Category Archives: Supply Chain

Supply Chain Network Design – It’s Not a Five-Year Plan

Last fall, Supply Chain Digest published a piece on Supply Chain Network Design Where the Real Money Is that noted that many companies limit the scope of a supply chain network study to distribution centres and customer service targets and fix everything for the next five years. As such, they leave a lot of money on the table. Why?

The answer is obvious if you think about what you’re shipping. Generally, CPG. And what’s the lifespan of the average CPG product these days? A heck of a lot less than five years. So even if you optimize your supply chain to the penny, as consumer tastes shift, and manufacturing locations shift as a result of technology (or natural disasters or bankruptcies that shut a plant down), your optimized supply chain begins to fall apart quickly.

Supply Chain Network Design needs to be continuous. And while it doesn’t have to be re-optimized with every new award, it should be re-analyzed and tweaked annually. This is one reason why you should consider leasing versus buying and signing shorter term contracts, even if there is a small price premium to do so. It’s also a reason why you should avoid locking in too many long term Freight or 3PL contracts (especially when you can BuyTruckload when you need to).

As SI said back in 2007, the nature of distribution network optimization is that it cannot be optimized within a single sourcing scenario, and any attempt to do so is likely to do more harm than good. To truly optimize your network, you have to optimize across all of your buys, and even in any given year, you’re likely renegotiating less than a third of your major contracts and a quarter of your buys, and you don’t expand into new countries overnight. That’s why it should be regular and pseudo-continuous.

Furthermore, like SI said back in 2007, the way to start to optimize your distribution network costs is to semi-annually or annually analyze all of your projected transportation needs over the next 6 to 12 months using all of your projected shipments (based upon current contracts, forecasts, and current patterns), aggregate volumes across lane groups (defined as the set of lanes that take a product from region A (such as a set of posts on the southwest coast) to region B (your major re-distribution center outside Chicago), bid out the appropriate lanes or lane groups to one or more carriers, and optimize a transportation award to these carriers who quote rates based upon minimum volume guarantees (such as 75% of expected volume across the lane). Then you should be re-optimizing the flexible aspects of your distribution network. You start by re-evaluating warehousing space that you are leasing or that is highly liquid and could be easily sold, re-evaluating the air and ocean freight options to you, re-evaluating the ports you are using, and re-evaluating your shipment consolidation strategy (should you always wait for shipments from multiple suppliers to fill the container or should you use a third party that can consolidate shipments for multiple buyers to fill the container). Finally, when fixed assets free up and can be renegotiated, you should be re-optimizing the distribution network to the extent possible.

And when you optimize continuously, you identify savings over the long term.

Working Capital Optimization – The Basics

Working Capital Management is a managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. (Source: Investopedia)

Working Capital Optimization is optimizing the balance between assets and liabilities, and, since assets can’t generally be acquired or disposed of on a regular, or quick basis, generally focusses on optimizing the ratio of cash-on-hand (and liquid assets that can be converted into cash-on-hand within 90 days) to liabilities. In practice, most organizations attempt to accomplish this by optimizing receivable collection, inventory cycles, and supplier payment terms. In other words, they try to collect receivables faster, reduce inventory cycles, and extend payment terms.

These are all valid ways to optimize working capital, but if they are not undertaken correctly, supply chain costs will rise. If you force your customer to pay before they can afford to and the customer has to borrow to do so, that’s going to increase their cost to service their customer, and if their customer can’t pay, they are going to come after you for price reductions at contract renewal time, and that’s not good for anyone. If you try to reduce inventory turn-over too aggressively, you will end up doing a lot of expediting or LTL shipments, which will reduce overall acquisition costs in the long run. And if you extend payment terms beyond which your suppliers can afford, at the very least you risk increasing your costs substantially as they will have to borrow at high financing rates and pass that cost onto you and you may even risk their financial solvency.

So how do you optimize each of these areas?

  • Receivables Collection
    Go after slow customers, but focus on those with the most ability to pay first. For public companies, use publicly available financials to figure out who is cash rich. For private companies, use credit rating data, such as that provided by services like D&B.
  • Inventory Cycles
    Optimize inventory (carrying) costs versus logistics costs versus potential loss from stock-outs and determine the optimal inventory cycle for each commodity.
  • Payment Terms Extension
    As per Tuesday’s post, figure out which suppliers can afford payment extensions such that they would suffer no negative impact or where the overall supply chain cost that would be borne by the end consumer is lessened and extend the terms.

PrimeRevenue – Priming Your Financial Supply Chain for Success

PrimeRevenue is a provider of Supply Chain Finance solutions that provides supply chain finance solutions to over 12,000 customers in 40 countries and that processes Billions of dollars of transactions each year. Like other providers of supply chain finance solutions, they provide a platform that helps suppliers access financing for their receivables when they need it. With over 40 leading financial institutions on their platform, it is a platform that every buyer and supplier should consider for their finance needs. But that’s not why we’re covering PrimeRevenue today. We’re covering PrimeRevenue because they go beyond just providing a funding platform to meet your cash needs – they also provide an analysis platform to help you figure out how best to meet your cash needs.

In particular, they provide a solution by the name of SciMap that provides a consolidated and classified analysis of your spend, enriched by insights from PrimeRevenue’s global database, based on detailed and updated market intelligence. This allows you to make better buying decisions as well as negotiate optimized payment terms, putting the power to improve your working capital in your hands.

In particular, this platform provides you information on:

  • average payment time for the commodities you buy,
  • average financing terms for suppliers with similar credit ratings, and
  • average financing terms for companies with a similar credit rating to you.

Based on this you can figure out

  • whether you are paying faster or slower than the market average,
  • what financing your supplier is able to get, and
  • what financing you are able to get

and then you can figure out whether you should be looking to

  • extend or reduce payment terms, depending on whether
  • the supplier can get better financing or
  • you can get better financing.

Then, if it is the case that the supplier can afford to be paid later and paying earlier threatens to increase the overall supply chain cost, then you have a valid reason to negotiate with (or, if necessary, mandate to) the supplier for a later payment, helping it to obtain the lower financing you know it can obtain if necessary.

When it comes to supply chain finance and working capital analysis, the PrimeRevenue SCiMap solution is unique in the supply chain finance space and a solution you should really be looking at if you want to get your supply chain working capital optimized.

Leaders vs. Laggards in Lean

Earlier this year, SC Digest published a comment from Mike Loughrin, CEO of Transformance Advisors, on Designing a Lean Transformation Program that not only covered four key indicators of success in a lean transformation, but also covered the differences between leaders and laggards that deserve a second look.

According to Mike, the four key indicators of success are:

  • Methodology
    Lean is the systematic elimination of waste by way of the five principles of value specification, value stream identification, flow creation, leverage of pull, and the continual strive for perfection.
  • Measurement
    While lean is the top priority, measurement is second as it is necessary to determine the status of the transformation.
  • Community
    Lean succeeds when best practices are shared and people collectively improve upon them.
  • Coaching
    Lean succeeds when mentors coach novices so that they can grow into future mentors.

So how do you distinguish leaders from laggards? According to Mike:

Indicator Leaders Laggards
Methodology Very systematic in the approach to lean. Adopt a couple of techniques from the lean tool box and apply these hammers to every problem whether or not it mimics a nail.
Measurement Assess all of their value streams and focus attention on those areas that need improvement the most, getting to the root causes of the issues. Focus on the symptoms in an effort to identify quick fixes that may or may not address the root causes.
Community Leaders take an active part in the lean community and are very visible at educational and networking events. Laggards don’t have the time, or money, for attending lean educational and networking events.
Coaching Leaders understand that techniques from the lean tool box are systematic and most effective when people are coached on how to use them correctly. Laggards learn by skimming articles and viewing a few webinars. They have a very cursory understanding.

Lean transformation takes discipline not shortcuts. Great article, Mike!

Don’t Confuse Centralized Sourcing with a Centralized Sourcing Model

A recent article over in S&DC Executive on “The Four Vs of Fixing a Decentralized Procurement Model” noted that implementing a centralized model from nothing is no mean feat and then presented the Four Vs” as a good starting point to begin their path forward to centralization of selected spend categories. Centralization of spend is a necessary step on the path to a centralized sourcing model, but that’s all it is – a step.

In order to have a centralized sourcing model, you have to centralized:

  • Talent,
    all of the Sourcing and Supply Management Personnel have to be in the same business unit
  • Technology, and
    all of the operations, even if they are decentralized all over the world, need to run on a common base technology platform
  • Transition,
    all of the processes need to be migrated to common sourcing and supply management processes, with local sourcing only taking place on categories that are truly local (otherwise, sourcing should be center led)

Now, when you are transitioning processes, you should start with sourcing and procurement, as this one-two punch will give you the biggest bang for your buck. The application of good advanced sourcing techniques to categories never sourced this way, or to significantly larger spend volumes, will typically identify savings opportunities in the 10% to 12% range. Then, good procurement systems will make sure that the savings are captured by preventing maverick spend (if the spend has to go through the system and appropriate rules are in place) and making sure the invoices match the POs which will need to match the contracted rates.

And the first step in a good sourcing process is spend analysis, which, if you want to get it right, does require:

  • Visibility,
    into all of the spend in the category being sourced
  • Variance,
    on the spend between sites (which will give you a quick estimate of savings potential)
  • Velocity, and
    to savings which results by choosing categories where contracts are expiring or have expired and where there will be little resistance
  • Value.
    generated from the process in a way that can be measured, tracked, and reported to the CFO.

The four V’s covered in the article are indeed a good starting point on your journey to centralized the sourcing process, but that’s just one aspect of transition, and it doesn’t even address technology or talent, two key factors in the centralization of a Supply Management function.