Category Archives: Supply Chain

Giving Your “Ugly” Supply Chain a MakeOver

Is Your Supply Chain “Ugly”? asked a very important question – is your supply chain an “ugly baby” — which it is if your distribution is slow, if your products are unpopular due to quality issues, and, most importantly, if your warehouse and inventory management is in shambles. This is a very important question because a $100 million dollar company can lose $3 million to $6 million a year by the time storage costs, depreciation and disposition costs, and losses are factored in (because it can lose $1 million a year alone on an inaccuracy of just 5%!)

To that effect, as my last post pointed out, if your inventory is not in order, you need to get it in order — fast — because a warehouse in shambles could be your undoing in a down economy. But how do you get your inventory in order? Supply and Demand Chain Executive, who ran the article by Rene Jones of Total Logistics Solutions, Inc. that highlighted the problem, comes to the rescue with an article titled “Get Control of Your Inventory” by Sumit Chandra, Mirko Martich, Shalin Shah, and Kumar Venkataraman of A. T. Kearney who provide insight on getting to the root of the problems, and fixing them.

Inventory management is an enormously complex job these days. Some retailers have to track hundreds of thousands of stock keeping units (SKUs) from thousands of suppliers across hundreds or even thousands of stores and distribution centers. They must also differentiate the products based on consumer demand in local, regional, national and global markets while dealing with inefficient processes and inappropriate systems that only serve to complicate the process. And good inventory decisions must balance five key business drivers: consumer demand, lead time variability, pack mix, merchandising presentation requirements, and visibility.

However, many inventory managers don’t have a clear understanding of what drives inventory levels, don’t have metric-based tools to track the key drivers, and don’t have anyone providing them with this information. Add to this the fact that there is a margin of error for each driver you try to account for, and that most companies don’t have a good forecasting process, and you can easily start to wonder how today’s supply chains can even function! The slightest error in a forecast can be very detrimental, resulting in too much inventory, which comes with unnecessary storage costs and disposition losses, or too little, which results in lost sales. So what can you do?

  • Better Forecasting
    Use good software that can take into account different demand patterns and distribution methods for various markets, as well as the seasonal, geographic and competitive position of each store. And focus on the process, and not just the software or final result. A tightly integrated S&OP process will produce better data, and better forecasting intervals, which will in turn produce better forecasts.
  • Lead Time Variability Reduction
    De-list suppliers with erratic lead times and distributors with low reliability. Track performance data against key metrics, provide regular feedback on performance and introduce supplier recognition programs.
  • Pack Mix Improvements
    When possible, optimize the pack mix size from the supplier. When not (due to complexity or cost), “break-pack” the item at local distribution centers to insure that only the needed level of inventory is shipped to a store.
  • Merchandising Presentation Management
    It might be case that extravagant visual presentations get a potential customer’s attention, but it’s also the case that such presentations can lead to excess inventory. Pack and presentation can increase inventory over a base level by 15% to 25% for an average retailer! In addition, specials on seasonal items can cause dramatic one-time boosts that can disrupt the normal inventory flow. The employment of advanced inventory flow-path techniques to determine cost and service-level tradeoffs can lead to significant savings.
  • Track Inventory Accurately
    Make sure that both outbound flows and inbound flows are carefully monitored by state-of-the-practice inventory management systems. If your system is not tracking and managing returns, you really don’t know how much inventory you have where, and whether or not it is resalable or able to be refurbished – both of which lower your overall inventory costs and losses.

Finally, make sure you have across-the-board visibility into what is where in your supply chain, and where the demands are.

Is Your Supply Chain “Ugly”?

A provocatively titled article in Supply & Demand Chain Executive that stated that “No One Wants to Hear They Have an ‘Ugly Baby'” recently caught my attention. Maybe it’s because, as the article points out, our economy is in trouble, your supply chain is crucial to your organization’s success or imminent failure, and, as the article deftly noted, your warehouse is about to make or break you! Or maybe it’s just because I liked the title. Either way, it was a good article.

It is a down-cycle, and that means, for those of you who aren’t innovating, and instead making the 10 Worst Innovation Mistakes that you can make during a recession, and who are unable to provide the customer what they want, when they want it, and at a price they can afford to pay, you may soon find yourselves out of business.

This means that if your supply chain is an “ugly baby”, that if your distribution is slow, that if your products are unpopular due to quality issues, and, most importantly, that if your warehouse is in shambles, you need to face facts, admit it, and do something about it.

How do you know if your distribution is slow? If it takes your competitor an average of 18 days to get product from Shanghai to their Chicago warehouse, and it takes you 27 days, your distribution is slow. If your closest competitor’s product sells out 3 days after it hits the shelves, and half of your product is still there 30 days later, your product is unpopular. And if received products take 2 days to be put away, if returns sit unattended for weeks, and if your personnel spend more time checking stock than they do processing it, your warehouse is in shambles.

When you consider that inventory can be as much as 20% of top-line sales, that many companies pay 20% to 35% of stock value to store inventory, and that certain types of products may decrease in value as much as 3% a month, it becomes easy to see that a $100 million company could be losing $3 million to $6 million a year with poor warehouse management that keeps too much stock on hand for too long by the time storage, depreciation, loss, and final disposition of remaining, unsalable, inventory is taken into account. (Heck, 5% inaccuracy on your inventory alone will cost you $1 million a year!)

Thus, if your warehouse is operating at anything less than 99% of optimal efficiency, you should do something about it sooner, rather than later, as the investments you make will quickly pay for themselves many times over in reduced inventory related costs. Not to mention the improvements it will generate in employee morale and customer satisfaction. As the author astutely points out, a warehouse laborer making $10 an hour can now spend as much as $100 a week for gas to travel to a job they likely hate. That’s one quarter of their take home income! If they’re not already looking for a job closer to home, unless your job is the best job in the world, they’re going to be very soon. In addition, every time a shipment is late, mixed up, or lost, your customers get a little more irate. They’ll only put up with so much, given all the other stresses they have to deal with in today’s economy, before they go elsewhere.

So if your supply chain’s ugly, admit it, and give it a makeover!

The Tax Efficient Supply Chain

Supply and Demand Chain Executive recently ran a pair of articles on The Tax Efficient Supply Chian Parts 1 and 2) by Giles Sutton of Grant Thornton LLP that pointed out that most companies overlook function-based tax planning where the supply chain is involved. Considering that tax reductions, or even tax payment delays in Free Trade Zones can save a company millions and millions of dollars, and free up millions more in working capital, tax considerations should play a major role in your supply chain, and in your supply chain finance, efforts.

When you consider that tax-planning affects both supply chain steps (including supply, distribution, retail channels, and customer delivery) and supply chain management processes (including procurement, EDI, merchandising, financing, branding, and asset management) and that it applies both above-the-line (taxes that impact operating income) and below-the-line (taxes that impact the income base), it has far reaching implications. Furthermore, as the author points out, tax issues permeate every aspect of identifying, acquiring, importing, transporting, distributing and selling goods and tax planning can impact almost every aspect of the supply chain. This means that tax savings can be almost anywhere. Some of the possibilities that the author points out are the following:

  • Procurement
    Ownership of the transaction is key as it allows the taxpayer to determine the subject matter, value of each component, and the appropriate jurisdiction, because the right balance can minimize tax.

    • in many states, intangible assets are not subject to property tax — thus, including a warranty cost in a capitalized asset unnecessarily increases a company’s property tax base
    • in many states, electronically downloaded software is not subject to sales tax
    • disconnecting volume or contract inducement payments from the purchase of the underlying property can cause sales or property taxes to be overstated
    • appropriate planning can often reduce customs and duties
  • Brand Management
    Brand management also has tax implications.

    • the determination of where branding occurs in the supply chain, and thus where value is added, determines the situs of taxability and the value of goods for import, export, and tax purposes
    • the ability to license and protect IP associated with the brand often impacts the jurisdiction of income taxation
    • the situs of where IP is held impacts the tax costs of dispositions
  • Merchandising and Marketing
    Critical in retail operations, they carry their own tax implications

    • site selection determines property tax
    • capitalization of store design costs have tax implications
  • Finance
    Finance structuring can have significant tax implications.

    • the capital structure of a legal entity can impact its franchise tax profile
    • internal leverage can reduce state income taxes in some jurisdictions
  • Customer Relationship Management
    There are tax implications in building an infrastructure to compile and store customer information

    • there are state income tax implications wherever such data is stored and maintained
    • an ability to license and protect IP impacts the jurisdiction of income taxation
    • capitalization of CRM software has property tax implications
  • Distribution of Asset Management
    Distribution management is more than just minimizing logistics costs.

    • an incorrect valuation of inventory can lead to higher taxes
    • some jurisdictions have sales tax exemptions for transportation equipment in inter-state commerce
    • distribution activities that are not separated into separate legal entities can expose a company’s major profit centers to unnecessary multi-state income taxation
  • Retail
    • the employee-intensive nature can lead to process-based payroll tax incompliance and / or unnecessary over-payments
    • state income tax savings can often be found on international distribution assets
    • inefficiently designed gift-card programs can cause unnecessary escheatment of funds

Furthermore, this might just be the tip of the iceberg in tax savings opportunities available to your supply-chain based business. (I highly recommend you read both of the articles. They are highly informative on the issue.) Especially when you consider the numerous benefits of tax-efficient procurement, which include:

  • prevention of incorrect or duplicative taxation
  • matching subsequent rebates or discounts with original purchases to reduce the overall taxable purchase price
  • structuring the transaction to fit within a statutory or regulatory exemption
  • unbundling taxable items from non-taxable items

In addition, tax-efficient procurement will:

  • improve the sales tax audit trail and reduce the time required to respond to audits
  • allow for more efficient refund claims when errors have been made
  • provide greater certainty regarding tax requirements

So what can you do to create a competitive advantage? The author recommends that you start with inter-departmental coordination in a holistic approach. Tax planning is most effective when your tax planners know in advance what each of the operating functions are planning to do, and what options they are considering.

(Supply Chain) Risk is on the Rise … But You Can Do Something About It

A couple of months ago Marsh released a research report on “Stemming the Rising Tide of Supply Chain Risks: How Risk Managers’ Roles and Responsibilities are Changing”. Although it started off by telling us what we already know, that risk has risen substantially in global supply chains over the last three years, it served to quantify the extreme degree to which risk has risen, with 73% of companies experiencing an increased supply chain risk level and 71% of companies experiencing an increased financial impact from supply chain disruptions (based on a survey of 110 risk management professionals in January and February of 2008).

Furthermore, even though 35% reported that supply chain risk management was moderately effective at their company, not a single respondent said that their risk management practices were highly effective. And 24% said that they still have no formal process to address risk! Considering that a single supply chain disaster could force a company to file for bankruptcy (or at least bankruptcy protection) in today’s market, this is not a good situation!

In addition, the study did a good job of pointing out that natural disasters are not your biggest risk factors. According to the study, the four biggest risk factors were pricing risks, supplier (& supplier delay) risks, risks within your own plants, warehouses, and stores (which, I’d like to remind you, includes fraud risks), and logistics disruptions. Natural disasters are always a threat, but they’re relatively rare, whereas all of the other types of risk are constant.

But there are things you can do. You can:

  • take a strategic role in mobilizing the company against risks,
  • work with risk managers to ensure risk processes are designed cross-functionality and end-to-end (like good end-to-end e-Procurement), and
  • innovate.

And since innovators tend to be top performers, it’s always a great strategy. For more strategies for success, as well as steps you can take to become a top performer, I recommend checking out the full report (registration required). It’s definitely worth a read.

And for more information on risk management, be sure to check out the other posts on the topic here on the Sourcing Innovation blog, over on e-Sourcing Forum, and the wiki-paper on the e-Sourcing Wiki.

The Economist and The Fragility of Perfection

It’s nice to see a major publication like the Economist tackle supply chain, even if the picture painted isn’t all that rosy, as in The Fragility of Perfection. The article, which starts off “ONLY Connect”, the words of the novelist E.M. Forster that tidily sums up globalization today, notes that an international company may buy its software from California, send its data to India, purchase its electronic equipment from China and staff its canteen with workers from eastern Europe. And that this specialization is all fine and dandy, but it depends on one critical factor: the reliability of supply.

This dependence on supply reliability is a vulnerability of the global industrial system, but how bad is it? And more importantly, how bad does it have to be? The article quotes David Bowers of Absolute Strategy Research who draws an analogy between today’s supply chains and the recent boom in structure finance which saw banks distribute risk to specialist vehicles like conduits. These banks worried less about the creditworthiness of borrowers, but the risks ended up back on the banks’ balance sheets when the sub-prime crisis broke. Mr. Bowers believes that just as the banks mispriced credit risk, so companies have misjudged strategic risk. And I have to agree. Way too many companies are single sourcing or running their global supply chains too lean when there are dozens of things that can go wrong. (Why? Some companies don’t understand the risk, and some don’t know how to make good sourcing decisions when multiple companies are involved. But there’s no excuse for either, especially when there are good strategic sourcing decision optimization tools on the market to help a company, by way of constraints, mitigate risks AND save money.)

However, what I really liked about the article is Mr. Bowers’ belief that loose monetary policy in America is leading, via the currency markets, to inflation in developing countries. This, in turn, undermines the cost advantages of outsourcing, as the prices of raw materials and labor rise. I’m sure my fellow blogger over at Spend Matters would agree that poor monetary policies, like free trade restrictions, will only hurt the economy.

Furthermore, disruption to the supply chain is a huge strategic risk. Supply chain disasters have bankrupted companies in the past. Remember Aris Isotoner, Webvan, or Foxmeyer? No? Well, they were destroyed by supply chain fiascos. Although just-in-time inventory levels create savings opportunities, they also cause huge losses when suppliers do not deliver in time. The reality is that the more independence there is in the system, the wider the effects of disruption in any one part of it will be felt. A disruption anywhere in the world could prove catastrophic in dozens of countries simultaneously, as the recent earthquake in China might just do if certain factories stay offline for too long. And the resulting losses could be far greater than the fallout of the recent subprime-mortgage crisis.