Monthly Archives: April 2011

Tompkins Associates and the Next Generation Supply Chain, Part III.2

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.

Today, we are going to continue our discussion of the objective of Margin Improvement.

As noted yesterday, 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

Yesterday’s post dove into reduction of COGS in detail, so today’s post is going to address the margin improvement strategies of increased speed and productivity and tax effective supply chain management.

Not only can a fast company get the products the consumer wants to buy to market faster, but a fast company can:

  • optimize the transportation mode
    using airfreight for dense high-value products like laptops
    and slower ocean freight for sparse low-value products like packing peanuts and take a sustainable approach
  • slot warehouses dynamically
    to increase picking efficiency, reduce labor costs, and adapt to a changing product mix
  • pre-pack orders from suppliers
    to allow for crossdocking, reduced handling, and, ultimately, reduced losses due to product damage from increased handling and re-packing

A productive company, which is continuously improving, is one that has

  • reduced labor costs,
    comparatively speaking,
    as they get more done with less
  • reduced material costs
    as it is constantly updating its rolling forecasts (with foresight to prevent overbuys) and its designs (to use more economical parts and raw materials and improve qauality)
  • better operating efficiency
    as it has not ony defined appropriate metrics, but tracks and updates them on a regular basis

Finally, a company that wants to make the most of its supply chain margins has a tax effective supply chain. As the white paper notes, the worldwide “Effective Tax Rate” (ETR) for a MultiNational Corporation is in the 20-35% range, with the average around 25%. That’s a lot of revenue lost to taxes for a company with a tax-effective supply chain. (Imagine what a company with a tax-ineffective supply chain is losing!)

Tax Effective Supply Chain Management (TESCM) is complex, dynamic, and conflicting as tax laws and regulations change. The allocations and locations of functions, assets, and risks, and decisions on transfer pricing, are inherent to the ETR, as well as to the optimized global supply chain but TECSM can make a significant difference in their company’s shareholder value. Unfortunately, the white paper does not provide any details on how to achieve TECSM due to the complexities and detailed knowledge of tax law and regulations required. However, Ernst & Young published a good article on How to Benefit When the Supply Chain Meets Tax in 2009, which was summarized in SI’s post on characteristics of TESCM, Grant Thornton LLP ran a pair of articles summarizing what to consider in a tax-efficient supply chain a couple of years back (Part I and Part II, summarized in The Tax Efficient Supply Chain), and this post lays out the basics of transfer pricing.

Thus, a company has a large number of opportunities for margin improvement at its disposal and an effective combination can easily deliver double digit percentage returns in an average supply chain. The final part of this series will dicusss the final objective of the Tompkins Associates’ Supply Chain Value Creation Framework, Capital Efficiency.

Vendor Lies

ComputerWorld recently ran a great article on tech relationships gone wrong entitle “lies my vendor told me” which is a must read for anyone buying technology because, you guessed it, some vendors will lie (lie, lie) to get that sale.

We can scale to that level of service.

Just ask the retailer who grew four hundred percent in 4 years only to lose 48 hours of uptime during the critical Christmas season.

Yes we have expertise with this third party system that our product can be configured to run on.

Just ask the publishing company which fell for the vendor’s claims hook, line, and sinker when it said that it had expertise to install and configure remote Citrix systems which its product could be configured to work on (but which it had never done itself).

Yes you need a firewall.

Even though you have no critical data and no data worth stealing.

Of course your IT department can support this!

Why else would we say that you don’t need their involvment? (Could it be because they know for a fact your IT department can’t support the application and that, if you ask, the deal is squashed.)

Yes our cloud platform is mature!

Even though we just bought it from a third party, who threw it together with glue and copper wire, and neither party has any idea how to properly build, maintain, and provide a cloud platform.

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.