First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  - Dec. 5, 2014 -  

What Would You Tell Accountants about Supply Chain Part 2?


A couple of weeks ago, I began a summary of a presentation I gave to an audience of accountants in Orlando at a meeting of large tax and audit firm BD0. It turned out to be quite popular and drew a number of reader comments. See What to Tell Accountants about Supply Chain?

My somewhat vague mission in Orlando was to identify the current supply chain issues and trends that were important to CXOs, so that BDO consultants would be better informed generally and able to look for opportunities to perhaps help their clients in this area.

So, as described in part 1, I started by defining what a supply chain is, in part using the SCOR model, but adding that the image showing the Plan, Source, Make, Deliver and Return processes with the three key flows of the supply chain (material, information and cash) came across in too linear a fashion. It was really more of a supply chain "web" than the picture might suggest.

Gilmore Says:

With this perfect network, Unilever would have logistics costs equal to just 55% of what it actually spent, and was able to identify all the different things (operational inefficiency, costs to meet extra customer requests, etc.) that accounted for the other 45%.

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I next thought it made sense to connect the supply chain to shareholder value, starting with a quick review of the famous DuPont financial model, and the role of supply chain in impacting that formula.

That was followed a summary of related insight developed by a man named Gerry Marsh, who has shown how two companies in the same sector with similar earnings and growth rates can have very different stock multiples, because one of the two throws off a lot more cash from its revenue. Of course, the supply chain is a key driver of operating cash flow generation.

So with that, I moved next to a series of key supply chain issues that I thought would likely most connect with their work. I considered but in the end did not address the "tax efficient" supply chain, in part because like most I am no expert, even though I do believe there are some real opportunities here if you can manage an iterative process of operational and tax-aware supply chain network design.

I started by noting that in terms of inventory levels, frankly we seem to have stalled. The annual REL working capital data, which we analyze, has shown corporate inventory levels rising in recent years, albeit very modestly. Our analysis by sector has shown very little progress over the past decade in most of them.

The graphic below charts the inventory-to-sales ratio, as tracked by the US government, measuring on-hand inventory levels against one month's worth of sales. As can be seen, other than the wild gyration in 2008-09 associated with the great recession, inventory levels have in fact been flat for a decade, even gently rising in the past few years. That despite lots of efforts to attack inventory, much technology spend to do so, etc.

Why is that? More on this someday soon, but I cited several factors: a general bias in the last few years towards top line revenue growth, relatedly SKU proliferation and new product introductions, and longer offshore supply chains. But more provocatively, I suggest many companies may have simply hit an inventory wall within the context of their current supply chain designs.


Next, I talked about the imperative to map and model a company's supply chain. The mapping took on extra urgency after the events of 2012 - earthquake and tsunami in Japan and massive flooding in Thailand, which caused huge supply chain disruptions. Shortly thereafter, a Toyota executive noted: "Our assumption that we had a total grip on our supply chain proved to be an illusion."

Mapping your supply chain down multiple levels is a massive job - but essential to understand and ultimately mitigate supply chain risk. The Japan incidence, for example, highlighted how often dual sourcing was not as risk free as thought if both suppliers are located in the same geographic area. Ditto with two or three suppliers for a given item which are all dependent on s single vendor for some key component or material.

That connects in a sense to building an on-going model of your supply chain that can be used to make both strategic and more tactical supply chain decisions. Companies that do such modelling in my opinion have a huge advantage over those that do not. I had a lot more to say on this, but will save that for some other day.

Next up: supply chain metrics. As I have said before here, most companies have KPIs out the wazoo today, and tracking performance against those metrics has become very sophisticated. My belief is that most supply chains generally hit their metrics most of the time.

Yet, study after study seems to show a wide disparity in supply chain performance. How can this be, given what I noted above? There must be at least one of three causes: (1) too many companies are being rigorous around the wrong metrics; companies are hitting their metrics, but they are the wrong measures; (2) the right metrics are largely in place, but the targets are set at the wrong levels; or (3) SCM performance is limited by the existing network design, to reiterate a point made above.

I think it is largely factors 2 and 3.

To the last point, I told the fascinating story we recounted earlier this year of how Unilever was able to define a "perfect logistics network," where all plants carried all products, everything went out on a full truckloads, operations went perfectly according to plan, etc. With this perfect network, Unilever would have logistics costs equal to just 55% of what it actually spent, and was able to identify all the different things (operational inefficiency, costs to meet extra customer requests, etc.) that accounted for the other 45%.

Next up was the wave towards Cloud-based software, and my belief it will soon come to dominate the landscape. I covered the usual ground of noting the pros and cons of Cloud versus traditional, and then made the point I offered just a few weeks ago here that companies should think along these lines: the net present value of the costs over some period (e.g., 5 or 7 years) should be the same whether you pay for an upfront license and maintenance or go the subscription/transaction route. This seemed to go over well with the accountants.

Finally (at least for here - I covered a couple of more things in Orlando) I took a look at risk management - still a very hot topic.

There is the traditional approach of a 2 x 2 matrix, with the dimensions of likelihood of occurrence (high/low) and size of impact from a given event/disruption. Some have taken this to a 3 x 3 approach to add a middle ground.

I've seen some companies add some intelligence with colors in the matrix approach to identify the speed at which an event would cause a major disruption, which is a nice touch. But I then presented Dr. David Simchi-Levi's new Risk Exposure Index (REI), which really for the first time quantifies supply chain risk by calculating "time to recovery" and then the resulting "financial impact" from a disruption. Totaling these together can quantify the full supply chain risk - very good thinking.

By the way, the REI has been updated/enhanced - look for a Videocast on this topic from SCDigest very soon.
I think I connected with the accounting audience, though you can never be sure. The good news is I realized this is all just as relevant for regular supply chain folks too, so I will carry it forward elsewhere in 2015 as well, starting with the Toronto CSCMP chapter early next year.

What would you tell accountants about supply chain? Any reaction to what Gilmore presented? Let us know your thoughts at the Feedback button (email) or section (web form) below.


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