| February
17, 2005 |
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Dan Gilmore
Editor-in-Chief |
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Just how good is your global supply chain, and what
is the impact on shareholder value?
The first part of our question is of course of increasing
importance, as companies from virtually every sector
jump on the global sourcing bandwagon. The tremendous
growth in the level of offshoring and outsourcing by
North American manufacturers, retailers, and distributors
has certainly been well documented, accelerated by the
explosive growth of China as a world manufacturing power
and giant consumer market.
At the recent Retail Industry Leaders Association (RILA)
conference, I came away impressed with the focus and
talent most companies there were putting on their global
logistics operations. Yet, a few private conversations
revealed that not all was necessarily as well as it
might have appeared. Global sourcing and supply chain
processes are often not well integrated, leading to
operational silos. Visibility and collaboration are
low. Logistics is “execution only” mode,
without much time for strategic planning.
SupplyChainDigest Contributing Editor Gene Tyndall and
I recently completed a report (available by clicking
here), that discusses the challenges of global supply
chain, and the tremendous leverage excellence in global
sourcing and logistics can provide to the bottom line,
and just as importantly, to shareholder value.
With global sourcing comes complexity. Supply chain
cycles lengthen, often dramatically. And anecdotal evidence,
at least, indicates that many companies give back more
of the gains in per units costs than they should. How?
Examples include:
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Not fully understanding total delivered
costs among different sourcing options |
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Substantial overhead in terms of sourcing operations |
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Increased inventory buffers and inventory obsolescence
as a result of the longer and more uncertain lead
times |
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Expediting costs |
Our
contention is that many if not most companies have a
significant opportunity to reduce operating costs, improve
the bottom line and substantially impact shareholder
value through improvements in global supply chain operations.
The report is actually constructed to provide a framework
for companies’ executives to think about these
opportunities, as frankly global sourcing and logistics
issues are among their highest priorities.
But maybe that should change. To illustrate the point,
we created a $2 billion company (“Action Apparel”),
which is actually a composite of several publicly traded
corporations in the soft goods industry. Gene and I
took the easy part, showing how improvements in sourcing,
inventory turns and efficiency could lead to a $23 million
dollar improvement to Action Apparel’s operating
income before taxes – a gain of more than 19%.
We then sought the advice of another expert, Gerry Marsh
of The High Tech Analyst Group, who has a unique and
powerful approach to calculating the impact of such
operational improvements on cash flow and ultimately
shareholder value. There’s a lot more to it than
we can summarize here (more
detail in the report), but according to Mr. Marsh’s
analysis, the financial improvements resulting from
global supply chain and commerce excellence should result
in a 22% improvement in Action Apparel’s stock
value, equating to a $175 million increase in market
capitalization.
It’s a connection we think executives often miss.
If your company is engaged in the global supply chain
(and who isn’t today), we think you’ll find
the report and financial analysis very interesting.
Do you think companies often give back more of their
potential gains from global sourcing than they need
to? Do we need more integrated global sourcing and supply
chain operations? Do executives really understand the
connection between supply chain excellence and shareholder
value?
Let
us know your thoughts.
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Many retail and DOD suppliers do not understand
the impact mandates have on their organization.
Join
these FREE webinars from Catalyst International and
discover how you can comply with RFID mandates and realize
improvements in your supply chain through RFID!
10:00 AM CT
Beyond Compliance: Retail
|
2:00 PM CT
Beyond Compliance: DOD
|
Register
for Retail Suppliers
Webinar
Register
for DOD Suppliers
Webinar |
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SCDigest will begin listing logistics/supply
chain career opportunities as we receive notice of open
positions, to help facilitate the job search and placement
process for our readers.
If you are
interested in making a career move, look to our new
recruitment corner for available opportunities.
Or, if your company is in need of filling a position,
please send us the job description and we can post that
as well - its FREE.
This week's
open opportunity is:
Aftermarket
Inventory Manager
For
a leading Chicago area manufacturer
Click
here for the full job description.
Click
here if you are an interested candidate.
(NOTE:
Any inquiries will be handled with complete confidentiality.)
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In the Federal Reserve’s Capacity Utilization
Index, what has been the average level over the
past 30 years (100 would equal complete utilization)?
Answer below
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Feedback is coming in at a rate greater than we
can publish it – thanks for your response.
A real mix of feedback this week, including a
few more responses on task interleaving (still
many in the queue), a rather stinging letter with
some suggestions for Promat show organizers, and
a letter on moving to 24 x 7 logistics operations
by ARC analyst and FOSCD (that’s short for
“friend of SupplyChainDigest!”) Adrian
Gozalez, based on his experiences at Motorola.
Our feedback of the week though comes from Michael
Lawitts of Velocity Oil, who has some interesting
things to say about the challenge of “the
last 30 yards” in retail based on our story
Tractor Supply Company’s improvements there.
For
the complete comments from readers, click
here.
Keep
the dialog going! Give us your thoughts on this
week's Supply Chain topics.
feedback@scdigest.com |
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View
Full Article >>>
Forbes magazine and
exec recruiters Christian & Timbers recently announced
a list of hot jobs for the next few years. Now I understand
the unending interest in information and education on
all things RFID – everyone is lobbying for the
emerging job of Chief RFID Strategist. Forbes says,
“The chief RFID strategist will design and implement
RFID systems and be an agent of change; a background
in business process transformation is helpful.”
It claims a starting salary in the $250,000 range.
The full list on the Christian & Timbers site liked
above also lists “Intellectual Property Attorney
with RFID expertise,” and Chief Logistics Officer
(again with RFID application expertise) as other hot
jobs.
Of course, early on in the days of bar coding we had
people with titles like “Director of Automatic
Identification,” but our impression is there aren’t
many of those jobs around any more. So our advice –
grab the brass ring now while you can, and while plotting
the move to Chief Supply Chain or Logistics Officer
when a company no longer needs an executive dedicated
to RFID.
Does your company have a dedicated position relative
to RFID? Do you think we will actually see executive
level RFID strategy slots? What will be the shelf life
of such titles? Let us know your thoughts.
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View
Full Article >>>
We rediscovered
this article from professor Dr. Hau Lee of Stanford
on supply chain performance management that we think
is worth reviewing.
First, Lee reviews the traditional approaches to performance
tracking. One of course, is simply the use of metrics
, but Lee points out several of the pitfalls of the
traditional approach:
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The focus on functional metrics ends
up driving locally optimized “silo”
behavior, not total supply chain performance. |
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Metric visibility often came too late to make
a difference, and doesn’t provide insight
into the future. |
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Many times, managers don’t know what to
do with the data. |
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Although selected metrics were called key performance
indicators (KPIs), there was no feedback or validation
to ensure that organizations were actually measuring
the most relevant business drivers. |
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Experienced managers learned how to “game”
or “tinker with” the metrics to make
themselves look good. |
The paper cites the example of a grocery chain with
particularly innovative “metrics tinkering.”
To boast the fill rate metric, “one particular
DC would monitor the supply conditions of its products.
When potential shortages were forthcoming, it would
advise the supermarkets of such potential shortage problems,
and request that the supermarkets not order those items
until later. This way, the fill rate metric always looked
impressive, since few orders were unfulfilled. …But
at the same time, the visibility of the true supply
performance and stock availability at the DC were lost."
So, is there a better approach? Lee argues for a closed
loop system, with six sigma type leanings. It should
include “The ability to define metrics, KPIs,
and exception conditions, as well as to update such
definitions when the environment changes, is a desirable
feature of any SCPM system. Once exceptions have been
identified, users need to understand the potential root
causes, the alternative courses of actions available,
and the impacts of such alternative actions. But once
responses have been defined, it is only through flawless
and timely execution of such responses that companies
achieve performance improvement. These responses should
then be documented, and the system updated with data
and information regarding both the occurrence and resolution
of the performance exceptions. The responsive actions
could, in some cases, result in new definitions of exceptions,
business rules, and business processes. Hence, a continuous
process of validation and updating is needed in the
cycle.”
How do you get there?
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Foster a performance-driven organization:
while it’s hard to define precisely what that
means, it’s relatively easy to distinguish
those that have it from those that don’t. |
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Technology: a hefty amount of on-line performance
monitoring tools is required. |
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Mustering the corporate will to make it happen,
rather than getting bogged down, as so many such
projects do. |
I think we really are still in the early stages of supply
chain performance measurement, and there are a number
of hurdles, including organization, reporting and incentive
structures, lack of the right technology, and the “important
but not urgent” syndrome. The article includes
case studies on how Flextronix and DaimlerChrysler made
major progress in this area.
What do you think the state of supply chain performance
management is? Are most current metrics systems just
fine? If not, is it a technology problem, or something
else? Let us know your thoughts.
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View
Full Article >>>
Nice piece from Harvard’s
Jonathon Byrnes on applying profitability management
principles to retail.
What is “profitability management?” It’s
an approach that stresses analysis of revenues and customer
segments to determine which are the real drivers of
profitability, which aren’t but could be if some
changes were made, and which customers should get the
Donald Trump treatment: “Your fired.”
The relatively few companies that have seriously gone
down this path usually report impressive results, though
most of course find such a proposition far too risky.
This piece notes, however, that many have argued the
strategy really only works for manufacturers and distributors
that can more flexibly choose to whom they sell, versus
a retailer that simply opens its doors to the public.
Writes Byrnes: “Recently, I worked with a major
retailer to improve its profitability. In a relatively
short time, we created a PC-based model that calculated
the profitability and return on invested capital for
every product in every store. We found the same profitability
pattern that I have seen in over a dozen other industries:
islands of high profits in a sea of marginal business.
There were large opportunities for profitability improvement
even in this well-run company.”
He quotes a retail executive as saying: "I suppose
that if supermarket executives sat down, they would
agree that probably 25 percent of the customers that
walk in the door cost them money. All the profit comes
from the 25 percent with the largest baskets—not
necessarily the largest revenue.... Well over half of
that profit comes from 10 percent or less of the base."
So what’s a retailer to do:
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Improve assortment management:
In general, smaller, tighter assortments are better.
“The exception is a specialty retailer competing
in a narrow segment with sophisticated buyers.”
Focus assortments towards the needs of high profit
customers. |
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Customer service management:
Perhaps a bit controversial, Byrnes argues retailers
should focus on in-stock positions for the category,
not necessarily each brand, as customers are often
indifferent to brand. He also suggests more proactive
programs for sales associates to push customers
towards high profit or excess inventory items. |
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Customer management: Figure out
who your high profit customers are, get them to
buy even more, find more like them. “Take
a few representative stores and analyze the breadth
of products your high-profit buyers purchase. Are
they buying your entry-level products? Your on-sale
products? Your traffic-drivers? Or, are they buying
high-profit, higher-end products at predictable
times, often early in the product lifecycle? If
the latter, you can focus your assortment to maximize
your sales to your power buyers, and stop losing
money on unprofitable customers.” |
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Product flow management: “In
a well-differentiated supply chain, products are
grouped into clusters corresponding to their demand
characteristics, merchandising characteristics,
and physical characteristics. Think about the differences
among high-turnover products, seasonal products,
and promotional products. Each of these clusters
requires a different set of operating policies and
a different supply chain. Each requires a different
game plan for effective management.” |
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Best practice management: Group
stores for analysis not by regions but similar in
size, demographics, competitive situation, and other
key factors, and analyze their performance. “Within
a statistically-sound peer group, you can observe
best practices and spread them quickly. The store
managers, and store operations group, can systematically
move the peer group of stores to its best-practice
standards. Internal best-practice benchmarking is
one of the fastest and most productive ways to improve
performance.” |
To succeed, retailers must develop a “culture
of profitability,” which may run a little counter
to the merchant in them that tends to focus on revenue
growth.
These recommendations make sense, but with the caveat
that the advice to focus on finding more “high
profit” retail customers is obviously a lot easier
said than done. This whole area is also of course related
to the efforts at “pricing” and “mark
down” optimization, which is slowly gaining some
real traction.
Should retailers focus more on category, product and
customer profitability than pure sales growth? Or
is
that a false promise in today’s world? Do we
have the data and tools needed to get there? Let us
know
your thoughts.
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The article about Tractor Supply caught my eye because
we are a firm that develops, manufactures, and delivers
private label lubricants to agricultural and construction
equipment dealers, like Tractor Supply, and we wrestle
constantly with the processes and procedures necessary
to keep our customers’ shelves full. We have implemented
several of the initiatives listed in the article, e.g.
allowing individual delivery sites to chose from a variety
of palletizing options; providing customer friendly
packing lists; agreeing with the customer on a target
ship date then notifying them upon shipment; and requiring
the carrier to notify the customer 24 hours prior to
delivery. However our experience shows that the effectiveness
of this has been constrained primarily by two (2) things:
1) the variable performance of customer selected carriers
and freight consolidators in picking up, moving, delivering,
and notifying our customers in a timely, predictable
manner; and 2) the diligence of the customers themselves
in verifying delivered quantities and putting away materials
when received. We see RFID as a promising solution when
it gets sufficiently cost effective to be used not only
by us at the manufacturing and logistics end, but by
our customers on the receiving end.
Michael D. Lawitts
Viscosity Oil Comjpany
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The comments
about PROMAT being held in Chicago in your last newsletter
raises a few other PROMAT issues. MHI says they periodically
survey the location issue but, I question who is being
surveyed (the devil is always in the details). It can’t
be marketing or sales, or management people being surveyed.
Any show predominately pulls attendees from a 300-mile
radius making the Chicago territories “richer”
with leads to the detriment of other exhibitor sales
territories. Moving the largest show in the industry
around would tend to even the lead wealth among sales
territories and thus increase the productivity of the
show for one of MHI’s customers …the exhibitor.
A second benefit of moving the show to different cities
would benefit another MHI customer…the attendee.
Since all shows are primarily regional, moving the show
around would allow more varied mix of regional attendees
(who might have trouble justifying travel to Chicago
in lean years) to be exposed to the educational events.
One of MHI’s objectives is to educate the market
on Logistics technologies. Well, the market is indeed
larger than a 300 mile radius around Chicago. Also,
exhibitors would reach a more varied mix of customers
with a “roving PROMAT” model. Sounds like
Win/Win for the exhibitor and the attendee?
Increased productivity is an important concept in Materials
Handling which brings me to my second PROMAT point.
Why does MHI insist upon PROMAT being a four day show?
The PROMAT fourth day traffic is not worth the investment
in time (mostly vendors talking to vendors on the 4th
day) It is insane that the exhibitors have tolerated
this situation for so long. Take 800 plus exhibitors
and multiply it by an average of four people per booth
times $250 (conservatively) of SG&A cost per person
for the 4th day/Previous night and you get a big number.
Combine that with the fact that you have taken sales
people out of the field for an additional day and the
cost becomes…well, priceless to sales and marketing
people.
So who is being surveyed by MHI? Why isn’t MHI
more responsive to the productivity needs of the exhibitor
customers and to attendees/potential attendees? Why
won’t MHI consider shortening the show to a 3-day
show? The reported answer from MHI is “If it were
a 3 day show, people would start leaving on the 2nd
day.” Well they might, but at least the exhibitor
won’t be forced to support the local economy for
a fourth day. That response from MHI is weak and could
be used as a stock answer for any show of any duration.
I suspect the real answer has more to do with being
able to charge $28/sq. ft. for exhibit space, bargaining
power with McCormick Place, or just a general risk aversion
to changing anything that could possibly harm the PROMAT
golden goose. I fear it is the latter answer as evidenced
by the inordinate time it took for MHI to move the NAMH
show out of Detroit despite years of exhibitor requests.
Whatever the reason, MHI would be well advised to be
more responsive to exhibitor Productivity needs as eventually
exhibitors will downsize their show investment to match
the return. This is already happening as vendors are
buying smaller booths. Eventually the market will correct
the situation as alternative technologies (Webinars/Seminars)
and competitive shows fill the void. Come on MHI, do
what is right for your customers. Adapting always involves
some risk. We deserve better and in the end, it will
result in a stronger PROMAT product.
Name withheld by request
I found your article on interleaving very interesting
reading and timely for some efforts we are putting forth
in this area.
We are a large manufacturer of plastic bottles and warehousing
is a big part of our operations. We implemented SAP
along with a fully functional WMS module about 4 yrs
ago in our operations. Interleaving was functionality
that was discussed at the time of implementation but
was delayed due to complexity to some future date. Over
the past 7 months, we have done some trial work with
the configuration necessary to make this happen as well
as try to better understand where we can deploy it in
our operations in order to gain a benefit in reduced
costs.
While hopes were high going into the effort, after overcoming
some of the technical issues associated with the configuration
of SAP to accomodate this, we are now working on the
business process aspects of taking advantage of the
opportunity. Your estimate of a 5-15% potential seems
more realistic as it relates to the opportunity to actually
gain an advantage against costs. The other comments
regarding complexity are certainly accurate, once we
got done, the software complexity does not appear to
be as substantial a roadblock as other aspects outside
of the software such as having tasks balanced in order
to have the interleaving opportunities available. Several
other points made are in line with our experience, also.
It was interesting to hear another perspective on this
as lots of people seem to talk about it, but it is much
harder to find people that are actually using it, as
you mention. It does seem to offer costs reduction opportunity
if it can be deployed into environments that can take
advantage of the functionality.
Mark Trott
Plastipak Packaging, Inc.
I agree with
your assessment on task interleaving. I have heard it
touted by many software vendors and spent a lot of research
on this, but when I finally got out on the warehouse
floor I found that most workers had stories of being
dispatched to the opposite end of a 400k sq. ft. warehouse
to pick up a pallet.
I do think this will work effectively with narrow aisle
storage with guided wire Turret Trucks in 5-6 pallets
high storage when you are picking for replenishment
and doing putaway simultaneously. There normally are
not the time constraints with doing putaway and pulling
for replenishment and it works well in this scenario.
Richard Milhollin
Integrated Logistics Management Solutions
An interesting
article on interleaving. As a system designer and consultant,
I have been a strong advocate of interleaving. It has
been effectively used for discrete pick, count and put
away tasks (pieces and pallets) since the late 70's
(Warner Robins AFB).
A major problem continues to be the lack of systems
capable of dynamic task assignments. For interleaving
to work properly, the system must be capable of handling
priority driven tasks. If the priority is put away,
the system must dynamically identify and prioritize
selected cycle count or retrieval tasks by location
age, distance, or other parameter. Many of the leading
WMS packages still cannot do this.
Your concern about training is unfounded in a properly
designed and configured system. Operators should be
directed to perform a specific task. At the completion
of that task, they are directed to the next. There is
no ambiguity. Again the problem lies with the system
capability and its ability to dynamically assign work.
It is a good topic and worthy of continued discussion.
I would only hope the WMS vendors are paying attention.
William Angell
W.M.Angell & Associates
Back in the days when I worked at Motorola, I was directly
involved in converting our manufacturing line to a 24x7
operation. Although my experience was in manufacturing
instead of distribution, I believe the "lessons
learned" are the same. You certainly highlighted
the most critical factor: the training of new employees.
Managers often talk about the importance of training,
but they often fail to "walk the talk" when
the pressure is on to get product out the door. In our
case, our volumes were increasing so rapidly, that we
were virtually hiring people off the street to cover
the evening and night shifts and putting them to work
with minimal training. It didn't take long for quality
and productivity to degrade. Briefly stated, it may
take you a bit longer to ramp up operations by investing
in training, but the cost is minimal compared to the
costs associated with decreased productivity, poor quality,
employee injuries, etc.
Two more points about training employees for evening/night
shifts: cross-train them in multiple processes and operations.
Absenteeism and employee turnover will be a problem
at the beginning, so you want to have the flexibility
to move people around in order to meet that night's
schedule and plan. Second, you must have ample coverage
of skilled technicians and facility support. In our
case, we had only one technician to cover multiple stations.
When two or more pieces of equipment developed problems,
he could only fix one at a time, so we were forced to
shut down operations and page technicians from the day
shift to come in.
With regards to supervisors, the most critical lesson
I learned (having served as the second shift supervisor
for several months) is to empower them to make important
decisions. There might be a tendency to view a night
supervisor as someone who simply oversees workers. But
the supervisor must understand the priority of orders
and customers so that when exceptions occur (and they
will) he can modify the schedule accordingly and re-assign
roles and responsibilities without waiting to get approval
from a higher-level manager. Although all supervisors
should be empowered regardless of shift, the simple
reality is that daytime supervisors typically can confer
with others when making decisions and so responsibility
is shouldered by many, while the nightshift supervisor
typically makes decisions alone and bears greater responsibility
for the actions taken or not taken.
Adrian Gonzalez
ARC Advisory Group
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