| August
26, 2004 |
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This week's audio interview with a leading supply chain
expert...
 Feautured
Guest:
Stephen Craig
Principal, CP Consulting
Click
here to play the full audio brief.
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Dan Gilmore
Editor-in-Chief |
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It’s
back to school time of course, and if your experience
mirrors ours, many of the key items are not on the shelf
when you visit your local retailer.
All of which got me thinking about RFID, and its promise
to significantly eliminate retail stock outs. As with
all these retail-consumer goods supply chain initiatives
over the past decade or more, RFID has two main thrusts:
cost reduction (lower inventories) and revenue enhancement
(reduced stock outs).
As one of the papers (written by Accenture) from the
Auto ID Center at MIT stated: “Research for the
Coca-Cola Retailing Research Council indicates a potential
for lost sales of 3% annually to CPG manufacturers due
to out-of-stocks, equating to a $12 billion revenue
opportunity.”
They are only leaving one thing out: on the revenue
side, it’s a zero-sum game.
There’s no question that in parallel with RFID,
we are seeing an increased focus on the retail shelf
and the consumer “moment of truth” by both
retailers and manufacturers. This includes much commentary
by industry analysts, and specific initiatives by companies
such as Procter & Gamble (see SCDigest
Archive from May 2004).
According to P&G, when customers can't find the
P&G product they're looking for, the retailer loses
the sale 41% of the time, and the customer buys a non-P&G
product 29% of the time. What I’m afraid is getting
lost, is that no matter what P&G, Target or anyone
else does, we consumers are still going to spend exactly
the same amount of money, or nearly so. Using P&G’s
statistics, 61% of the time (100 minus 29%) when facing
a stock out, the consumer either buys another P&G
brand or package type, or goes to another store to buy
the specific product they want. You can also deduce
that of that 61% when they still buy P&G, 41% of
the time the consumer goes to another store, and 20%
they buy another P&G product in the same store.
29% of the time they pick up something from Kimberly-Clark,
Unilever or Colgate.
The point is that the consumer spending only grows by
such factors as the economy, discretionary income and
population growth, and that any top line benefits a
retailer of consumer goods company received from RFID
or any other initiative can only come out of some competitor’s
pocket. The $12 billion cited by Accenture is not extra
revenue really available to manufacturers and retailers,
but rather the amount of consumer spending that might
shift to one retailer or manufacturer from another based
on relative in-stock performance.
Why is this important? Because it says that the top
line benefits from initiatives such as RFID (assuming
for a moment they are real) are market share gains,
not market expansion, as commentators often seem to
imply. Meaning:
| 1. |
Early adopters
will take market share from late adopters, at
least temporarily. |
| 2. |
When most everyone is
doing it, things will return to as before, absent
any lasting impact from the “moment of truth”
switches to other brands or retailers that were
more consistently in stock. |
By contrast, the inventory savings from RFID and other
initiatives are not zero-sum games. Everyone has the
chance to reduce total inventories needed to support
a given amount of retail sales, and total supply chain
costs really are reduced.
All of which seems to me that in calculating increased
sales from reduced stock-outs (as I have seen in several
theoretic ROI business cases), companies need to be
very careful to consider how much of their sales are
really lost to out-of-stocks.
I realize the issue is more complicated than this, and
involves a retailer’s “scorecards”
for vendors in a category, of which in-stock performance
is a key indicator. But over time, my wife is still
going to buy the same amount of Tide, Crest and adhesive
tape no matter what they do with RFID.
Is top line growth from in-stock improvement really
a zero-sum game, or is actual consumer spending likely
to be increased? Is the economic/ROI analysis around
improved in-stock from RFID and other initiatives being
done right?
Let
us know your thoughts.
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 By
Doug Hubbard
President, Hubbard Decision Research
In a
recent interview, SCDigest editor Dan Gilmore
gave me the opportunity to explain a little bit
about “Applied Information Economics”
(AIE). AIE is the method I developed about nine
years ago which applies advanced financial and
statistical modeling methods to risky technology
investments. I’ve known Dan for a few years
and always found him to be a good proponent of
more sophisticated quantitative methods. When
he suggested I contribute to a regular column,
I took the opportunity as a way to discuss AIE
in depth within the context of Supply Chain Management.
I’ve used AIE now on a total of 44 distinct
IT investments over the last nine years in 22
separate organizations of all types. I’ve
also done larger “AIE Implementation”
projects - where the company adopts AIE as a standard
process – in five organizations. I’ve
written about using more quantitative methods
in various periodicals but, so far, I haven’t
written much about what I’ve learned from
all those projects. To me, each one is like another
sample in an ongoing experiment. I collect the
data and track the findings over the years.
AIE,
in part, utilizes what is called a “Monte
Carlo” simulation. Monte Carlo simulations
generate thousands of scenarios according to the
defined probabilities for all the uncertain variables
in the business case (e.g., just about all of
them). But AIE adds more than the traditional
Monte Carlo simulation ...
For
complete column, click here
Give
us your feedback.
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Approximately how many new stock-keeping units
(SKUs) are added to retail store shelves in the
U.S. each year?
Answer
below
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Feedback
is coming in at a rate greater than we can publish
it – thanks for your response. We received
a considerable amount of response on our First
Thoughts piece two weeks ago on Collaborative
Logistics. This includes our Feedback of the Week
from Bill Loftis of the Context Group.
Among
the many other letters below, you’ll find
one that suggests this is really just another
form of wholesale distribution (I was waiting
for someone to suggest that), and another that
warns that anti-trust issues are big barriers.
Take
a look - you’ll enjoy the comments.
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 >>
It’s
a year old, but found an interesting white paper on
understanding and mitigating the risks of global sourcing
on the Stanford University supply chain forum web site.
It’s worth a read.
The author cites a 1988 article from Harvard Business
Review, at the very early stages of the offshoring movement,
which argues that the costs of inventory obsolescence,
inventory buffers, and lack of demand responsiveness
would negate the cost-per-unit benefits of offshoring
production.
Well, the incredible growth in offshore production shows
most companies don’t agree with this analysis.
China confidently boasts it has now become “the
factory to the world.” But, the author notes,
there are of course real risks that can reduce the benefits
of offshoring. These include:
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Under-calculation
of the total acquisition and delivery costs |
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Lost sales from under-responsiveness
to market demand |
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Problems with quality
and execution over this extended supply chain |
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Loss of intellectual
property and key engineering/design skills |
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Long-term impact on the company |
The key point is made that while companies understand
these risks at the “headline” level, few
have actually evaluated these risks thoroughly and taken
steps to mitigate the risks. As global sourcing has
become a “proxy” for increased profitability,
the urge to move offshore has become incredibly powerful
– and indeed a survival issue for some companies.
What to do? There’s more than we can summarize
here, but a few of the ideas include:
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Total acquisition
cost management: the ability to very accurately
estimate the total delivered cost of globally
sourced goods |
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One touch information
flow: eliminate errors from double entry, duplication,
etc. |
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Total product identification
and compliance: use of auto ID to accurately track
product movements |
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Real-time routing through
dynamic visibility: see across the long supply
chain, with the ability to react if a disruption/exception
occurs |
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Vendor development: understanding vendor cycle
times, and partnering to cut cycle time and risk |
Key Takeaway: While offshoring must
be considered as part of virtually every company’s
supply chain strategy, as we’ve said on these
pages before, the benefits from these new sourcing arrangements
are often dissipated through lack of understanding and
management of the costs and risks. While “visibility”
is an important goal in any supply chain, it is simply
essential to manage global sourcing programs.
Do companies understand and manage the risks and hidden
costs of global sourcing well? Is visibility the key?
What do you think are the biggest global sourcing risks?
Let us know your thoughts.
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View
Full Article >>
Mercer Management recently authored
a nice piece on how the growth strategies of many companies
(mergers and acquisitions, product and channel expansion,
personalization of products for customers) has in many
cases obscured true and added complexity that in total,
actually reduce company profits. It notes some convincing
evidence that in many consumer products companies over
the past few years, profitability has well lagged top
line revenue growth.
The problem? In summary, not all revenue and customers
are equal: “A subset of any individual business
component, whether that component is brands, products,
channels, or customers, constitutes the vast majority
of profits. Other, marginal subsets contribute little
to profitability as currently configured and likely
do not justify invested or potential capital. The remaining
subsets destroy value for the enterprise based on their
actual direct contribution or their impact on system-wide
economics.”
Supply chain costs are of course a significant variable
in assessing the profitability of components of the
business, and supply chain reconfiguration becomes a
critical level in unlocking profits. The challenge most
companies have is accurately allocating “overhead”
costs to individual business components (products, channels,
customers). The difficultly doing that can mask unprofitable
components and lead to poor choices. The paper cites
an example of a company that re-looked at how they considered
manufacturing overhead, found several of its lines were
not profitable, and were able to close some plants and
move the profitable products made at those facilities
to other plants.
“Rationalizing” SKUs and brands is at the
core of this effort – Mercer makes the point that
most companies have brand/SKU revenue concentration
curves with “long tails” - many lower volume
SKUs that deliver little revenue and profit.
This insight is not new – at a supply chain level,
failure to integrate processes and operations across
acquired businesses are a key factor in why the potential
results from these combinations so often fail to be
realized. Most companies feel the pain of SKU proliferation
– but are unable to muster the will or discipline
to do anything about it.
Do most complex companies have significant opportunities
to reduce costs through rationalizing both supply chain
operations and SKU/brand portfolios? If so, why don’t
more of them take action? Let us know your thoughts.
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View
Full Article >>
CIO magazine
has been running a series on companies with “agile”
supply chains – the ability to respond quickly
to changing needs and requirements both in real time
and over time. This piece highlights how Chrysler has
used IT to increase agility, and suggests some overall
principles for companies to consider.
What defines agility? Fast and flexible, for sure, but
also transparency – “Managers can ‘see
into’ systems and, when necessary, make ad hoc
adjustments that keep manufacturing and delivery processes
aligned with customers' needs and their own bottom line.”
A few of the keys:
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Look
beyond the shop floor: Agility isn’t
just achieved from internal operations, but by
crafting agile relationships with suppliers. Chrysler,
for example, has knitted together a variety of
information sharing and collaboration tools for
its suppliers, including web-based transaction
processing, and an “Integrated Volume Planning”
application that shares sales and forecast data
back through the supply base, and collaborative
design tools. |
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Share lots of
data: Break down the cultural and related
barriers to broadly sharing supply chain information
with suppliers and distributors. |
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Put timely data
to work: Take steps to capture and communicate
more data in real time. More widespread use of
mobile data collection devices can play a key
role in improving data timeliness, and agile companies
are adding event notification and response systems
to take advantage of real-time data. Chrysler
tracks something like 400,000 events/steps in
its supply chain processes, enabling the company
to synchronize delivery with suppliers in a just-in-time
mode for 95% of its parts and assemblies. |
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Get close to
your partners: It’s a two-way street
– the information flow needs to be not only
from your company to your suppliers, but from
them back to you as well. The article cites a
partnering effort between Boeing and GKN Aerospace,
in which Boeing’s actual consumption is
fed directly into GNK systems, dramatically improving
its production scheduling and reducing overall
cycle times. GNK states it has reduced inventories
by 35% as a result of the effort. The system was
a product of detailed discussions between cross-functional
teams at both companies. |
OK, this
all sounds good – it also sounds very expensive.
Chrysler’s systems were built over many years
with automotive OEM IT budgets. Nonetheless, for the
rest of us, I think we can take some steps to integrate
the supply chain and increase agility that focus on
the lowest hanging fruit to start, mapping cross-company
business processes to look for opportunities, and use
the internet to share information (there are many package
products that do that today).
What do you think defines an “agile supply chain?”
Is aggressive use of IT essential to increasing supply
chain agility? Can the supplier integration efforts
of the automotive industry provide lessons for other
verticals? Let us know your thoughts.
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You may be
right in expecting more multi-enterprise activity in
the future. The opportunity seems too great to hold
back. Someone once mentioned that it offers the chance
for fractional ownership of dedicated pricing, which
is huge. We are seeing more interest in TL collaboration
due to current capacity issues, particularly in niche
markets like flatbed. Improved service seems an overlooked
value, as some multi-enterprise solutions increase delivery
frequency, reducing retail stock-outs. Maybe we'll see
it ramp up as 3PLs develop more flexible networks that
benefit both distribution and transportation.
The greatest hurdles seem to be cultural. One example:
in a recent project, plants were reluctant to share
"their" capacity with others, even with substantial
savings (over 15%) and improved utilization. For these
shippers, proven capacity was a higher priority than
potential cost reduction. It has taken time to work
through these issues.
Outsourcing or centralization can solve cultural and
savings allocation issues, but not every company wants
to go that route. We are currently in the process of
building a model to match shipments and allow individual
plants to retain control, in order to get started. Fully
automated optimization seems technically possible, but
for most not culturally, at least not yet.
Bill Loftis
The Context Group
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I
agree with your article on the multi-party concept.
I am familiar with ES3 and the concept is good. However
here in the US we have not taken full advantage of all
the new European material handling innovations, which
reduce distribution operating cost. Not till companies
and 3PLs adapt newer lower cost solutions will the multi-party
really pay off.
Daryl Hull - Director
Modern Handling Equipment Co.
The
concept of shared resources among competitors is not
new but there are roadblocks, not the least of which
are antitrust concerns. And before you suggest that
we do away with antitrust laws, remember that we tried
that route. Monopolies are not efficient for enterprises
or governments.
Jack Kuchta
Gross & Associates
What came to my mind when reading your piece on "multi-party
logistics"? From Britannica On Line---- wholesaling:
“The term may include sales to a retailer, wholesaler,
broker, distributor, or business enterprise. Wholesaling
usually involves sales in quantity and at a cost significantly
lower than the average retail price. It has become an
important step in the supply chain since the introduction
of mass production and mass marketing techniques in
the 19th century. Without wholesalers, manufacturers
would have to market their products directly to a huge
number of customers at high unit costs, and buyers would
have to deal with an inconveniently large number of
suppliers. There are three major categories of wholesalers.
Merchant wholesalers, the most important category, are
independent businesses that buy merchandise in great
quantities from manufacturers and resell it to retailers.”
Mark Neuwirth
Unitech
Your story struck a chord. In 1963, when I was 14, I
delivered the Akron Beacon Journal newspaper in Macedonia,
Ohio, a suburb midway between Cleveland and Akron. The
two Cleveland papers of that time went on strike that
winter, and by the time the strike was over, I had 100%
of the market for daily newspapers in my territory,
79 houses out of 79 houses.
When the strike was over, the Cleveland Plain Dealer
needed a carrier. So I got that route, too. Then the
Cleveland Press needed a carrier. When I inquired about
that route, the motor route driver said "Hey, don't
you deliver the Beacon Journal? And the Plain Dealer?
Why would you want another route?" I tried to explain
about the economies associated with delivering multiple
papers to the same house, but he didn't get it. I also
explained that the few deadbeats on my route wouldn't
be able to switch to another paper to avoid paying me.
That he got, but he didn't like the control I would
have, so I stayed with just the two routes. It wasn't
bad, except on Sundays, when I had about 140 large Sunday
papers to deliver.
I think I was meant to go into logistics and supply
management. Just thought you'd like the story. If I
were doing it today, I'd try to peddle USA Today and
the WSJ, too.
Emil Macek Jr., C.P.M.,
CPIM, CIRM
As I see from different automotive OEM and top 10 Tier-1
suppliers, each of their plants works as separate units.
To give you an example, even the same containers are
named differently from one plant to another. Most of
them have ERP systems, Mainframe systems and Data warehousing
systems but with duplicate/incorrect data that can only
be understood and used by particular plant people (maybe
this is called creating a job security for themselves).
Lot of collaboration can happen within the network of
those shippers individually and is currently taken up
as a major project in many companies. I think multi-party
collaboration is the next logical phase after internal
collaboration fruits are seen and is a long way to go.
Automotive Industry reader
Name withheld by request
Let's call it "3PC...Third Party Consolidation".
It's one of the oldest forms of "collaboration",
yet one of the biggest "missed opportunities"
in supply chains today. Everyone knows that transportation
is the big dog when it comes to logistics costs, yet
so many seem to be oblivious to the savings potential
of consolidated shipments, not to mention the service
(lead time reductions, on-time delivery improvements)
and receiving dock productivity (TL vs LTL deliveries)
benefits. I cringe every time I see/hear about a new
DC startup announcement from a manufacturer ... another
opportunity missed!
This is not a technology play; it's a strategic, network/process
design issue that requires out-of-the-box thinking on
the part of a company that is stuck in their current
box. In my opinion, 3PL operators have done a very poor
job of selling the value of their services. Outsourcing
for outsourcing's sake does nothing for productivity.
Without consolidation, real economic value is hard to
deliver. 3PL's need to sell, and deliver, the value
of consolidation. Again, this is not new ... we need
to look around with our eyes open, and see what's already
goin' on...all "solutions" are not residing
on your hard drive!
Dave Sandoval
B.U.S. Systems, Inc.
Many years ago, I worked on a study for three brewers
in another country who were considering joint distribution
to bars and restaurants. The studied predicted substantial
savings as the customer lists and delivery frequencies
were very similar. In the end though, brewer #1 with
about 50 percent market share opted out. They decided
that reducing distribution cost for all three would
also reduce their cost advantage compared to the other
two brewers.
Bob Ruuhela
A. Epstein & Sons International, Inc
I believe the issue is more around what will blast that
BIG hole in the barriers (I think most of us in the
industry know the barriers). What will be the catalyst
to put critical mass into this next level of collaboration?
If it is not government intervention out of necessity,
e.g., over congestion in the major urban areas, then
it will simply be an ROI that business can no longer
ignore! The "drivers" are well in place today
to take true costs to realistic all time altitudes that
no one with a minimal sense of mathematical and industry
knowledge can ignore.
There is little blood left in the stone; and the case
will not be difficult to make. Then the challenge is
insuring the decision makers within the group are all
getting on the same page and able to work through it
(more change), at least some things are consistent.
Martin Kelly
iWheels Logistics
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