Category Archives: Supply Chain

Why a Sourceror’s Job is Never Done!

As pointed out in this recent piece on “responsive supply chains thru flexible warehouses” over on the ChainLink Research site, “optimal” does not last long. Demand changes, product mix changes, freight costs change, available carriers change, available suppliers change, raw material costs change, and so on.

It’s not just the warehouse. It’s the end-to-end supply chain operation. That’s why it’s crucial that not only are sourcing projects conducted for each category consistent with the cost cycles (and, specifically, when they tend to hit their low points if the organization is able to source at that time), but that each time the project is conducted, serious effort is put into analyzing and optimizing the buy. Because if the organization simply makes the same decision it made last time, it likely is not making the optimal one.

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From the Brink to Cash in the Bank – Supply Chain Management Can Save You Too

The SCMR is back, Quinn is still in charge, and it looks like he’s striving to maintain the quality that the SCMR was known for. I was quite impressed with one of the first articles on driving a turnaround in tumultouos times, which presented a case study on PolyOne and how it came back from the brink of bankruptcy. In March of 2009, it’s share price reached an abysmal low of $1.32. On May 27, it was $10.19. That’s an eightfold improvement in a little over a year and the reason analysts are now recommending it as a buy.

In the past year, it generated $218 Million of free cash flow and reduced its net debt by $233 Million. This is very significant given that it’s sales in 2009 were only 2.061 Billion as it means that PolyOne not only freed up 10% of their total sales for working capital but also managed to direct over 10% of their total sales to reduce their net debt. Plus, not only is their long term debt only 60% of what it was in 2005, but they went from a net loss of 273 Million in 2008 (when sales were 33% higher) to a net income of 68 Million in 2009, an incredible turnaround.

So how did they do this? Great supply chain management. Specifically:

  • Manufacturing RealignmentA series of mergers and acquisitions left PolyOne with over 40 global production facilities, considerably more than it needed to meet demand and mitigate risk. A detailed network analysis indicated that they could more than meet demand and mitigate risk with only 80% of manufacturing capability. This allowed them to close nine production facilities and significantly decrease operating costs.
  • Inventory ReductionAt the end of the third quarter in 2008, the company was carrying $331 Million in inventory, a number equal to 16% of sales in 2009 and an incredible cost. They undertook a two-day Kaizen event to identify opportunities to reduce inventory and cash-to-cash cycle times that identified consignment inventory reductions, opportunities to reduce costs by way of distributors, better inventory transfer practices with key suppliers, and opportunities to improve reorder points. Specifically the first thing they did was kill the re-order points that were on autopilot in the SAP MRP, which didn’t reflect the plummet in demand that came with the economic downturn. Moving to regular, manual review, helped them reduce inventory by $139 Million in just six months.
  • Process ImprovementsThrough numerous process improvements that included inventory stratification, PolyOne also reduced DSI, which dropped from 55 days in first quarter to 37 days in third quarter, while improving on-time delivery.
  • Greater Customer FocusManagement established the mindset that on-time delivery was critical and by improving customer focus, PolyOne improved on-time delivery from 81% in 2005 to 93% in 2009, a 15% improvement.

In short, it was supply chain that saved the day, and its the best practices described in this blog that will get you there. Get a strategy, manage your finances, lean your supply chain, improve your forecasts, optimize your inventory, analyze your opportunities, adopt e-Sourcing, and optimize your awards and you too can go from a net loss of 10% to a net income of 3% literally overnight, on your way to becoming a best in class supply chain company.

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How Will McKinsey’s Five Reshaping Forces Affect Your Global Supply Chain? Part II

Our last post overviewed a recent article in the McKinsey Quarterly that discussed the “five forces reshaping the global economy” that every executive has to grapple with, which left the reader with as many questions as answers. This post will attempt to shed some light in the directions the answers may lie.

The following are the forces that were identified:

  1. Growth and Risk Management in Emerging MarketsMultinationals will have to get in on the ground, attract local management talent, and let the local management talent craft an appropriate strategy for the local market. The multinationals that don’t do this will likely miss out on most of the growth opportunities that are available as the current economic climate, coupled with declining population growth, will significantly limit growth opportunities in developed markets. As a result, your supply chain leaders will be working considerably with local talent in analyzing product costs and sourcing for remote developments.
  2. Labor Productivity and Talent ManagementMultinationals will have to look to developed countries for R&D talent, engineering capability, and innovation and focus on grooming talent in emerging markets to manage the new breed of talent available to them. In addition, management will have to double down on new technology, process innovation, and alternative delivery models to maintain productivity levels with a decreasing workforce in developed economies. Sourcing teams will continue to become global. At first, the team leaders will be in the developed world, and the supporting analysts, with the technical and mathematical skills, will be in emerging markets. (A couple of big consultancies are already very successfully applying this model today.) As time goes on, your leaders will move to emerging markets (following IBM’s example), and the leaders of tomorrow will be just as likely to be in Shanghai as Chicago or London.
  3. Global Flows of Goods, Information, and CapitalMultinationals will have to learn how to maximize efficiencies in existing trade flows as current global economic conditions will likely slow down the introduction of new channels and opportunities. They will need to adopt trade management software to automate manual processes, decision optimization to optimize carrier and route selection, and “spend” analysis to analyze trade data to identify emerging trade patterns that they can take advantage of. Your supply chain will increasingly see solutions developed by Asian multi-nationals, like Algorhythm and Zycus, implemented by local consulting powerhouses, like InfoSys and Wipro.
  4. Natural Resource ManagementCompanies will have to design new products with resource and environmental management in mind, or risk incurring additional costs, and bad press, in the future. Even if the up-front costs are higher, decisions not to use more environmentally friendly materials and processes will have to be very carefully considered. In addition, identifying the effects of forthcoming regulations in India and China will become a top priority.
  5. The Increasing Role of GovernmentsCompanies will have to continually analyze the potential impact of major government programs on the economy and GDP and determine the best markets in which to pursue not only new product introductions (NPI) but new product development (NPD).

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How Will McKinsey’s Five Reshaping Forces Affect Your Global Supply Chain? Part I

A recent article in the McKinsey Quarterly, that summarized some of their global survey results, tackled the “five forces reshaping the global economy” as executives are still grappling with how to seize the opportunities of an interlinked world economy. It provides some good information and insight, but leaves one with as many questions as it provides answers. This post will summarize the five reshaping forces and the next post will attempt to shed some light in the directions the answers may lie.

The following are the forces that were identified:

  1. Growth and Risk Management in Emerging MarketsEmerging markets and their young and growing populations will not only raise consumption, but will also become the major contributors to the global talent and innovation pools. However, most multinational executives in developed economies still aren’t betting on significant revenues from emerging markets for at least the next five years.
  2. Labor Productivity and Talent ManagementDeclining birth rates and greying workforces in developed economies are impeding growth, mandating the need for major gains in productivity just to maintain stability. Developed economies are already projecting significant talent shortfalls in management, R&D, and strategy.
  3. Global Flows of Goods, Information, and CapitalThe relatively free flow of goods and capital in recent years drove globalization to unprecedented heights, but the economic downturn and global financial crises appear to be preventing further growth. Most executives do not expect more than moderate increases in the short term.
  4. Natural Resource ManagementIncreasing constraints on supply or usage of natural resources continues to affect companies’ bottom lines in the developed world. A significant number of executives, 25% on average and 45% in energy and manufacturing, expect this trend to have a negative effect on profits.
  5. The Increasing Role of GovernmentsExecutives in North America and Europe are haunted by the perception of crippling public debt levels created by the government and expect that the net impact on GDP growth in their home markets will be negative.

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Don’t Forget to Take Advantage of LKE When Upgrading Supply Chain Assets

A recent article over in Inside Supply Management is “shining a new light on asset reinvestment” by pointing out that many companies can save as much as 44% of sale proceeds if they use like-kind exchange (LKE) or “1031” exchange to defer capital gains tax on sold assets when the sale is being used to generate cash to buy new, similar, assets to replace deprecated supply chain assets.

If you plan reinvest the the funds from the same of an asset in a similar or like-kind asset within the IRS established timelines to identify and purchase the replacement asset and conduct the transaction through a qualified third-party intermediary, then you defer the capital gains tax. This can save your organization a considerable amount of money over time if you’re selling over a million dollars of depreciated assets each year as you bring new, like, assets into the mix. As per the example in the article, if you sold $2 Million worth of assets each year and replaced them with like assets, after five years, that’s $10 Million worth of assets sold. If you ended up paying the equivalent of 40% in taxes, that’s 4 Million dollars you lost from cash-flow if all of the assets were replaced.

Seems like a no-brainer to me, especially since it will only cost a few thousand a transaction to have a qualified and knowledgeable legal or accounting firm act as the qualified intermediary, which is a fraction of what you’ll save when you’re selling Million dollar assets.

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