the buy to understand precisely what it should be paying (and why) and then apply decision optimization to understand how all of the different cost drivers interact, which will enable it to negotiate the best overall deal.
There are a large number of opportunities to take cost out of the production stage, and go lean, including the following seven opportunities identified in the white paper:
- eliminate overproduction
- reduce waiting time (between steps)
- reduce transport (of raw materials)
- remove unnecessary processing steps
- eliminate excess inventory
- reduce unnecessary motion
- reduce the defect rate
Similarly, there are a large number of opportunities to take cost out of the transportation stage, especially if you redesign your logistics network, and the following seven opportunities identified in the white paper are a great start:
- develop core carrier programs
- implement a TMS (Transportation Management System)
- take control of inbound freight
- outsource various (non-core) transportation management functions
- identify shipment planning and execution opportunities
- rationalize fleets
- improve controls
Inventory represents a huge opportunity to reduce costs, especially since most organizations make a number of inventory management mistakes on a daily basis. In many operations inventory accounts for over 20% of the overall product stock. The white-paper identifies a number of opportunities every company has to improve inventory management and lower costs. The following ten opportunities identified in the white paper are great ways to obtain profitable growth through better storage management:
- strategic positioning of inventory
- product protection
- seasonal buys
- special deals
- quality assurance
- value-added services
- returns management
- freight spend reduction
- growth management
Margin can be improved by improving the perfect order rate and by planning and implementing profitable, differentiated, service programs. A company can create a differentiatd service program by:
- segmenting markets and product groups
- identifying key value points by customer
- identifying consolidation opportunities around the customer
- identifying and creating common processes and systems
The supply chain can take cost out of the return stage by:
- reducing the number of returns (which can be as high as 20% in electronics)
- reducing the cost per RMA (Return Material Authorization)
- improving the return velocity
- capturing residual product value
- deriving value from sustainability initiatives
- standardizing the process
- recovering costs from suppliers (who do not meet defect rate targets) and
- multi-channel visibility
The white-paper provides five great approaches for reducing the number, and rate, of returns and four great suggestions for capturing the residual value of products that should not be missed.
For more information on designing the supply chain for the optimal goal (best price/TCO, best quality, best availability, and agile supply base); improving production, transportation, and storage; creating differentiated service programs, and improving the returns process, see Tompkins Associates‘ white paper on Leveraging the Supply Chain for Increased Shareholder Value. For more information on decision optimization or Should-Cost Modelling, see various posts here on Sourcing Innovation and the e-Sourcing Wiki.
In tomorrow’s post we’ll discuss the other two strategies for margin improvement: improving speed and productivity and tax-efficient supply chain management.