Category Archives: Supply Chain

To Get The Most Out Of Supplier Reports, Read Between the Lines

SIG recently ran a good article on Getting the Most out of Supplier Reports (that now appears to be hidden behind a registration/membership wall in their newly redesigned site) that made some good points. Many suppliers are just beginning their reporting journey, and don’t always know what is important or what the customer really wants. Plus, and this is even more important, if a supplier is really doing poor in one area, it may not want you to know, especially if renewal time is coming up.

So how do you get the most out of the reports?

First, go beyond the facts. As the article notes, the reports should include quantitative and qualitative information. Have the supplier go beyond just spend, on time delivery, and other hard metrics and include customer service ratings, quality reviews, and overall compliance levels. The supplier might be hitting the cost targets, delivery times, or resolution times, but your internal stakeholders, the customers, might be extremely unhappy with the supplier.

Then, and this is SI’s advice, pick a couple of metrics that are poor and a couple of metrics that are good and dig, dig, dig. For example, let’s say on time delivery is poor. Find out why. When the supplier says that the production rate is 80% of predicted throughput, don’t just say to speed up, dig. Is it labor issues? Is the supplier short-handed? Is it mechanical issues? Does key equipment keep breaking down? Is it supply? Is a second tier supplier repeatedly late? Don’t stop until you find the root cause and make sure it gets appropriately addressed. Then choose a good metric. For example, let’s say the supplier hit the savings target. Why? Every cost has components, and where a supplier is concerned, there will be supply costs, labour costs, and overhead costs. Make sure you understand which costs were reduced and to what degree. There might still be gold in the veins. For example, let’s say that supply costs dropped 10%. If market costs dropped 12%, then the supplier might not have done anything! If the supplier was supposed to reduce supply costs and overhead costs, and leaves one cost untouched, the supplier can still do better.

But don’t stop there. As the article indicates, make sure you have the supplier compare its performance serving you to its average performance serving other customers. This will help you identify metrics that you need to monitor for improvement.

And audit. (But not too often.) This will allow you to maintain control and give you more insight into the supplier’s performance. (However, if done too often, will be too time-consuming, instill angst in the supplier, and not produce any results if no issues are found.)

Doing this will allow you to read between the lines and extract true value from your supplier reports.

Let’s be Clear. Logistics Services and Logistics Technology Services Are NOT the Same!

And while the technology they use is important, the initial focus should be on the logistics services and whether the logistics services they offer are sufficient enough for the provider to even be under consideration.

Recently, I came across the headline that offered 5 Essential Technology Questions to Ask Any Logistics Service Provider and, as logistics services are not the same as logistics technology services, I assumed it would focus on judging the logistics provider’s general level of technical competence online and off, but the questions were entirely oriented around the technology solution used by the provider. While a good solution is good, because you need visibility, integration, etc., the first thing you need is to get your goods delivered. The second thing you need is sustainability. Then you need technology – and if the provider is deficient, there’s always the possibility that you can provide the technology. In other words, while the questions were good, I think they were off track. Here were the questions:

  1. What does visibility really mean to the provider?
  2. Can they customize their tools to meet your needs?
  3. What process integration options do they offer?
  4. How many current providers are integrated with their technology?
  5. How mature is their system availability process?

These are important, but I’d start with:

  1. What technology do they use to manage their fulfillment operations?
  2. How sophisticated is the schedule capability? Can it handle last-minute shipment changes?
  3. How much visibility can they give you into their schedules, capacity, and your shipments?
  4. Is the integration format standard and supported by your systems, or will you need some custom integration work?
  5. What is their ability to support their system, or yours if their system does not have the requisite visibility?

    Basically, you want to know that:

    1. They are using a fairly modern tool and have a firm, efficient grasp on their operations.
    2. They can handle dynamic schedules and expedited shipments when needed.
    3. You can get the visibility you need, even if someone has to do some development work.
    4. The integration can be accomplished efficiently and effectively.
    5. They, and you, are not dependent on a third party to manage, support, and query the system.

    A logistics services provider is not going to be an expert in software and systems. That’s not their core strength, so you shouldn’t be asking them questions like they are. That being said, you should make sure they are technologically literate and able to make use of appropriate technology. Find the balance, or you might end up eliminating some potentially great partners.

If America is Going to Be Number One Oil Producer By 2020, Will Canada Be Number Two?

According to this recent Economist Article on Energy to Spare, America is on track to produce all the energy it needs at home. Considering that Americans burn three and a half times as much energy as the average Chinese person, and hasn’t been able to meet its energy needs in over half a century, this seems like a tall order. Especially since, demand has more than doubled since America was last able to satisfy its energy needs from domestic sources.

However, the International Energy Agency is forecasting that America could become the world’s largest oil producer by 2020, when it could be churning out 11.1 Million barrels a day, and be energy self-sufficient by 2035. Coupled with the fact that demand is waning due to increased fuel efficiency, the prediction is that rising production and falling demand will equal out in 2035.

It’s an interesting prediction, but so is the prediction about the Athabasca Oil Sands north of the American border. Right now, production is about 1.3M barrels per day, but estimates are that production can get to 5.1M barrels per day. As per this article in the Economist, on The Sands of Grime, Canada’s oil sands contain over 170 Billion Barrels of oil that can be recovered economically with today’s technology. With the third largest proven oil reserves in the world, it’s quite likely that production can ramp up to make Canada at least fourth in oil production by 2020, with third place a strong possibility. Right now, Venezuelan production for 2020 is estimated at 6.5M barrels per day and Saudi Arabia, at close to 10M barrels per day, expects it can get to 11 M barrels per day (Source). With the difference between Canadian production estimates and Venezuelan production estimates for 2020 less than 30%, it would only take a 15% increase in Canadian production and a 15% decrease in Venezuelan production for Canada to edge in third.

Unless Saudi Arabian reserves are less than estimated, or Canadian production ramps up exponentially beyond expectations, we probably won’t make number two, but number three is a strong possibility.

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.