Digital disruption challenging supply chain dynamics

Digital age has changed a lot of things like DVDs, Cameras, cassette players, phones etc. and this space will keep on disrupting itself in near future also. A recent study published about Fortune 500 organizations, said that since 2000, 52% of the companies in the Fortune 500 have either gone bankrupt, have been acquired, ceased to exist, or dropped out of the Fortune 500. End to end supply chain visibility, which is also impacted by Digital Disruption, has changed a lot. Some of the organizations (very few) have adapted and are using digital technology to their advantage whereas the others are facing new challenges. According to Gartner, by 2016, less than 20% of the organizations will be able to provide end to end supply chain visibility. Also, as per them, 70% of large companies cannot achieve the Supply Chain Maturity required to be winners in 2020. Logistics, which is intrinsic part of any efficient supply chain, is becoming most important than ever and while its costs vary from a low 2.4% for a pharmaceutical industry to a high of 10.8% for CPG industry, the challenges are very similar across industries.

Modern Supply Chain needs to be more mobile with ubiquitous visibility and access, have more insights with real time information for best decisions, more collaborative for faster responsiveness from all stakeholders/participants and more engaging. Let us take an example of optimization of logistics. Digital tools available these days not only help in route and capacity optimization but also landed cost simulators will provide costing in different scenarios so that a decision can be taken after considering all parameters in terms of mode of transport, inco terms, exchange rates etc. These tools combine the knowledge of Wiki, social bookmarks, forums, blogging, in house multi team collaboration and even photo sharing & video campaigns to provide strong input to the supply chain planners.  New ideas that keep floating at different digital platforms will form the core of supply chain planning and innovation around it. Going forward, digital platforms will capture, develop and prioritize ideas, generate proposals, optimize investment and will help in commercializing ideas.  

The major benefits expected are faster speed to market, higher product revenue, improved product margins, better fill rates, improved product launch performance and improved sales effectiveness. 

 

The above article has been written by our guest Sam Page – Supply Chain Leader in a Fortune 500 organization.

Check for important features before selcting reverse auction solution

Procurements costs are a substantial chunk of the total supply chain costs and best in class organizations always strive to drive deflation in their procurement costs keeping transparency and quality intact. Reverse auctions have proven to be quite an effective tool over the years, in this endeavor and have allowed the organizations to rule the prices to a larger extent in addition of making sure that the vendors agree to the terms and conditions first and then quote their prices.

The process of reverse auction starts with doing some homework by the buyer organization to set the terms and conditions, pre-qualification criteria, specifications of the items/services to buy etc. and then an auction event is set up in the platform that they have deployed for this. The pre-qualified vendors (other vendors can also be invited) gets communication from the buyer or by the reverse auction service provider on buyer's behalf and they are notified about the event time, duration and other modalities. when the event starts, the vendors log in using their user id/password combinations and start bidding on the items/services. Since they can start bidding in the event only below the start price stated by the buyer, the buyer can control the prices to an extent. Also, since the process is transparent with vendors able to see the lowest bid value (but not the name of vendor who quoted it), they try to outpace each other and quote their best prices.This ensures that you get the best price for your buy and that too from the pick of vendors that you selected to be part of the process.

There are multiple solutions available in the market these days as reverse auction has already been proven as an effective tool to reduce costs, improve efficiency and transparency and brings host of other benefits to the organizations. The key features that you should look for, while evaluating the solutions are:

• Vendor name encryption: To maintain transparency of the whole process, it is imperative to have a feature which allows you to control, who in the organization can see the actual names of the vendors who are bidding in the event. This will make sure that if a buying executive within the organization has some friends in a vendor organization, the quotes are not leaked to them during the event and we have a fair play. On the other side, some senior executives like the chairman or CEO would like to see the actual vendor names instead of encrypted names. So a feature to control this ability is a must have in a reverse auction solution
• Different pricing models: Depending upon parameters like available time with existing teams, volume of auctions in a year, intricacies of business, specifications of items/services, ease of operations in reverse auction platform etc. you might want to try out multiple pricing options and the more popular ones are: Pricing per event - this is more popular if you want the service provider to create complete events for you), unlimited events for a lump sum fees - this is useful if you have the self service option and your team creates and manages the whole event on the service provider's platform, %age of spend in year - popularity of this model is going down these days, share of the saving you achieve by using reverse auction processes - this model is offered to those organizations only which measure the procurement costs as a general practice and have historical data to prove what is the as-is state: choose the best pricing model
• Refresh time of bids: Refresh time is the time taken by the platform to refresh the data entered by different bidders to show the buyer the latest data. This varies from 5 seconds to 30 seconds normally but it is important to weigh your requirements in details before you try to select the service provider
• Self Service and Assisted Events: The option to have self service events as well as assisted events is an important one as it allows you to move from self service to assisted event if there is some attrition in your team or the workload is huge in a specific period. An assisted event is the one for which the vendor communication, bid form design, managing the event etc. will be managed by the service provider and you just have to watch the event going on
• Spend analytics and Reporting features: Managing events is one activity that will help you save costs but to further drive deflation and to know which vendors are getting most orders - what is my spend per vendor etc., you will need some spend analytics capabilities in the solution. Look for these capabilities and match with your requirements

The above are some important features that are required to be looked at while your evaluation process is on. But please note that the above list is nowhere near the exhaustive list and you should first write down the requirements in details, map them to the capabilities of the solution and then take a decision.

Finally an Inventory Solution for Wholesalers, Dealers and Large Retailers

For ages, the resellers like wholesalers, dealers and retailers had to forecast, plan and store their own inventory where all of the risk is theirs only and the rise and fall of demand kept on impacting their on time delivery, their return on investment, stock-outs and so on. Never ever they had a collaborative solution which can provide them access to a preferred group of resellers inventory and they can collaborate to re-distribute, re-allocate and replenish inventory based on the groups requirement.

Few days back, I witnessed an inventory management solution which could help the resellers do all this and not only this but the solution offered lot of other benefits. I prefer to call this solution as Shared Inventory Pool Solution (SIPS). This solution ensures that you can afford to keep lesser inventory and at the same time the participants of the group can plan together which slow moving items should be kept jointly or can allocate these items storage to different participants so that at least others can release their capital to that part and use it elsewhere. The benefits of SIPS are:

• It allows aftermarket manufacturers, dealers, wholesalers, retailers etc. to indicate which parts of the inventory can be shared with the participant group members and which part of the inventory can be visible to them. This helps you control your inventory privacy as well as let others know if you have something that they need and you have extra numbers, then those can be borrowed and sold
• Provides real time access to shared inventory pool whenever a customer orders which helps in giving accurate available to promise (ATP) date to them
• Provides ability to split an order across multiple participants in case the participant is not ready to part with its critical inventory and in this case, the customer will still get a unified quote and no participant will lose sales for want of stock
• KPIs like obsolescence, scrap, shelf life, on-time delivery, perfect orders fulfillment get improved
• Best in class inventory codification, catalog management and categorization
• Provides ability to integrate with multiple ERP systems and extract allowed visible items data to be shown in a single screen to all the participants

Since SIPS can also be a cloud based solution, it is an innovative and practical application in supply chain space. I am not sure if this solution is available for businesses other than resellers for now in the market but it is just the matter of time if it is accepted in the reseller market and is able to show its value.

SCM Strategy: Do not lose sales due to inventory issues

I have written earlier about inventory optimization and its key drivers and thanks to my readers, the article made it to the best inventory optimization articles and was appreciated by Chief Supply Chain Officers across the globe. It also triggered a debate on how should we first identify the exact causes of lost sales due to inventory related issues and deploy pertinent solutions. Normally, lost sales due to inventory drives the business teams to push for increase in inventory levels and if the supply chain team resists, the sales team will start adding buffers to the safety stocks of at least the best selling items and hence the inventory levels will rise automatically over time. These measures  however, are less scientific and panic driven which increase the working capital and inventory carrying costs. It also reduces the inventory turns and leads the best in class organization towards the laggards position, though the service levels might increase.

This whole situation compelled me to take the article to the next level and come out with the possible reasons, causes, solutions and enablers on the subject of losing sales due to inventory issues. I could create a small framework that talks mainly just about the key reasons etc. and do not cover everything related to it. Infact, this framework (which is given below) is industry agnostic and can be the starting point of inventory optimization for most organizations. It also incorporates the best practices that major supply chain leader companies (like Apple's iPAD SCM policy) deploy and is worth a look and evaluation.

In case the above picture is not visible or you need further details on how to use the framework to identify the reasons, causes, solutions and enablers for your own organizations, please contact me through the contact form. I share the knowledge completely free of cost.

iPad supply chain success shows why Apple is no. 1 in AMR Top 25 supply chains

The hype around iPad reached its pinnacle when Apple announced that from 12th March this year, they will start accepting pre-orders and from there their journey to fulfill the demand across US started. Nothing unusual, they planned to make things work in terms of high percentage of on-time delivery but the way responded to the market dynamics and improved their supply chain in record time is commendable.

To start with, they planned to have enough stocks at hand when the actual shipping’s were to start not knowing that the best of their forecasts are to be defeated this time as the actual demand for iPad exceeded everybody’s imagination. Though they played a nice card with a condition that one customer can pre book at the most 2 iPads to make sure that the reach is more and people do not stock them to resell at more price in case of shortages from the company, but still a small hiccup at their manufacturing facility ensured that they got delayed in their first shipping. The actual shipping stated from 3rd April this year which was a small but impatient 4 days delay for the prospective buyers but once there, Apple ensured seamless availability in announced markets.

Looking at the unprecedented demand (they sold 200000 units on the first day itself), they further fine tuned the supply chain with improved forecasts and negotiations with their key suppliers to bring their lead times down substantially. The suppliers they talked to, included Broadcom, Samsung, Foxlink technology, Toshiba, Cirrus Logic, LG Display and Seiko Epson and this showed an excellent example of practical collaborative planning where Apple started sharing actual demand and choice pattern with their suppliers and end to end collaboration with dedicated teams at each supplier and Apple made sure that they have the most efficient and effective supply chain for iPad.

The consumers had something else in mind and the excitement generated by iPad’s revolutionary design and features was too high to resist by a lot of people. This further increased the demand and again posed issues with Apple’s supply chain teams. But unlike Amazon which failed to cater to the peak in demand particularly when Oprah endorsed their recently launched product “Kindle” in one of her shows and had to delay the shipping by multiple weeks, Apple’s team seemed to be well prepared for the new situation and handled this quite well. The result was evident by their sale numbers which said 2 Million units sold in 60 days. An accomplishment noticed by Chief Supply Chain Officers across the globe.

When AMR Research announced the results of “The AMR Supply Chain Top 25 for 2010”, Apple again topped the list for consecutively the third time thus scoring a hat trick. As per AMR, “Apple dominates because it consistently brings both operational and innovation excellence to bear in some of the most competitive markets in the world. From a supply chain perspective, the company's ability to ramp volumes both in hardware and software while redefining what a mobile telephone is supposed to be has been impressive. Unwilling to rest, Apple has continued to push innovation with its launch of the iPad, which is another new platform product for digital content and a further extension of the brand”.

All three major ingredients of today’s best in class supply chain that are embedded innovation, networked supply and demand shaping, are the pillars of Apple’s supply chain and this is one main reason why it could push out companies like Proctor & Gamble, Cisco, Wal-Mart, Pepsi, Dell, Samsung etc. each one of whom are infact supply chain icons across the globe and are followed with respect.

Hats off to Apple SCM Team!

6PWXGU8TT4X7

Effective Warranty Management: Road to delight customers and save costs

Warranty Management is often a relatively neglected area in total supply chain and is seen more as a liability than a way to reduce cost of production, procurement and returns. Infact, effective warranty management not only satisfies your customers (rather delight them in most cases) but also contributes substantially in cost reduction in above mentioned areas.

By warranty management, I mean creation of warranty structure and pricing, administration of warranty claims, management of claims, OEM parts recovery from suppliers and customer management. So there is a gamut of activities that are part of whole warranty management and if this is handled in an effective manner, we will be able to reduce costs substantially. To manage warranty processes, there is also a need of automation of the processes like:

• Deploy and end to end workflow based process that starts with returns from customer to process the warranty claim – This will ensure that teams are clear about their responsibilities, their turn around times, approvals required etc. and it will save time to process the warranty claims. Result: dollar savings, higher customer satisfaction
• Seamlessly integrate service execution operations with warranty management – All periodic services when integrated with the warranty management process, will provide more opportunities to increase revenue by selling extended warranties to customers and this will also help in reducing warranty related repairs thus reducing cost for the organization. This will also help us to mail down the root cause of the product failures and thus further reducing the warranty incidents
• Implement warranty analytics system to get information on warranty patterns, product feedback and competition data. This will ensure that warranty teams are updated and can initiate actions within the organization to reduce warranty cost for a product and incorporate latest features based on usage patterns of customers. It is a strong tool to also curb the fraudulent claims and facilitate to the speed of recovery of parts claims from the suppliers
• Deploy warranty management software to track performance of warranty settlement in terms of time taken; cost of processing and value added suggestions sent to production to reduce further warranty cost in product. This will help you to improve the product as well as provide data points for further improving the processes
• Create a central knowledge portal which records the best practices for one product’s warranty management and shares with other teams so that successful strategies can be replicated

All above enablers will not only reduce the cost of warranty processing but also will increase revenue (by selling extended warranties) and improve the customer satisfaction to the level of customer delight. We all know that how important is customer satisfaction or delight these days and how it can be converted more revenue in future. So, let us use warranty management to our benefit and deploy the best practices as above for a better managed supply chain.

Best Practice: 5 ways to implement strategic sourcing and save cost

The biggest objectives of sourcing operations are to save cost and make sure that right material is available at right time. Since both pull each other in terms of getting one of them fulfilled makes the other one unfulfilled, it has become a dire need for the industry today to move from the tactical ways to improve the efficiencies in sourcing operations to the strategic ways so that more organized and intelligent purchasing decisions are taken as a process.

The today’s strategic sourcing initiative can be facilitated using following 5 ways:

• Automated sourcing or eSourcing: This is the most important and the best way to achieve higher efficiency from your sourcing process. Automation of activities like RFPs, supplier negotiations on lead time-price etc. and other online requests like advance shipment notice, changes in delivery schedule will make sure that the delay in communication is least and the manual errors are avoided. This also can be supplemented with supplier base, item category and process knowledge to support online negotiations and maintain advanced sourcing results
• Contract Lifecycle Management solution: Lot of times, we fail tot rack the key milestones in our contract and either lose on discount or lose the already calculated potential savings. Activities like creation of contract, approval management, maintaining the service level agreements and key data analysis helps the sourcing team to execute and monitor the supplier contracts much more efficiently and hence can bring good savings
• Spend Analysis: Do you know, even the best managed organizations have only 70% spend under management. This is an area which offers a lot of space to improve and availability of this spend data helps not only drive deflation with suppliers, it also provides you opportunity to aid your other sourcing efforts. Spend Management tools will add to your ability to extract data from multiple systems, its transformation and enrichment and reporting in user friendly formats. You will be able to see data on the basis of vendors, item price, item category or UNSPC codes which will immensely help you in negotiating with your vendors and improve cost savings
• Collaborative Sourcing: It is time to include your suppliers as well as customers in your sourcing cycle not from costing perspective but from item lifecycle value creation perspective. You need to start exploiting your suppliers innovative skills to your advantage by collaborating more with them and collectively reach your targets of cost savings
• Reverse Auctions: We all know that reverse auctions are auctions where the bidder is the seller and not the buyer. This concept forces competing vendors to reduce their bids in order to win a particular contract and in process you get the cost savings. Implement a reverse auction system in your organization and start using this for at least the high volume commoditized products and items. In addition of the savings, this is more transparent and competitive way of sourcing which takes the whole process to a strategic sourcing level. One caveat though, most of the suppliers do not like this process as this squeezes their margins and does not help in long term relationships with suppliers. Implement it but balance it in such a way that your partnership with current suppliers is not impacted.

I am sure above practices and tools have the potential to help you achieve your strategic sourcing objectives and can bring cost savings to your operations.

Improve Reverse Logistics for making SCM Green & to Increase Revenue

Reverse logistics is the largest part of the broader supply chain management process called as returns management. Returns Management, in addition to catering to handling returns that come back from customers due to various reasons, also puts in place, processes to reduce the number of returns by doing some reverse engineering with the help of departments like warranty, product quality, marketing and testing – but still the major portion of a returns management process is management of returning goods from the customer, that starts with customer’s request to return the item and ends with putting away that item in the pertinent warehouse. This part of returns management is called as reverse logistics and lately, the scope of reverse logistics has been increased at least in the best in class organizations, and now it includes facilitating smooth refund to the customer as well as ensuring a good percentage of items getting either recycled or re packaged to be sold to new customers in different product categories. This is the need of the hour for all of us to put more focus in, and this will help us not only to increase our revenue (discussed later) and to make our supply chain greener (recycling). Let me first break down few broader sub processes of Reverse Logistics so that we can focus on the pertinent parts:

• Customer request register and finalize modalities/approvals (if required)
• Organize the returns, their journey back and putting them away in warehouse
• Credit customer for the returns
• Re-cycle/Repackage returned goods and keep them ready for selling

Now, to make sure that you increase revenue from your returned goods, it is imperative that you need to increase the percentage of the returned goods that can be sold back by recycling or re-packaging while keeping in mind the compliance related stuff where those can not be sold as new again. All this can be achieved to the closest by following strategies:

• Ensure that the process of customer approaching you and returning goods is smooth not just because you need to compliant against some practices but to make sure that the customer satisfaction increases rather than decreasing by returning the goods sold by you. A smooth and customer friendly process will increase their confidence in your product quality, minimize their purchasing risks (so they will come again to you) and increase your brand value
• Revisit & Leanergize your process of picking the returned goods from your point of sale or retailer, organizing their safe and cost effective journey to your warehouse and to your supplier’s warehouse (in case of buy items) and putting away the goods in your warehouse in earmarked sections. This will make sure that your:
• Cost of returning goods is lowest – For example: using the same trucks/vehicles that bring goods from your suppliers, to send the returned goods to them can save cost of shipment
• Quality of goods is not diminished during transit
• Picking the same goods for reselling is easiest and transparent
• Early identify the goods that need repair before being sold again and have a process in place to make sure that repair required parts reach directly to your or suppliers depots where they can be rectified – This will save multiple journeys for same parts
• Recycle the packaging material of returned goods for good corporate citizenship and a cleaner and greener supply chain
• Separate out the physical receiving sub-process from the account credit sub-process and allow for gaps between physical and accounting such as, out of a returned pallet only part may be moved back to inventory and another part of it may be credited to your customer
• Integrate your IT systems such as handheld scanners, warehouse management system and accounting system share the information and are in synchronized at all times – for faster and cost effective process of returns

Since this area is huge, the strategies can go on and on but there is a need to identify which ones suit our own organization and execute them to the plan to achieve increased revenues as well as greener supply chain contributed by efficient reverse logistics management.

Product Configuration: Is this your biggest challenge in Quote to Mfg cycle

Are you one of those engineering organizations that pride on meeting all of the customer’s requirements in their engineered products? If yes, then I am sure, in the process of meeting customer’s varied requirements and even more about their ever changing requirements during the course of manufacturing of the product, you spend a lot of resources and this is one area where your lean objectives still are not met.

The whole Quote to Mfg cycle is quite longer for the engineering organizations and often the longest period as well as the area for maximum improvement is product design and configuration. Lot of times, companies struggle with lack of resources, maintaining configuration rules and synchronized data and lack of internal alignment and here is where your enterprise systems – be it supply chain system or ERP system, play a major role. Multiple product configurator solutions are available in the market these days though the most important factor for considering a configurator solution remains its ability of re-use of earlier designs and reducing the design time by bringing down the scenario of starting from scratch every time, but the factors like ease of use as well as good product support have become equally important.

A good product configuration solution not only reduces the design lead time but also instills confidence in your customers that you have excellent capabilities to immediately & correctly articulate their requirements and also can show them in quick time about how the actual completed product will look like. The other benefits of a good order configuration process are:

• Improved accuracy
• Better quality
• Increased flexibility
• Reduced manual work and hence errors
• Good data integration which make your process lean and efficient
• Improved speed of quoting
• Single face to customer for quotation or proposal
• Better product costing
• Improved ability to cross sell/upsell
• Much faster and improved new product introduction
• Improved ability to charge premium for custom products as well as modified products during the course of manufacturing

More so, you can conquer the bigger challenge of integrating sales, manufacturing and engineering information to have a single source of truth for all these business functions. Look at the above benefits and introspect if you are able to relate to the challenges and longer and inaccurate product configuration process a pain area for you as well, then re-visit your strategy and consider deploying a product configuration solution.

SCM Lean Strategy: Keep your Vendor Master clean and well maintained

Vendor Master Management is one of the most critical parts of the procurement and accounts payable business functions and often it creates inefficiencies in the processes and stops their movement towards a leaner supply chain. This failure of system controls due to unclean, redundant or ambiguous data in vendor master can result in duplicate and erroneous payments, missed potential discounts, delay in check realization, un-applied or misapplied credits, reporting errors for tax and fraud etc. There is a strong business case to maintain a healthy vendor master so that the vision of lean supply chain becomes reality as soon as possible for an organization. The steps that we need to take care of, for a well maintained vendor master are:

• Identify the right owner: While every organization has an owner for the vendor master but it is equally important that the owner know about the vendor master requirements, its standards, data quality-accuracy-consistency maintenance ways etc.
• Deploy Master Data Management Solution: Modern MDM solutions are an excellent value-add for maintaining your master data and vendor master being one of most critical masters, will benefit a lot from this initiative. It will ensure that you have enough controls, automation, access-create-modify-delete rules in place and are being monitored by management regularly
• Clean the data and deploy cleaner rules: It is well known that duplicate, redundant and inconsistent data spoils the whole procurement cycle in terms of reduced effectiveness and efficiency and it has bullwhip impact on the end to end supply chain. Many a times, this data inaccuracy robs an organization to claim volume discounts, deflation etc. from suppliers. We not only need to clean the data but also make rules stringent enough so that the data stays clean
• Standardize naming conventions: No need to mention that if a supplier is named as Alkes Info Systems and AIS and Alkes and all of them are coming as different vendors in your report, how in-effective will be our vendor management policy. We need to standardize the naming convention of naming vendors, items etc. so that no duplicate data is created – Most of this will be taken care of if you have right owners and an MDM solution in place
• Separate out one time vendors with regular vendors: Often, one time vendors (or less than 5 transaction vendors) inflate the data in vendor master and the supplier reporting MIS gets skewed. Explore strategic sourcing and the use of p-cards to reduce need for one-time vendors. For lowering the risk of duplicate payments, consider not allowing manual or electronic data interchange transactions with vendors on p-card programs

Other than above, smaller measures like purging the unused records, retaining the right records, updating the policies regularly etc. will also help in keeping the health of vendor master as good for supply chain.

SCM Strategy: Transition from forecast driven to demand driven

Today, when market volatility and turbulence has become the norm and customer expectations are on the rise, a fresh look at your supply chain strategy is like a doctor’s prescription for a symptom that can inflate your organization’s medical condition anytime. Without being more mystifying, let me come to the point of moving your organization from being forecast driven (be it make to stock or make to order) to demand driven. The reasons are clear, that we all are feeling pressure like never before to reduce the supply chain costing, the lead times, visibility and on top of all, want to improve our on time delivery for complete customer satisfaction and achievement of these business metrics can be improved vastly by moving towards demand driven manufacturing. It also helps to reduce the risk in the supply chain with the help of shared information between the constituents of supply chain.

We all are aware, that in the current century, supply chains compete with each other instead of organizations and there are some pressures and challenges in industry these days that force you to be more responsive and competitive in the market:

• Life cycle of services, product and technology are shortening
• Increased competition challenges forces more frequent product changes
• High levels of variants and product proliferation increase business risk
• Self imposed actions/processes lead to supply chain ‘chaos’
• Forecast-based management no longer viable as it increases inventory and does heavy filtering of real demand

Now is the time to forecast only for capacity and execution needs to be based on the real demand. If we bring the consumer at the start of the supply chain from being at the end and start focusing on more and more collaboration with our customers, our suppliers and our 3PL agents, we will be able to work on the base of real demand and not on the basis of forecast. Another reason for moving away from forecasts is that every constituent in the supply chain tends to build its own buffers and it leads to increased inventory at all levels and since all constituents have separate inventory, the overall visibility of total inflated inventory is low and extra working capital is engaged.

Moving to demand driven order fulfillment which is based on real time collaboration with your supply chain constituents, will ensure that there are no buffers as everyone works together and come to consensus on a single demand pattern which drives our order fulfillment and hence procurement, manufacturing and resource utilization. This will also deliver benefits like:

• Much reduced bullwhip effect in supply chain
• Optimized inventory at all levels
• Better availability and less stock outs
• Improved asset utilization
• Enhanced demand management

So, rethink your supply chain strategies and design them for the 21st century for better topline and bottomline.

SCM Strategy: Don’t press wrong buttons to reduce Cash to Cash Cycle

Cash to Cash cycle is the one of the most important metrics to measure business performance and also it tells a CEO about how lean its business is. There is immense pressure on the supply chain professionals to reduce the cash to cash cycle and free up working capital to increase the ROI from business. This sometimes, forces them to take wrong panicky measures to reduce this cycle and in the long run, the business gets to the see the negative side effects of the strategy. I wanted to focus in this article about what actions we should take to reduce the cash to cash cycle and what actions should be avoided.

Most of us know that cash to cash cycle is the period in which the portion of working capital (cash) is out of reach of your business. It means that shorter the cycle, leaner your business is. In other words, cash to cash cycle depends on three major factors:

• Outstanding invoices from your customers
• Capital deployed in inventory
• Outstanding payable invoices of suppliers

Putting this in a formula, it will become as:

Cash to Cash Cycle = Period sales outstanding + Period cash is locked as inventory – Period cash is free as business did not pay its invoices

Period in above formula will remain constant for all three variables and normally it is taken as one day.

The most obvious targets from above formula, for reducing the cash to cash cycle are reducing the number of days of customer outstanding, reducing inventory and increasing the number of days, we take to pay up suppliers and rightly so but the way of doing it, is often wrong. Some organizations will start pressurizing suppliers to accept more than 60 days or even 90 days as payment terms to shorten their C2C cycle and this can be dangerous as your suppliers viability is at stake and either you will see a growing rift between yours and supplier organization, reduction in quality, increase of prices whenever they get chance or suppliers moving away from you altogether.

Another mistake we normally do is to start reducing inventory indiscreetly instead of looking at the ways how the inventory can be moved faster by offering discounts on slow moving items, by improving the lead times of inventory receipt at your warehouse or by working with suppliers for moving towards just in time inventory etc. The reduction in inventory though will give you shorter C2C cycle but can also trigger multiple stock outs bringing down business and customer satisfaction.

The third mistake is little difficult to achieve as it includes the customer but we see this also often. The organizations not only stop offering credit to customers but also start asking about advance payments in certain cases. No need to say, what impact, this will have on your customers and will they not move away from you given the first available opportunity. Instead, we should focus on improving speed invoice issue and processing, improve response to disputed bills, reduce invoicing errors and reduce the incidents of bad debts. These internal measures will make sure that you are not playing a one sided pressure game and not making your partners pay for your operations. Instead you truly will achieve lean operations and reduction in cash to cash cycle will automatically come as a byproduct.

Now, please don’t ask me, what do I do if my cash to cash cycle is zero (yes, it can achieved) and I have excess cash. Go acquire a target company or pay bonus to your employees or start a new product or service range etc. – the list is endless and fruitful.

SCM Trend: Linking pricing with supply chain

Pressure on supply chain efficiency and effectiveness increased during the just concluded recession and even after the lean period ended, the pressures remained there, as the customer is becoming more and more demanding everyday. This pressure can be eased a little bit by weighing the cost of improving the supply chain with the discounts that can be offered to the customer in case they are ready to wait for a certain period of time which is above and beyond the stated lead times. The trend has already taken shape in few industries and the best in class players have started using this as a strategy to ease the pressure on supply chain. This not only give customers a welcome cost benefit for their wait time as well as give time to the organization for strengthening the supply chain while not losing sales due to capacity constraints.

To explain the scenario a little bit in detail, let me cite a case study here:

A camera manufacturer/retailer sells its most popular model at $200 and the lead time it promises their online customers to deliver the camera at their home is 7 working days if the destination is within USA. Now, what they do is to implement a two tier pricing for the camera model and provide an option to the customers as below:

• Camera price with 7 day lead time : $200
• Camera price with 21 day lead time : $180

So they offered a 10% discount on their most selling camera model if the customer agrees to delay the shipping by 2 weeks. They found that 28% of their customers opted for the 2 week delay and hence the organization not only could maintain better on-time delivery performance for the one week lead time products but also could ease the pressure on the supply chain. Customers also did not go to the competitors products and also were happy to get some discount on their favorite product. Since, this pricing strategy was for a limited period, it soon ended and by the time, using their demand and forecasting intelligence, the organization made arrangements to improve supply chain capacity.

In above case, though the pricing strategy implemented by the organization was for a limited period but it makes sense to have such a strategy for those of your products where bringing the lead time to the promised or to match competition, costs you more than providing some discount to customers for some delay in lead time. But, beware of setting dangerous precedents as if the competitors start following this (which they will), then you might not be able to go back to original pricing and this can erode your margin for ever. A well thought out strategy is needed in this case to make sure that you get the benefits of this pricing strategy and not lose in the long run.

Free up your working capital by increasing global inventory visibility

I do not have to sell the idea of reducting your working capital as there is not even a single organization that does not want to freeup its working capital so that it can be invested in expanding, modernizing or improving its operations in many ways. I want to share one of the effective ways of not only reducing the working capital but also to improve some other critical business metrics. 

In case, an organization has multiple warehouses (and in multiple continents) due to reasons like faster delivery to customer, savings in shipping costs or low cost local sourcing of components/products then it makes good sense to improve on its capabilities in having visibility of inventory while booking a sales order from a customer. It means, that if an organization has the ability to see in real time, which all of its warehouses has the item available required by the customer then it makes easier to make decision on which warehouse should be used to ship the material so that following metrics can be improved:

• Reduction in  slow moving inventory - If a warehouse holds large stock of slow moving items and a "closer to customer" warehouse also have that item but in bare minimum quanttities, even then, one might want to select the warehouse which is far but provides the opportunity to reduce that slow moving item in bigger numbers
• Reduction in item obsolescence - Some items have shelf life and having visibility on their stock in different warehouses provides us the opportunity to ship the soon expiring items first
• Higher ontime delivery - Again, if a nearer (and default) warehouse for a customer, does not have the item and will have to procure it to ship to the customer, then visibility of stock in other warehouses provides the opportunity to check out if the item is available elsewhere and can be shipped to the customer cost effectively without compromising on on time delivery
• Higher Customer Satisfaction - This business metric will get a boost from the above metric (high ontime delivery) and we are sure to see much improved confidence in our organization when their orders are reaching on time more frequently
• Higher Inventory Turns - The most obvious and effective benefit of global inventory visibility is its capability to improve the overall inventory turns by provding us the opportunity to optimize stock at all warehouses and hence improving annual inventory turns which results in freeing up of working capital

So, keep an eye on a solution in your Supply Chain that provides you the capability to improve your real time visibility to global warehouses so that you can reap the benefits that it brings.

SCM Strategy: Improve your data quality index to improve supply chain performance

Doing more with less or same resources is the mantra for everyone these days and supply chain is also in the same boat. World over, there is a huge pressure to improve the performance of the supply chain of organizations and large investments have been earmarked for deploying state of the art or what do we call them as best of breed systems to measure the supply chain performance and efficiency in real-time. These investments are, in spite of the ongoing recession or low demand phase where revenues have shrunk and margins have taken a nose dive. The only reason is that the organizations have the belief that there is enough room for improvements in this area and these investments will help them realize long term benefits.

All these big ticket IT systems largely work on the principle of improving the processes, automating the transactions, reducing the cycle time and improve the collaboration between departments of the organizations as well as with suppliers and customers. The improvement targets are fixed after measuring the as-is values of the decided SCM metrics and then a time-bound plan with well defined strategy is put in place to achieve the best in class supply chain performance.

This post focuses on the last part where these systems measure the SCM metrics and accordingly a plan is made to improve those. We always spent huge money on deploying these systems but the focus on the quality of data is not on similar scale. Lot of times, it is seen that the SCM Metrics had a wrong as-is value because the data quality was not correct. What happens due to this is obvious – the targets either will be conservative or aggressive. Both of these situations defeat the purpose of the whole exercise...

SCM Strategy: Use Supply Chain Intelligence to improve operations

With global supply chains involving more suppliers, customers and intermediaries today than ever before, managing supply chain-wide information and knowledge effectively is becoming critical to business success.

If we need to improve the performance of supply chain, then first of all, we need to know where exactly we lack. World over, customers are getting more and more demanding and they now need faster and accurate fulfillment. To add to this, the demand is changing fast and organizations need to add capability to become flexible in responding to demand changes. On top of this, supply chain is increasingly becoming more and more complex due to globalization and there are much more KPIs coming into picture, to be controlled and improved so that the overall supply chain performance is improved.

Supply Chain Intelligence or Business Intelligence  for Supply Chain operations takes different forms and can be either operations focused (tactical)...

Discussion: What key metrics to attack, to optimize your inventory?

Traditionally, it has been understood that to improve customer service you have to have higher level of inventory. This ensures that orders are filled quickly and accurately. But it also means that the value of your inventory is high, to the detriment of your organization as it ties up cash and warehouse space that could be put to other and better uses. So we need to optimize inventory in a way that does not impact your service levels and yet frees up cash. There are multiple ways to achieve this and each one of us uses one or other ways to optimize our inventory and yet keep the service levels at high levels. I used social media to gather inputs from industry experts on this subject so that we can uncover the metrics that they are

Collaborative Forecasting: Improve forecast accuracy & de-risk your operations

Forecast accuracy is often blamed by non sales functions in an organization for bringing increase to inventory and to reduce service levels by increasing stock outs frequency. We forget while blaming that it is estimation and the actual facts and this is the reason it is called as forecast. Forecasts will always be inaccurate though the level of accuracy might increase in some cases and will deteriorate in others. Now, as we know, the whole supply chain efficiency and performance is highly dependent on the forecast and since the forecast has their own dynamic inaccurate levels, it is important for us to de-risk our supply chain from the impact of inaccuracies in the forecasts. We generally have two major types of forecasts viz. demand forecast and the supply forecast. The demand forecast is to help manage your operations, and supply forecast to send to your suppliers to prepare them to respond to your requirements. Again, the supply forecast is a direct result of the demand forecast. Now, either we can improve the forecast accuracy by improving collaboration between customers and suppliers or/and we can de-risk our operations from the impact of forecast inaccuracy by incorporating quicker response to demand changes.

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How can we improve the accuracy of forecast? The forecaster’s dream is to develop a process that predicts the exact demand that will be received in every future period. With so many factors influencing actual demand, an exact forecast will remain just that – a dream. So it can be helpful to think of your actual demand as a combination of both a predictable portion and a random portion. Your hope is that by considering all the “right” factors in your forecasting process, the portion of your demand that is random disappears, thus greatly minimizing the risk of forecast error. The ultimate measure of an accurate forecast is the number of times you had hit stock outs while improving or maintaining your inventory turns per annum. If your demand is very predictable, you could carry very little extra inventory and you would never have a shortage. Inventory can be used to buffer against the unpredictable demand and there are numerous costs which can be avoided by carrying just the right quantity of inventory for every part you sell.A lot of mathematical research has been done to generate forecasts from historical demand. The assumption is that past results are a reliable predictor of the future. As world economic events continue to unfold, it is quite clear that historical demand is, at best, just one possible indicator of future demand. Therefore, in today’s environment, “statistical forecasts” should be seen as just one input to the demand planning process.In addition to using mathematics to generate a better forecast from historical data, another approach to improve forecast accuracy is collaboration. Now, what is collaboration? According to Wikipedia, Collaboration is a recursive process where two or more people or organizations work together toward an intersection of common goals done by sharing knowledge, learning and building consensus. Collaboration seldom requires leadership and can sometimes bring better results through decentralization and egalitarianism. In particular, teams that work collaboratively can obtain greater resources, recognition and reward when facing competition for finite resources. Additionally, the Collaborative forecasting is the process for collecting and reconciling information from within and outside the organization to come up with a single projection of demand. Normally, a collaborative process is more suited to create a demand forecast that considers multiple, and sometimes competing factors like:

• Historical trend of demand, including trends, similar products and seasonality
• Macro and micro economic trends
• Advertising & promotions
• New product introductions, competitor activities and pricing shifts
• Insights of demand and supply chain planning participants

The collaborative forecasting process normally needs to get inputs as below:

• Sales force sends their data on forecasts. Most of the times, this will be at finished goods level and this finished good might be a complete assembly or a service part
• Customers, distributors, dealers and other sales channels also send their inputs as per the local demand patterns and event dependencies
• Marketing and Statistical teams check the demand history for respective period
• Market research team will capture the other market factors like any positive or negative events coming up, money flow and the factors it is dependent on, product trend in the target market segment etc.

All above inputs, when combined should be reviewed by the forecasting team so we are closest to the actual demand. Here we need to keep in mind that the estimates coming from distributors, dealers and other sales channels will factor in the current inventory position at their ends and so will not present the correct picture of the actual demand in field. This can be easily sorted out by asking them to send their by as well as sell side of forecasts and including the sell side to our forecasts for estimating the sales. But, please note that to ensure correct inventory you still need to consider the buy side story from these channels. And yes, before I forget and close this post – please do not think that you or your team can manage all above inputs in Excel or other spreadsheets and do not need technological tools to come out with the final forecasts after compiling data from all sources. The lack of an efficient, collaborative tool forces people to make many compromises in their process. To take examples, they will:

• Run the process infrequently (once a month at best, often once per quarter)
• Bucket data by large time buckets (monthly forecast and monthly actual sales)
• Summarize data by product family or other superset of parts
• Determine forecasts for individual SKUs through disaggregation models from the level where the forecast is actually created

Collaborative forecasting has evolved a lot during the last few years and there are multiple tools and products available in market that will help you not only standardize and automate the process but will also assist in taking correct decisions by providing results from various statistical forecasting methods. Collaborative forecasting certainly is a much better way to improve your forecast accuracy and thus de-risk your supply chain operations from the variability in demand.

Supply Chain Strategy: The importance of doing RIGHT things

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If I ask a simple question that how do you think your supply chain is faring and which are the improvement areas you identified for this year, I will get more questions than answers requesting that the question needs to be more precise. Exactly this happens if I give you an answer for a question that what do you think is the definition of a perfect supply chain? If the answer is like, "A perfect supply chain means delivering the right product in the right quantity to the right place at the right time in the right condition to the right customer at the right cost."....oohhff...I lost my breath for few seconds. Did you get to understand the answer? I have more questions now after seeing the answer and similarly I am sure you will also be in same position.

Well, the answer makes a lot of sense but will need a little elaboration so that the correct Supply Chain Strategy can be out in place to reach that perfect level or to be nearest to it at least. Let me start with the first ingredient which is "Right Product" - some of us will wonder if it is really a big deal to ship the right product to the customer and the answer is - Yes, it is. consider an example where your organization manufactures rail engines that have long life. If after 12 years of engine operation, you get an order from the customer that they need the oil pump for an engine that you sold to them and to add a pinch of salt here, they also need a clamp of the hose pipe that comes out of the radiator. They do not have a drawing of the parts they need but since the engine has stopped working - they are losing revenue and need the parts urgently. After receiving the order, the order entry executives searched through the database and looked at the inventory but could not find the same part as long back your organization improved the part quality as well as design of the engine to next level and these parts are no longer available with them. But after discussion with the customer engineer, they conceptualized what exactly is required and ordered a supplier to send this to them at the earliest. What do you think - the chances of sending the wrong part exist or not? This is not an exception and its occurrence is substantially high to impact your supply chain. I have a personal example to state here - I ordered a pizza recently with the one of the popular chains and found that instead of delivering the pizza that I ordered, they sent me another pizza. After I called them to state my dis-satisfaction, they claimed that since the pizza I ordered, was not available so they sent me the higher priced pizza at the same cost but since the pizza they sent, had mushrooms in it and I am allergic to mushrooms, it was of no use to me. So again an issue of "Right Product". There are numerous examples like where we fail to understand the real need of the customer and hence fail to ship the right product - This is the starting point of your supply chain perfection aspirations - Ship the Right Product.

The next three important ingredients - the Right Quantity at Right Place at Right Time, is somewhat easy to explain as all of us understand if we do not supply the full quantity of the product at the requested time and place, we lose on customer satisfaction and service levels. Some times, we might have to face penalties and other times, we might lose the customers themselves. These ingredients drive the most important and cost centric supply chain strategy which is to decide on inventory levels, order entry & execution bandwidth and location & number of distribution centres. All three of them are cost centres and it is highly recommended to optimize these if we need near perfection in supply chain.

The next one is the right condition, which again is easy to understand that we need to send the shipments duly packed so that they reach their destination in the condition which we want them to be in, when they reach the customer end. Please note that this not only pertains to the breakable or brittle items only but almost to all items like in the case of hazardous material - enough risk mitigation is required, in case of eatables or flowers - speed of shipment is important, in case of complex toys - a catalogue of assembling the toy, is required etc. So we need to make sure that we ship the item in such a way that it reaches the customer in right condition.

We now move to the next right move, which is Right Customer. Sounds like an easy one and people will start saying that we know our customers, we know who has ordered and we always send to them. But, slowly we will start hearing that yes, we had sent the generator self start batteries last year to the Cincinnati plant of our customer instead of sending to Atlanta and we had to airlift them at our cost to ship them back to Cincinnati. What would have happened in this case? What are the SCM Metrics, that were impacted by this error - the most important of them all i.e. Ontime delivery. Whole measures that were put in place to improve supply chain performance were of no use and we still missed on our on time delivery despite huge inventory carrying costs that we were carrying to ensure better service levels. So it is ultra important to Ship to the Right Customer.

The last and the controller of supply chain performance is the right cost. Obviously, if cost is not one of the criteria of a perfect supply chain, it would have been much easier for us to reach the perfection level. We can easily pile on inventory to make sure that we never hit stock outs, employ more than enough people to execute shipping, have state level distribution centres to ship the item with minimum shipping time etc. but since the organization needs to make money and one of the important factors in that endeavor is cost, we need to make sure that the delivery of the product to the customer is at the Right Cost to the organization.

I hope, we are now more clear on the ingredients of a perfect supply chain and this can help all of us to make better Supply Chain Strategies to reach our goals.

Strategy: Catalysts to achieve your Lean Objectives

Few weeks back, I wrote an article on the role of demand planning, forecasting and inventory optimization in achieving Lean Manufacturing. This article evoked a great response among readers and since the comments on this blog were not working for some time in between, I got maximum comments in my mail box or in the discussion I posted on one of the social media sites.

The responses were largely questions and expert opinions and I thought to share some of them here with the readers as these are highly rich in content and will be helpful for all of us to think about our strategies to achieve lean manufacturing with or without the help of planning.

Largely, there were two schools of thought on whether planning (forecasting and demand planning) helps in achieving lean manufacturing to an extent that the investments made in these areas are justified and are able to provide the returns accordingly. Thoughts were divided and one group was sure to say that forecasting is just a guess and will remain a guess so it is sheer time wastage to improve your guesses and hope that these will help you in your lean objectives whereas the other group was as sure as the first one on the fact that forecasting can surely help in achieving lean objectives as it reduces inventory and improves the service levels, which makes easier for the manufacturing operations to stick to a single product line for optimum period so that the manufacturing line efficiency improves.

To quote some of the responses, Wally Johnson (VP Supply Chain/Operations at EPIC Technologies LLC) said, “A forecast is nothing more than an educated guess. The better your guess, the closer you get to maximizing you revenue and minimizing the waste in either lost sales or excess inventory. As you reduce your lead times and your ability to respond, the forecast becomes less important. At the limit, planning is reduced to communicating needs to suppliers and aggregating immediate needs from customers. So, no planning doesn't help you get lean, but the less lean you are, the more you need it”. Another comment from Michael Pitcher (President, Operations Excellence LLC) is - “Forecasting can be used, at least initially, to size buffers and marketplaces. This is especially true for new products, cyclical/seasonal products, or short life-cycle products. Once buffers are established, actual pull must be used to recalculate and resize buffers and marketplaces. So, there can be value to demand planning and forecasting. On the other hand, it can be a huge waste of time and energy when over emphasized.”

We had quite an opposite viewpoint from Connie Wendzicki (COO at Griffin Technology), who says – “The demand planning is what you do to calculate the correct inventory levels when you implement the lean system. These inventory levels have to be revised frequently as the demand and supply patterns change. Even Toyota had an extensive planning department to accomplish this function. If you set-up lean without figuring out the right inventory levels you can be in for a few big surprises! On the other hand - analysis paraysis is not good either. Better to put the system in place with the best inventory levels you have vs. wait forever until you figure out what the "perfect" inventory levels and reorder points should be. There is some tolerance for error. You will at least see where the problems are (where inventory is piling up or where lines are starved for inventory) if you implement the system and you can tweak it then”. Connie is helped by the comment from Ron Golan (Director at XML Limited) who mentioned that, “…my experience taught me to believe in continuously trying to optimize demand planning and forecasting - you may not hit bulls-eye, but the closer you get, the more efficient you are in minimizing lost sales and excess inventory. And the build-to-order approach - that might work for Dell, but is completely unpractical for so many other companies. Plus, in many cases you'll just be passing the issue to your suppliers, and remember some of us may be on the receiving end of this”.

Carlos Moreno (Senior Logistics and Supply Chain Analyst with Medtronic) mentioned a third approach with his comment – “Lean is a tool for continuous improvement is a cycle that never ends. It may be applied to improve lead times, supplier performance, operations and supply chain processes just to give some examples. Forecast and demand planning are useful as strategic and long-term planning tools and also subject for continuous improvement. Since forecast and demand planning are estimated guesses based on crystal ball projections (marketing and sales forecast), I would see them as variables out of the control of the supply chain management processes for inventory control and customer order fulfillment”.

These were few of the responses and comments and the one thing that came out clearly and I replied to them in most of my replies is that alone forecasting or demand planning is not enough and the another part of our strategy here needs to include reduction in lead times so that the dependence of operations on accuracy of forecast reduces. Basically, if the supply chain responsiveness is fast (in other words lead times are low) then the organizations have more capability of responding faster to the changing demands and hence they can achieve leaner manufacturing processes as well as lower inventories with improved service levels.

I liked the idea of freeing up of operations with their dependence on forecast accuracy and as put up by Swaminathan Appu Iyer (DGM – Distribution & Logistics at Reliance Retail Limited), “The manufacturer whose efforts to effectively forecast and plan demand are being undermined by an increasingly complex business environment. Manufacturers large and small are struggling with the fact that demand forecasting and planning, never a simple process, are today being made much more difficult by trends such as globalization, shortened product lifecycles, and customer demand for more product variety. In fact, many manufacturers are finding that, despite what they thought were their best efforts, forecasting error rates are actually rising”. This shows that planning is something that most organizations are still struggling with.

All these comments and inputs lead me to think about a joint strategy that has to have a blend of both i.e. a focus in planning as well as supply chain responsiveness to achieve our lean objectives. I echo comments from Charles Stuart (Director at TGX Limited) who says that – “Puneesh, I would like to clarify my view - it is as you also approach it - a blend of both. A forecast is a forecast - a guess, a prediction etc. Good tools and good process will generally make a better forecast. But fewer businesses put the same kind of effort into LT reduction which can have responsiveness and an inventory benefit. I have worked in businesses that have done both approaches with significant benefits from each element. I suggest it should not be either/or but both”

Before I sign off, I would like to thank all the experts who shared their approaches and thoughts on the topic. I could not highlight comments or inputs from all contributors in this post due to similarity in thought communication in rest of them but tried to capture the essence of all so that readers get to know from who’s who of the corporate world on the future strategies on the topic and accordingly design the same for their organizations.