Monthly Archives: April 2011

Tompkins Associates and the Next Generation Supply Chain, Part III.1

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:

  1. Reduce COGS (Cost of Goods Sold)
  2. Improve Speed and Productivity
  3. 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.

Plan

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.

Buy

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.

Make

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

Move

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

Store

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
  • postponement
  • value-added services
  • returns management
  • freight spend reduction
  • growth management

Sell

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

Return

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.

Don’t Fear New Technologies

This byline in a recent Industry Article on “five things you need to know about material handling” is an article in itself. It’s bad enough that most companies think they can’t afford new technologies and put upgrades off until they’re so far behind the curve that the upgrade is a multi-million dollar effort because everything has to be upgraded, and usually all at once, resulting in a big bang project that, more often than not, blows up in their face. It’s even worse when they fear new technologies. Good technology saves time, money, and enables the identification of opportunities that would never be noticed otherwise.

This isn’t to say that you should buy every module that a sales person will throw at you, but that you should look for the solutions most appropriate to your needs, buy them, implement them, and profit from them. Becuse, without the right technology, as the article points out:

    • you’ll never know you have too many lift trucks
      which results from not optimizing fleet management for maximum uptime and efficiency
    • you’ll never know that some trade-offs are only illusions
      and disappear when you use optimization to identify a third transportation option that saves time and money
    • you’ll never know that capital equipment can be more than capital equipment

and that it can be an ongoing expense as the initial cost of most equipment these days is only a fraction of the total lifetime cost when maintenance and operation is factored into account, and this is as true for computing technology as it is for lift trucks; an average PC costs much more to operate over its lifetime with today’s energy costs than it costs to buy it

So don’t fear new technology. However, remember that a commodity is a commodity and you’re not looking for a partner. I have to disagree with the author, who works for a vendor, on this point. Sometimes you just need a PC, or, in this case, a lift-truck.

Tompkins Associates and the Next Generation Supply Chain, Part II

In yesterday’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 Profitable Growth.

There are two primary methods by which a company can achieve profitable growth:

  1. Capture New Customers/Markets
  2. Outperform Competitors

Capturing New Customers and Markets

There are four primary types of strategies a company can use to expand its marketshare. From low risk to high-risk, these are:

  1. (Increased) Market Penetration
  2. (Further) Product Development
  3. Market Development
  4. Diversification

Each of these requires appropriate supply chain strategies to implement.

Increased Market Penetration usually comes as a result of an initiative to improve price, availability, or customer service — each of which depends on a supply chain contribution. In the first case, the supply chain will have to cut costs to allow for lower prices. In the second case, the supply chain will have to redesign to allow for further replenishment at hot points. In the last case, the supply chain will have to improve the return, repair, and replacement process to allow for faster, and better, customer service.

Product Development requires the supply chain unit to not only identify potential sources of supply but to model the potential costs associated with a design decision because up to 80% of the cost can be locked in at design time. If one design limits supply to pricey raw materials and high cost component manufacturers but another design allows for lower cost materials and a broader range of component manufacturers, the supply chain needs to steer design into the latter direction. A good product development strategy address the road-map, portfolio, product architecture, knowledge management, IP, and talent required for an effective end-to-end product lifecycle.

Market Development requires the supply chain to broaden its geographic base from a supply or distribution perspective and build a successful global operations model. If the new customers are in a new country, then not only will the supply chain unit’s expertise be required to set up distribution channels, which will likely include temporary warehousing locations, but the expertise will also be required to determine if the company should be manufacturing locally as well as selling in the local market.

Finally, Diversification, which often takes the form of a merger or acquisition for quick market entry, requires the supply chain unit to identify which competitors have supply chains that could be integrated smoothly with the company’s supply chain in a way that would improve efficiency and/or reduce cost.

Thus, a business can only obtain profitable growth in new customer or market segments with an appropriate contribution from the supply chain unit. So how does the business identify the right opportunity, which is the one that both the market and the supply chain is ready for? It uses a set of five filters to analyze each possible strategy: the basic value filter, the market filter, the strategic filter, the company-specific filter, and the supply chain filter to sieve out the right opportunity. (For more information on the filters and their application, see “Leveraging the Supply Chain for Increased Shareholder Value”.)

The other option a company has for profitable growth is to outperform competitors. A company is only capable of outperforming its competitors if it has a better understanding of the customers’ needs and wants than its competitors and delivers on those needs. In order to gain this understanding, a company has to continually be monitoring the market and collecting information on market trends, customer responses, and buying patterns — which come from POS (Point-of-Sale) and supply chain visibility systems. Hence, it is again the supply chain that provides the most critical information — what the customers are buying from the product line, and, most importantly, what they aren’t.

It is now easy to see the criticality of the supply chain for any company that wants to achieve profitable growth. In our next post, we’ll discuss the next objective of the Supply Chain Value Creation Framework, Margin Efficiency.

You Don’t Have To Be Big To Be Sustainable

It’s nice to see a big publication like Inc. address the issue of sustainability in supply chains. It’s even nicer when it says that smaller supply chains without the financial means to make an aggressive push towards sustainability can still take gradual steps to be more socially, economically, and environmentally responsible, as it did in a recent article that addressed How to Build Sustainability Into Your Supply Chain.

Going after the low-hanging frutit of transportation and sourcing efficiency is a big step. Transportation is among the most unsustainable processes in an average supply chain as there are no viable long-distance shipping options that don’t rely on fossil fuels. While plants can be powered by wind, hydro, and solar energy, trucks, planes, and trains still require fossil fuelds. Thus, minimizing shiping distance, and the need for shipping in the first place, takes a lot of waste out of the operation and makes it sustainable.

Another easy step, as the article points out, is to minimize waste. Many manufacturing by-products can be reused or recycled, and can often even be resold to companies that can reuse or recyle them, turning (the) cost (of waste disposal) into profit.

Yet another easy step, not pointed out in the article, is to install timers and motion sensors and automatically turn off lights, heat, cooling, etc. when it’s not needed. A considerable amount of your energy is wasted heating and cooling space that no one is using.

Even if you can’t transform your operation overnight, you can still green it considerably taking baby steps.

Tompkins Associates and the Next Generation Supply Chain, Part I

About the same time that CAPS Research and A.T. Kearney were releasing their study on “Value Focussed Supply: Linking Supply to Competitive Business Strategies” (which was discussed extensively on SI in VFS: Will Yet Another Acronym Solve Our Woes?, VFS Enablers: Competitive Enablers in a New Wrapper, VFS: Accident or Planned?, VFS Level 1: Eliminate Value Leakage Part I and Part II, VFS Level 2: Increase Current Value, VFS Level 3: Create Tomorrow’s Value, VFS Level 4: Stretch for Added Value, and VFS: Are You Ready) and not long after Dalip Raheja of The MPower Group (TMG) declared the need for Next (Supply Chain) Practices in his much debated post on how Strategic Sourcing is Dead (which was followed by his declaration that The Sourcing Emperor Has No Clothes, his contribution to the Strategic Sourcing Debate in Part IV, and his invitation to The Wake for Strategic Sourcing), Tompkins Associates quietly released a 41-page white paper on “Leveraging the Supply Chain for Increased Shareholder Value” that declared the need for a new Supply Chain Value Creation Framework and a renewed focus on business value in the supply chain. Stating that the supply chain needed to move away from a cost focus to a focus on value, Tompkins Associates defind three objectives for the supply chain — profitable growth, margin improvement, and capital efficiency — and went on to describe the actions that a modern supply chain could take to achieve these goals … actions that aligned nicely with the CAPS and AT Kearney Value Focussed Supply paradigm and echoed the need for Next Practices and Next Generation Sourcing.

The importance of supply chains and their effectiveness, or lack thereof, has never been more apparent. A single supply chain disruption can cripple, and even bankrupt, your business, and a single failure in quality control can turn into a PR nightmare overnight with effects just as deadly. But even worse, lack of value creation on a daily basis will slowly eat away at profitablity and the life blood of the company.

But this doesn’t have to be the case as good supply chains drive value, which ultimately reaches shareholders and investors. It is the supply chain mega process, Plan – Buy – Make – Move – Store – Sell – Return, that comprises the core operations of most businesses, and the four supply chain information flows — Materials/Product, Information, Cash, and Work Flow — that determine the effectiveness and efficiency of overall business operations. Thus, a well oiled supply chain greases the rest of the business and an efficient and profitable supply chain lays the foundation for an efficient and profitable business.

A supply chain that uses a Value Creation Framework, such as the one presented by Tompkins Associates in their white paper, and that focusses on Profitable Growth, Margin Improvement, and Capital Efficiency can deliver significant and lasting value to the business simply by adopting and executing on value enabling actions. The whitepaper outlines six primary types of value enabling actions and then dives deep into implementation strategies that your organization can use to create value in the supply chain. The next four posts will discuss some of these actions at a high level and outline 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.