Category Archives: Supply Chain

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.

The Financial Reporting Supply Chain

The financial reporting supply chain refers to the peopleand processes involved in the preparation, approval, audit, analysis and use of financial reports. The cycle both starts and ends with the investors and other stakeholders, who want to make informed economic decisions about a company and, therefore, require financial information to do so. The chain includes management, the board of directors, auditors, and regulators – and each have their part to play.

In recent years, there have been numerous efforts, particularly in the USA, to change and improve financial reporting. But to what end? Have the reporting processes become better or worse? Have financial reports become more or less relevant, reliable, and understandable? What needs to be done? These are questions that the International Federation of Accountants (IFAC) attempted to answer in a recent survey (administered in June and July of last year) that was summarized in a “Current Perspectives and Directions” piece released in March of this year.

The reported summarized results on the issues of corporate governance, the financial reporting process, the audit of financial reports, and the usefulness of financial reports. The results included positives, areas of concern, and improvements that are needed. But per haps the most important result of the study is that while corporate governance, the process of preparing financial reports, and the audit of such reports has clearly improved in the last five years, the financial reports themselves have not become more useful.

Considering the huge financial burden placed on companies to prepare these reports, especially since the introduction of Sarbanes-Oxley, this is troublesome. The reports should be useful to the target user groups, they should address the relevant concerns that shareholders have with respect to corporate governance and auditability, and they should enable the supply chain, not detract from it.

So what can be done? The “areas of concern” identified in the report give some clues:

  • Reduced usefulness due to complexity
    In other words, the reporting requirements need to be simplified.
  • Focus on compliance instead of on the essence of the business
    You comply with laws in the execution of your business, you do not execute your business just to comply with laws.
  • Regulatory Disclosure Overload
    Too much information is required.
  • Use of Fair Value
    What exactly is fair value?
  • Difficult and often changing financial reporting standards.
    Financial reporting standards need to be steady.
  • Lack of forward looking information.
    Companies need to move forward as well as looking back.

However, regulatory changes take significant amounts of time, and in the interim, you need to continue to produce complex reports to meet an ever increasing dizzying area of regulation. So what can you do? the doctor recommends that you:

Automate. Centralize (a copy of) all of the relevant financial data in a central database / data warehouse and acquire applications that automate the production of as many regulatory reports as possible.

Simplify. Use whatever leeway you have in report preparation to design reports that are as clear and easy to read as possible. Consider producing different summaries for different groups to simplify message communication. Extrapolate forward based on past and current performance and paint a full, realistic, picture for the stakeholders.

It won’t solve all of your problems, but it’s a start.

Not Just A (Manufacturing) Litmus Test for Politicians! (CEOs and CSCOs, Take Note!)

Industry Week recently ran a good article called “Just In Time – A Manufacturer’s Litmus Test for Politicians” that had some very good questions that I doubt any of the current US presidential candidates would have good answers to.

However, they, or their equivalents, are questions that any CEO, and, more importantly, any CSCO should be able to answer. Specifically:

  • Vision
    What is your vision and mission for the supply chain department … and how does it sync up with the vision and mission of the company?
  • Relevant Experience
    Have you ever worked on a design team that made products similar to those being made by your company? If not, how do you plan to acquire the expertise needed to help the design team make the right decisions in the design stage before up to 80% of the product cost is locked in?
  • Customer Focus
    How have you improved the customer experience in the past? What can you do for your current customers?
  • Management Experience
    How do you plan to improve ROIC and contribute to overall company growth?
  • Competitiveness
    How are you going to increase overall competitiveness of the company supply chain compared to the industry average?
  • Environmental Stewardship
    How are you going to reduce the organization’s carbon footprint while reducing cost and increasing efficiency?
  • Trade Practices
    How are you going to achieve best-cost country sourcing while optimally determining what work to keep in house vs. what work to outsource?
  • Training & Education
    An educated employee is a productive employee. What is you plan to insure your team stays up to date on best practices, processes, and methodologies?
  • Research & Development
    Innovation should not be confined to R&D. What is your plan to insure that supply management contributes its fair share of innovation to corporate growth?

Supply Chain Shocks Get the Attention of “Chief Executive”

One of the publications I like to peruse regularly is Chief Executive, but more often than not, supply chain has been missing from their pages. However, it looks like that might be changing and it was nice to see the recent article on “Shocks to the Supply Chain” that noted the importance of the supply chain and the need for a company to look at its supply chain “holistically”.

With fuel costs approaching 120 a barrel as I write this, limited shipping capacities, skyrocketing raw material costs in certain categories, and supply chain risk increasing by the day, it’s nice to see supply chain getting more press in publications targeted at chief executives as it could be the only shot at profitability for many company’s in today’s economy which is currently undergoing a recession and stagflation.

It’s also nice to see that it noted that supply chain is taking on importance in companies of all shapes in sizes. For example, the article noted that Jamba Juice takes supply chain issues so seriously that last July it made the effort to lure the Vice president of Global Procurement at Wal-Mart to its operation. Furthermore, in an effort to control costs, they also use long-term forecasting models to minimize surprises and develop a holistic approach to mitigate future cost risk.

And although the article was pretty high-level, and not that useful to a supply chain pro, it also had some good advice at a level an executive not well versed in supply chain can understand. For example, the article notes that the supply chain should be flexible and allow for different modes of sourcing, manufacturing, and transport if breaks emerge or if costs increase. So, even though it won’t tell you anything you don’t already know, it would be worth your time to make sure your CEO’s copy of Chief Executive falls open on those pages. Because maybe, just maybe, they’ll get a little closer to understanding just how important you are.

Stacking the Supply Chain

Industry Week recently ran an article that asked the question “How does your supply chain stack up?” Written by the Director of Corporate Partnerships from the University of Tennessee, the article summarized the main lesson learned by the Department of Marketing and Logistics since they started offering supply chain assessments in 2006.

To date, the department has performed eight supply chain audits for companies across a diverse range of industries that ranged from 100M in annual sales to 30B. Although the firms were very diverse, they found that, to their surprise (but not mine), that all of the firms faced exactly the same supply chain problems.

Specifically, they found the seven following commonalities:

  • Too much product complexity
    Too many models and lack of a good process to eliminate underperforming products.
  • Too much slow-moving and obsolete inventory
    Sales doesn’t want to reduce price because they’re measured on margin – but products lose value over time while incurring inventory holding costs.
  • Supply chain considerations not part of the product design process
    Design teams rarely consider inventory, transportation, or warehousing issues – just to name a few.
  • No supply chain strategy
    Many supply chain organizations are so consumed with the daily battles of cost control, inventory management, and customer service that they don’t plan for the future – sometimes with disastrous results.
  • Ineffective matching of supply with demand
    In most companies, sales is driven by revenue generation while operations strives to cut costs.
  • Physical network problems
    Many organizations do not have an optimal network design. Warehouses need to be appropriately placed and transportation optimized.
  • Global issues and outsourcing problems
    Outsourcing decisions are made everyday, but few firms consider the total cost of an outsourcing decision.

Addressing just one of these problems can lead to millions in savings. For example, a hard goods manufacturer achieved 600M in cash-flow improvements through inventory and asset optimization and another manufacturer found 5M to 10M in savings simply by restructuring its distribution network.

So what can you do? Lots. And even though the article stopped short of specifying what you can do, this blog entry is not. If you have these problems, you can start by looking into these potential solutions:

  • Product Line Consideration
    Look to today’s modern auto-companies. Instead of giving you 30 different options, and letting you choose from 2^30 or 1B different configurations, some only sell three or four standard configurations of a car: the base model, the value model, the extended model, or the luxury model. Assembly is efficient and product complexity is minimized.
  • Pre-Launch Price Reduction Planning
    Model the inventory holding cost up-front, analyze historical price trends, and pre-determine dates where remaining inventory will be reduced, marked down, and cleared. If the product happens to be composed largely of raw materials that are increasing in price (i.e. steel) and has a scrap value that increases over time, you can take this into account as well and determine a formula that is to be run on predefined dates to determine the appropriate price decreases. This is very important if you are in electronics, where you can predict that in 6 months the product will have lost 20% of its value – that tells you that a 10% reduction in 3 months might be better than having to fire-sale the product in 7 months.
  • Include supply chain in product design
    When different options have dramatically different material, inventory, warehousing, or transportation costs – supply chain can point this out.
  • Sync the Plans
    Every time the business plan is updated, update the supply chain plan as well to meet the goals of the business plan. Don’t have a supply chain plan? Get one!
  • Forecast with Foresight
    Make sure forecasting is done by an integrated Sales & Operations Planning team that includes the head of sales, the head of marketing, and the head of supply chain – and that every department works off of the same forecast.
  • Network Modeling
    Model your current network, and re-run the network flow model at least once, if not twice, a year to optimize flow – and do a complete network re-design exercise every three years to determine the optimal network design and if any changes need to be made.
  • Outsource Intelligently
    Don’t outsource anything you haven’t optimized internally first – displacing a problem doesn’t solve it, it just makes it worse. If you need help getting your house in order, bring in an expert to help you.