Category Archives: Supply Chain

What Your Supply Chain Can Learn from Starbucks

A great post over on the HBR blogs on “Why I Appreciate Starbucks” summarized some of the fundamental differences about Starbucks when compared to other multi-national corporations. These differences are part of its success story and contain best practices that can be used to improve your supply chain.

The author identifies the following fundamental differences between Starbucks and your average corporation as follows:

  • it sees itself as part of a larger community,
  • it tries to balance profit with social responsibility,
  • it creates a “third place” between home and office where people can connect comfortably,
  • it trains its employees to brew the perfect espresso in order to insure the quality of its signature product is not sacrificed,
  • it doesn’t let major disruptions delay important actions and events that need to be done,
  • it understands that employees feel far more committed to companies whose values and mission they find inspiring, and
  • it understands that customers and clients increasingly prefer to support companies whose values are consistent with their own.

These lessons can be easily translated into supply chain organization success.

  • The supply management organization must see itself as part of a larger company.
    In a successful business, all of the individual units cooperate and act as one larger business unit.
  • The supply management organization must balance cost reduction with social responsibility.
    The media and consumer backlash that can result if the organization cuts cost by buying from third world factories that employ child labor, for example, can cost way more than the amount the organization will save.
  • The supply management organization must create an atmosphere of collaboration
    and provide a comfortable meeting area where cross-functional teams can meet and work together towards success.
  • The supply management organization must train its employees to source the perfect bill of materials,
    where cost, quality, reliability, and all other important factors to the business unit that needs the product or service are appropriately balanced and the end result is overall better than what the organization would have negotiated on its own.
  • The supply management organization must be able to work through major disruptions quickly and without significant impact to overall commitments to its end customers.
    The supply management organization should regularly be gathering market intelligence and updating its contingency plans and be ready to get the job done no matter what, even if it means a lot of extra elbow grease now and then.
  • The supply management organization must hire an A-Team that believes in the mission and values of the organization.
    A team that is not committed will never achieve the level of success as a team that is.
  • The supply management organization must put the needs of the organizational units they serve between their own.
    The needs of the many outweigh the needs of the few, or the one.

Follow this advice and your supply management organization is on its way to becoming world class.

Step 1 To Building a World Class Supply Management Organization

Adopt a start-up mentality.

Yes, it’s that simple. A lot of blood, sweat, and tears will still be required, but, getting it right really is that simple. And a big thank you to Mark Suster, regular TechCrunch contributor, who wrote a great article on Whom You Should Hire at a Startup that allowed me to realize this.

As you may have noticed, a number of issues have been on my mind of late. In addition to Next Generation Sourcing and Supply Chain Education (or lack thereof), I’ve been trying to figure out how an organization without any modern supply management capabilities, a follower if you will, can go about laying the foundations of a world class supply management organization to become tomorrow’s leader. Obviously if next generation sourcing is the goal, it can’t be the starting point, and education, while critical, requires a foundation. And, more importantly, you can’t turn a “B”-Team into an “A”-Team if there is no raw talent waiting to be released, molded, and shaped under the leadership of the right Colonel.

But if you want to build a new capability, you’re essentially building a new organization, and how do you build a new organization? You create a new start-up, and since, as an organization, you have the one thing that most start-ups don’t — money (and lack of adequate funding is the biggest reason most start-ups fail), you’re almost guaranteed to succeed if you follow successful start best-practices. And since there’s really only three best-practices that you need to remember, this isn’t hard to do.

So what are these best practices?

  1. Hire a talented team
  2. Give them a goal
  3. Get out of their way

Taking these points in reverse order, the biggest mistake many first-time entrepreneurs make is that they overvalue their importance in the start-up success equation. They think that no one gets it like they do or that it won’t succeed if they don’t champion it 24/7 or that the team will lose momentum if they’re not constantly preaching the doctrine, when, in fact, nothing could be further from the truth. In fact, entrepreneur ego is the second biggest reason most start-ups fail. An entrepreneur who believes the start-up can’t succeed without him or her tends to make multiple, deadly, mistakes which include micro-managing top-talent who get frustrated at the inability to do their job and the lack of forward progress (because the CEO isn’t an expert in finance, technology, marketing, or other critical functions that the top-talent is supposed to be leading); overchampioning the cause 24/7 to the point where the talent gets sick of all the cheering and actually loses excitement and drive to succeed; refusing to step to the side and play nice when new leadership is required to take the company to the next level; and overvaluing the company and turning away reasonable investment offers, which drives away any future investment when the rumour gets out the founders are too greedy.

A good entrepreneur realizes that they are the enabler, not the doer, and after giving the talent they hire a goal, gets out of the way of the team and, moreover, does everything they can to remove distractions and barriers to team success because a good team wants to excel and will do whatever they can to shine if allowed. Because, as Suster’s great article on Whom You Should Hire at a Startup points out, an A-Team

  • punches above their weight class,
  • doesn’t care above roles and stretches their job description to do what has to be done,
  • has the right attitude, and
  • gets the job done.

So if you want to build that world-class supply management organization, adopt a start-up mentality, hire an A-Team, give them a goal, provide them with whatever they need (including the right training and technology, which they will help you identify), stand back, and don’t be surprised if miracles happen.

Tompkins Associates and the Next Generation Supply Chain, Part IV

In Monday’s post, we brought your attention to Tompkins Associates’ recent white paper on “Leveraging the Supply Chain for Increased Shareholder Value” which nicely complements CAPS Research and A.T. Kearney’s study on “Value Focussed Supply: Linking Supply to Competitive Business Strategies” and echos our cry for Next Generation Sourcing methodologies. A cry which has been taken up not only by The MPower Group (and spearheaded by Dalip Raheja who has declared that Strategic Sourcing is Dead and invited you to the The Wake for Strategic Sourcing) but by BravoSolution (who are rallying the battle cry for High Definition Sourcing and who have given us A Futuristic Look at High Definition Sourcing). We told you how they declared the need for a new Supply Chain Value Creation Framework and a renewed focus on business value in the supply chain, outlined three supply chain objectives — Profitable Growth, Margin Improvement, and Capital Efficiency, and described six primary types of value enabling actions to achieve the objectives before telling you that we would spend the next four posts discussing some of these actions and why Tompkins Associates’ white paper on “Leveraging the Supply Chain for Increased Shareholder Value” should definitely be on your reading list as you outline your Next Generation Sourcing strategy.

So, today, we are going to discuss the objective of Capital Efficiency.

Capital efficiency is a measure used to determine whether a particular product, service, or operation is profitable, could be profitable with some adjustments, or should be abandoned entirely. The basic measure is computed by dividing the average value of output by the rate of expeniture for a period of time. A good capital efficiency is greater than one.

There are two primary ways for a company to increase capital efficiency. It can reduce working capital or improve the return on its fixed assets.

The most effective way to reduce working capital for many companies is to improve inventory management as significant amounts of working capital are typically tied up in inventory for an average company. The most effective reduction will be realizied when both cycle stock and saety stock is optimized. The white paper on “Leveraging the Supply Chain for Increased Shareholder Value” outlines four techniques that can be used to minimize cycle stock and four techniques that can be used to minimize safety stock.

With respect to improving return on fixed assets, a supply chain has four options. It can focus on the network assets, the building assets, the equipment assets, or the technology assets.

Technology assets need to be upgraded regularly or the cost to maintain the systems will increase as the risk of obsolescence skyrockets. Thus, a return on technology assets can be obtained by upgrading to a new system with addtional value before the technology becomes obsolete and the upgrade prohibitively expensive. (To determine how much the upgrade is going to cost, use the Cost Model Calculations in the SI Enterprise Software Buying Guide.)

Equipment needs to be maintained as no value can be obtained when it is not functional, and if it breaks down to the point of no repair, all value is lost. Thus, value is maintained when equipment is maintained. However, value can only be increased by upgrading to new, more efficient equipment that is easier to maintain, repair, upgrade, and control through modern control systems.

Building assets offer a fairy large opportunity for return on assets. If a building is appropriately designed for a function and has the right height, layout, and column spacing, no space will be lost, operations will be efficient, and, if LEED standards were followed, it will be energy efficient, cheap to maintain, and sustainable. Any building that is not used 100% does not deliver an optimal return. If a building is only partially used, a greater return can be obtained by leasing the unused space, or, if usage is sparse, disposing of the building and acquiring, or leasing, a more appropriate space.

Finally, the network offers the greatest opportunity for a large return on assets as an appropriate network realignment often removes 5% to 15% from total supply chain cost. A well designed network has low transportation costs, high agility, and (geographically dispersed) robustness and can withstand a disruption in part of the network. A good network is optimized, using the techniques outlined in SI’s three-part series on Supply Chain Network Optimization (Part I, Part II, and Part III), and stress-tested against multiple scenarios using a simulation tool.

All-in-all, a company has multiple options for increasing capital efficiency, just as it has multiple options to improve margins and achieve profitable growth. That’s why its important for a company to adopt a value-focussed mindset, implement next generation sourcing and supply chain practices, and chase the value that is just waiting to be extracted from the supply chain. And that’s also why it’s important to add papers like Tompkins Associates’ “Leveraging the Supply Chain for Increased Shareholder Value” to your working library as there aren’t that many resources out there that describe what a supply chain needs to do to get to the next level.

Tompkins Associates and the Next Generation Supply Chain, Part III.2

In Monday’s post, we brought your attention to Tompkins Associates’ recent white paper on “Leveraging the Supply Chain for Increased Shareholder Value” which nicely complements CAPS Research and A.T. Kearney’s study on “Value Focussed Supply: Linking Supply to Competitive Business Strategies” and echos our cry for Next Generation Sourcing methodologies. A cry which has been taken up not only by The MPower Group (and spearheaded by Dalip Raheja who has declared that Strategic Sourcing is Dead and invited you to the The Wake for Strategic Sourcing) but by BravoSolution (who are rallying the battle cry for High Definition Sourcing and who have given us A Futuristic Look at High Definition Sourcing). We told you how they declared the need for a new Supply Chain Value Creation Framework and a renewed focus on business value in the supply chain, outlined three supply chain objectives — Profitable Growth, Margin Improvement, and Capital Efficiency, and described six primary types of value enabling actions to achieve the objectives before telling you that we would spend the next four posts discussing some of these actions and why Tompkins Associates” white paper on “Leveraging the Supply Chain for Increased Shareholder Value” should definitely be on your reading list as you outline your Next Generation Sourcing strategy.

Today, we are going to continue our discussion of the objective of Margin Improvement.

As noted yesterday, there are three fundamental ways that a company can improve margins:

  1. Reduce COGS (Cost of Goods Sold)
  2. Improve Speed and Productivity
  3. Practice Tax Effective Supply Chain Management

Yesterday’s post dove into reduction of COGS in detail, so today’s post is going to address the margin improvement strategies of increased speed and productivity and tax effective supply chain management.

Not only can a fast company get the products the consumer wants to buy to market faster, but a fast company can:

  • optimize the transportation mode
    using airfreight for dense high-value products like laptops
    and slower ocean freight for sparse low-value products like packing peanuts and take a sustainable approach
  • slot warehouses dynamically
    to increase picking efficiency, reduce labor costs, and adapt to a changing product mix
  • pre-pack orders from suppliers
    to allow for crossdocking, reduced handling, and, ultimately, reduced losses due to product damage from increased handling and re-packing

A productive company, which is continuously improving, is one that has

  • reduced labor costs,
    comparatively speaking,
    as they get more done with less
  • reduced material costs
    as it is constantly updating its rolling forecasts (with foresight to prevent overbuys) and its designs (to use more economical parts and raw materials and improve qauality)
  • better operating efficiency
    as it has not ony defined appropriate metrics, but tracks and updates them on a regular basis

Finally, a company that wants to make the most of its supply chain margins has a tax effective supply chain. As the white paper notes, the worldwide “Effective Tax Rate” (ETR) for a MultiNational Corporation is in the 20-35% range, with the average around 25%. That’s a lot of revenue lost to taxes for a company with a tax-effective supply chain. (Imagine what a company with a tax-ineffective supply chain is losing!)

Tax Effective Supply Chain Management (TESCM) is complex, dynamic, and conflicting as tax laws and regulations change. The allocations and locations of functions, assets, and risks, and decisions on transfer pricing, are inherent to the ETR, as well as to the optimized global supply chain but TECSM can make a significant difference in their company’s shareholder value. Unfortunately, the white paper does not provide any details on how to achieve TECSM due to the complexities and detailed knowledge of tax law and regulations required. However, Ernst & Young published a good article on How to Benefit When the Supply Chain Meets Tax in 2009, which was summarized in SI’s post on characteristics of TESCM, Grant Thornton LLP ran a pair of articles summarizing what to consider in a tax-efficient supply chain a couple of years back (Part I and Part II, summarized in The Tax Efficient Supply Chain), and this post lays out the basics of transfer pricing.

Thus, a company has a large number of opportunities for margin improvement at its disposal and an effective combination can easily deliver double digit percentage returns in an average supply chain. The final part of this series will dicusss the final objective of the Tompkins Associates’ Supply Chain Value Creation Framework, Capital Efficiency.

Tompkins Associates and the Next Generation Supply Chain, Part III.1

In Monday’s post, we brought your attention to Tompkins Associates’ recent white paper on “Leveraging the Supply Chain for Increased Shareholder Value” which nicely complements CAPS Research and A.T. Kearney’s study on “Value Focussed Supply: Linking Supply to Competitive Business Strategies” and echos our cry for Next Generation Sourcing methodologies. A cry which has been taken up not only by The MPower Group (and spearheaded by Dalip Raheja who has declared that Strategic Sourcing is Dead and invited you to the The Wake for Strategic Sourcing) but by BravoSolution (who are rallying the battle cry for High Definition Sourcing and who have given us A Futuristic Look at High Definition Sourcing). We told you how they declared the need for a new Supply Chain Value Creation Framework and a renewed focus on business value in the supply chain, outlined three supply chain objectives — Profitable Growth, Margin Improvement, and Capital Efficiency, and described six primary types of value enabling actions to achieve the objectives before telling you that we would spend the next four posts discussing some of these actions and why Tompkins Associates’ white paper on “Leveraging the Supply Chain for Increased Shareholder Value” should definitely be on your reading list as you outline your Next Generation Sourcing strategy.

So, today, we are going to discuss the objective of Margin Improvement.

There are three fundamental ways that a company can improve margins:

  1. Reduce COGS (Cost of Goods Sold)
  2. Improve Speed and Productivity
  3. Practice Tax Effective Supply Chain Management

Reducing COGS involves taking cost out of the supply chain mega process of Plan – Buy – Make – Move – Store – Sell – Return. Thus, the supply chain has lots of opportunities to reduce cost as each stage has multiple costly inputs.

Plan

While the white-paper skips over this step, there are lots of opportunities to take cost out in the planning stage. Without going into much detail they are:

  • Understand true spend
    and identify where the organization is spending money and ask if it needs to be spending money there? Maybe it’s paying for twice as much warehouse space as it ever uses, maybe it’s buying office supplies off-contract at double the contract rate, and maybe it hasn’t even analyzed it’s energy spend.
  • Understand true demand
    as better forecasting takes cost out of spend across the board, as the organization won’t overbuy (and tie up working capital in inventory) and won’t underbuy (and lose marketshare to the competition)
  • Understand true 3rd party needs
    and know exactly what skills and equipment are needed by the third party component manufacturers, 3PLs, etc.

Buy

Not only can the organization reduce cost by designing the supply chain for the optimal goal — be it lowest TCO / highest TVM, best quality, greatest availability, or maximum agility — depending on the product or service being sourced, but it can should-cost model before the buy to understand precisely what it should be paying (and why) and then apply decision optimization to understand how all of the different cost drivers interact, which will enable it to negotiate the best overall deal.

Make

There are a large number of opportunities to take cost out of the production stage, and go lean, including the following seven opportunities identified in the white paper:

  • eliminate overproduction
  • reduce waiting time (between steps)
  • reduce transport (of raw materials)
  • remove unnecessary processing steps
  • eliminate excess inventory
  • reduce unnecessary motion
  • reduce the defect rate

Move

Similarly, there are a large number of opportunities to take cost out of the transportation stage, especially if you redesign your logistics network, and the following seven opportunities identified in the white paper are a great start:

  • develop core carrier programs
  • implement a TMS (Transportation Management System)
  • take control of inbound freight
  • outsource various (non-core) transportation management functions
  • identify shipment planning and execution opportunities
  • rationalize fleets
  • improve controls

Store

Inventory represents a huge opportunity to reduce costs, especially since most organizations make a number of inventory management mistakes on a daily basis. In many operations inventory accounts for over 20% of the overall product stock. The white-paper identifies a number of opportunities every company has to improve inventory management and lower costs. The following ten opportunities identified in the white paper are great ways to obtain profitable growth through better storage management:

  • strategic positioning of inventory
  • product protection
  • seasonal buys
  • special deals
  • quality assurance
  • postponement
  • value-added services
  • returns management
  • freight spend reduction
  • growth management

Sell

Margin can be improved by improving the perfect order rate and by planning and implementing profitable, differentiated, service programs. A company can create a differentiatd service program by:

  • segmenting markets and product groups
  • identifying key value points by customer
  • identifying consolidation opportunities around the customer
  • identifying and creating common processes and systems

Return

The supply chain can take cost out of the return stage by:

  • reducing the number of returns (which can be as high as 20% in electronics)
  • reducing the cost per RMA (Return Material Authorization)
  • improving the return velocity
  • capturing residual product value
  • deriving value from sustainability initiatives
  • standardizing the process
  • recovering costs from suppliers (who do not meet defect rate targets) and
  • multi-channel visibility

The white-paper provides five great approaches for reducing the number, and rate, of returns and four great suggestions for capturing the residual value of products that should not be missed.

For more information on designing the supply chain for the optimal goal (best price/TCO, best quality, best availability, and agile supply base); improving production, transportation, and storage; creating differentiated service programs, and improving the returns process, see Tompkins Associates’ white paper on “Leveraging the Supply Chain for Increased Shareholder Value”. For more information on decision optimization or Should-Cost Modelling, see various posts here on Sourcing Innovation and the e-Sourcing Wiki.

In tomorrow’s post we’ll discuss the other two strategies for margin improvement: improving speed and productivity and tax-efficient supply chain management.