Category Archives: Supply Chain

Do We Have to Send CPOs to Disney for Training?

According to Steve Hall of Procurement Leaders, who was busy blogging while most people were off on summer vacation, the CPO’s challenge is to re-imagine supply chains. Traditional transformation is just not enough – you have to come up with radically different designs. You have to do for supply chains what Walt Disney Imagineering does for Disney – blending imagination and engineering in a unique way to create unique experiences with their creations.

It seems that according to Steve, rapidly escalating issues such as material shortages, commodity price volatility, increasing government regulation, and financial risk in the supply base cannot be tackled by current supply chains unless they are suitably re-imagined. I’m not sure I entirely agree.

It’s not that I disagree that CPOs will need more imagination, and more engineering skills, in the future, but we must remember that:

  • material shortages happen all the time as a result of natural disasters, unexpected spikes in demand, etc.
  • commodity prices go up and down as a result of shortages, or expected shortages, or expected surpluses
  • government regulations are never-ending – going back decades
  • financial risk has always been there – it’s just at a high-point now due to global economic instability

In short, these risks are not new. They’ve been around since trade began, we’ve had, and developed, methods to deal with them since trade began, and we’ve survived. The only difference now is that all four risk categories have simultaneously hit (near) all-time highs — and the situation is only expected to get worse. Plus, whereas shortages always disappeared in the past when production ramped up, in some categories, either due to space restrictions, climate issues, or production issues, the shortages are not going to go away any time soon. In some areas, there is only so much suitable farmland; in others, the climate is no cooperating, and others still, we can’t mine the materials as fast as we need to concern them. So, in these cases, we are going to have to engineer products to use less of these materials, or alternate materials, but this is as much of an engineering challenge as a supply chain challenge (and proof that Supply Management needs to be involved earlier in product development and closely collaborate with the rest of the organization).

In short, CPOs will need to use their imaginations more often and be more creative in their solutions when backed into tough corners, but it’s not time to throw away the time-honoured supply management toolkit just yet. We’ve faced many of these problems before (even if it has been a decade or two), and many of the solutions are still relevant.

Is Your Supply Chain OCF? Part II

In Part I, we asked if your supply chain was OCF, and by OCF we meant Operating Cash Flow and not Obsessive Compulsive Finance, although you have to be the latter in order to achieve the former. We explained that, at least from a working capital management viewpoint, it is a better measure of financial health than other financial measures. We finished with a question – How Do You Impact It?

First, let’s look at one detailed formula:

  1. revenue as reported
  2. – (increase in) operating trade receivables
  3. – investment income
  4. – other income that is non cash and/or non sales related
  5. – costs of sales
  6. – all other expenses
  7. + (increase in) operating trade payables
  8. + non cash expense items
  9. + financing expenses

Based on this formula, supply chain can impact:

  • 1. Revenue as Reported
    by creating new value-added services, creating enhanced versions of a product that can be sold at a premium, etc.
  • 2. Receivables
    by creating agreements that allow for faster collection, by factoring, etc.
  • 5. Cost of Sales
    by reducing product and service costs, reducing inventory costs, reducing transport costs, etc.
  • 6. All Other Expenses
    by reducing indirect costs, SG&A overheads, etc.
  • 7. Payables
    by taking advantage of early payment discounting, by reducing amounts owed through reciprocal trade agreement, etc.
  • 9. Finance Expenses
    by taking advantage of market knowledge to obtain best rates, by selecting appropriate currencies (to hedge against), etc.

And the impact can be measured as follows:

Supply Chain Contribution to OCF / OCF

where Supply Chain Contribution is, technically (where all projections are without Supply Chain Contribution):

  • Actual Revenue – Projected Revenue +
  • Projected Receivables – Actual Receivables +
  • Projected Cost of Sales – Actual Cost of Sales +
  • Projected Other Expenses – Actual Other Expenses +
  • Actual Payables – Projected Payables** +
  • Projected Finance Expenses – Actual Finance Expenses

** while this is technically correct from a Finance view who want the organization to hold onto cash longer, from a Supply Chain view it’s usually stupid, as SI has argued for years, because your cost of capital is often lower than that of a supplier and the goal is to lower overall supply chain costs. In other words, the improvement in payables is probably coming at a cost of a greater improvement in cost of sales.

In other words, if Supply Chain Contribution to OCF was 400K and the OCF was 2M, then supply chain contributed 20% and that’s proof in the pudding that supply chain has value.

Is Your Supply Chain OCF? Part I

Is it? Well, if it’s any good, it’s probably Obsessive Compulsive about Finance, but that’s not what I’m referring to. By OCF, I’m referring to the Operating Cash Flow Metric that some are claiming is the right way to measure supply chain contributions to the organization, and, as such, the measure that should be used in place of EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), ROI (Return On Investment), or ROIC (Return On Invested Capital).

Operating Cash Flow refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investments in securities. The IFRS (International Financial Reporting Standards) defines operation cash flow as cash generated from operations less taxation and interest plus investment income received less dividends. The calculation of cash generated involves determining cash collected from customers and subtracting cash paid to suppliers.

The push for OCF contribution, specifically, the measure of how much additional cash was generated or how much cash payment was avoided, as a measure of supply chain success by a few pundits (including David Schneider) is due to the fact that it is a more accurate measure of how much cash a company has generated (or used) than traditional measures of profitability such as net income or EBIT. (Wikipedia)

The rationale is that other measures are (much) more easily manipulated. For example, a company with numerous fixed assets (factories, equipment, etc.) would have decreased net income due to depreciation, but since depreciation is a non-cash expense, the net income amount is not a true measure of the cash position of the company. In addition, since a company can choose to recognize receivables before the cash is received, traditional balance sheets and resulting EBIT(DA) are also not accurate measurements of the true cash picture. And since companies need cash to run (as pesky people want to be paid), cash flow is often the true measure of company vitality.

OCF allows a company to get a much better grip on its working capital than other measures, and since Supply Chain revolves around working capital, the metric makes sense. So how do you impact it?

Stay Tuned for Part II.

Who to Blame if Your Supply Chain Complexity is Spiralling Out of Control?

Management, for demanding ever cheaper costs? No.

Consumers, for demanding ever more variety in your product offerings? No.

You blame information and communication technology, or ICT. We made it all possible. We opened the world up to you. It’s true that you didn’t have to try and conquer it, but you did, and now you have supply chains with complexity spiralling out of control.

And this view is backed up by recent research by Mr. Richard Baldwin of the Graduate Institute of Geneva, which was summarized in a great article in the Economist this summer about Chains of Gold. According to Mr. Baldwin, cheaper communications allowed firms to manage supply chains over ever greater distances. Companies discovered they could build plants in cheap locations, ship components there to be assembled and export the finished product around the world. While the first unbundling separated producing markets from consuming markets, the second broke up production entirely across long, multinational supply chains.

And, in addition to a much faster rate of industrialization of developing and emerging economies, you now have supply chains that are increasing in complexity by the quarter where a single component may be exported several times, adding to tallies of gross trade but not to measures of value added. We have a plethora of Pakled emerging markets that now merely “borrow” technology from rich-world firms, who are incented to limit technology transfer out of fear of theft and unexpected competition.

But supply chains are maturing. As per the article, evidence suggests that supply-chain trade may have declined less and recovered faster than overall trade during the financial crisis, which is promising. So maybe you’ll get that complexity under control after all!

The Real Problem With Most of Today’s Supply Chains?

They’re too fast and too slow.

And no, this is not an oxymoron.

As highlighted in this recent post on Supply Chain Digital, the product life cycle is in decline now that 50% of annual company revenues across a range of industries are derived from new products launched within the past three years at the same time that there are 250 supply chain disruptions to public company supply chains every month (Supply Chain Brain) that result in shareholder value dropping by 10.28% on average (SAS) and that takes the company an average of 50 trading days to recover from.

They’re too fast. There are too many products being introduced too fast. For example, how often do you need a new phone anyway? It’s a damn phone. And a dress shirt is a dress shirt. Now, it’s true that you need to constantly improve computing technology (to keep up with the bloatware), but do you need to change the form factor every year? Sure you need to increase the memory, the processing power, and the storage, but there’s no reason the form factors can’t stay the same — especially since density keeps increasing.

They’re too slow. The average company can’t respond to supply chain disruptions or market shifts fast enough to prevent significant stock-outs, significant drops in revenue, or reputational damages that take it, on average, two months to recover from.

Companies need to balance the competing agendas of innovation, renovation, and reverberation. While constant product innovation is needed, the innovation needs to enhance the product lines and not destroy them. Since research is expensive, the gains from each effort need to be maximized. That means reusing designs, components, and innovations to the extent possible for more than just a year or two.

Furthermore, some things just can’t be reinvented. A toaster is a toaster is a toaster. A new design every year isn’t going to drastically increase revenues and is, to be blunt, a waste of time.

Unnecessary efforts need to be eliminated and redirect to risk management. There’s not enough focus on risk or the mitigation thereof. For example, the benefits of an innovation efforts can be eliminated by the failure of a strategic supplier and the expected profits from a new a product launch can disappear if a supply disruption translates into stock-outs across the board in peak seasons.

In other words, your supply chain needs to slow down and speed up.