Hello, my name is Jim Tompkins and I am the CEO of Tompkins Associates and Tompkins International.
I am pleased to be with you today to present our sixth segment in this second series of the Global Supply Chain Podcast.
What we have done so far on this second series is an overview of the supply chain and then the supply chain elements: buy, make, move, and store. Now we move to the last in this series, the Sell component of the supply chain.
Joining me today is a Tompkins Associates expert on the Sell component, Ralph Cox. Welcome Ralph.
I find it interesting Ralph that I get more questions on the Sell component of the supply chain, as many think the sell function is about good merchandising, marketing, retailing and customer relationships, and they don't really see it as a part of the supply chain.
What do supply chains have to do with Sell?
Ralph:
Well, quite a lot, actually. While the functions which you mentioned -- merchandising, marketing, and sales -- all obviously play a crucial, direct role in sell, supply chains provide the product planning and execution.
That is, supply chains fulfill the commitments that have been made and provide the product availability that customers deserve. In other words, supply chains have a number of aspects which can either facilitate or completely undermine good merchandising, marketing and sales efforts -- forecasting, demand planning, and inventory management are the three most fundamental. They are present in virtually all supply chains.
As a simple example, if supply chains don't work well, distribution centers and stores run out of product and customer needs can't be met. No one wants that to happen. And, to avoid out-of-stock situations, a remarkable number of supply chain functions have to work well, and together, if costs are to be controlled simultaneously.
Going in the opposite direction, when a customer returns a product for repair, if the reverse logistics don't function in a timely manner, the customer just waits and waits, becoming more and more frustrated.
Supply chains need to position the right product in the right quantity at the right place at the right time. Anything else either hurts customers or exacerbates costs. And sometimes, unfortunately, customers can be hurt and costs exacerbated simultaneously.
Jim:
OK, good; so without effective supply chains Sell would not work well at all. So Ralph, how do supply chain processes keep customers satisfied or even better, delighted?
Ralph:
Several ways, some strategic and some tactical.
First, through accurate forecasting. Whether for ongoing routine demand, for one-time events such as sales promotions or for new SKUs to be added, accurate forecasting is the foundation of an effective supply chain. When sales are under-forecast, products are not available or are delayed. And, when sales are over-forecast, excess inventory is created which ultimately raises product costs or reduces profits.
Second, through solid demand planning at the SKU-location level. Good demand planning requires the use of accurate, up-to-date information on capabilities, capacities and lead times regardless of whether the product is purchased or manufactured.
Third, through effective inventory management policies. That is ... stocking policies which are based on logic. Safety stocks which are based on management's priorities and implemented through statistics. And cycle stocks which are based on economics ... the balancing of product acquisition costs vs. the inventory holding costs of opportunity, storage and risk.
Fourth, through focused, meaningful sales and operations planning, called S&OP. S&OP processes are designed to ensure good resolution of the inherent conflicting demands on supply and inventory.
And, finally, supply chains keep customers satisfied through a variety of other tactics. These include joint replenishment, inventory transfers, total supply chain costing, supplier relationship management, SKU rationalization and product hierarchy leveraging to mention just a few.
Jim:
Good, I get it Ralph, but I think some of our listeners may say now that they may get the customer connection, but they are going to want to ask 'But doesn't all of this cost money and hurt profitability?'
Ralph:
Not necessarily. Really good supply chains maximize profitability, particularly through safety stock inventory policies.
Throughout most of the supply chain, providing that all of the service requirements such as on-time shipment or accurate order picking are met, the objective is to minimize cost. Inventories work differently. They are technically an asset, in financial terms, but at the same time can be a major financial liability if they don't perform.
Inventories have three kinds of quote unquote "costs."
First, they tie up capital, which could otherwise be providing a financial return. Even worse, while the capital is tied up in inventory, some is lost, damaged or superseded, while some becomes out-of-date or otherwise not worth what it was when purchased or manufactured.
Second, inventories have to be stored, insured, sometime heated or cooled, and are taxed, all annually.
And, third, they impact profits either negatively, when out-of-stock situations occur, or positively when customer needs are met to the maximum. The third aspect is usually the most important and, for most businesses, has a direct impact on profitability.
Jim:
Thank you Ralph, we both know there are customer service and financial aspects to supply chains. How do you tell if you are supply chain is supporting the Sell component well or not?
Ralph:
By conscientiously measuring performance. You can tell how the supply chain is doing by just measuring performance - internally and externally - but, more importantly, you can improve the results with a three-step process.
First, by carefully determining which aspects of your supply chain are most important to measure.
Second, by regularly reporting thte results on those aspects broadly across the organization.
And, third, by reviewing performance results and asking some very specific questions on a regular basis, typically monthly.
That 3 step approach will almost always ensure continuous improvement.
Let's take what to measure first. While everyone wants to measure things that matter, selecting a metric isn't a casual decision; in fact, ideally, it derives from the organization's goals.
When determining what to measure, it's important to consider a variety of possible metrics across the complete realm of customer service, quality, safety, environmental responsibility and cost issues, generally in that order.
Reporting is ideally handled directly by your information system, automatically, and clearly, that is, visually with graphs reflecting results over a period of time - certainly not just pages full of numbers! They should be distributed from the natural work team - the one which directly impacts results - to management, and displayed publically.
The review process needs to answer five questions:
First, "how are we doing?" That's a very important, intentionally open-ended question which, over a period of time, will increase understanding and facilitate contributions from all.
Second, "what recent situations positively impacted or enhanced results; and how can we repeat them in the future?"
Third, "what recent situations have negatively impacted or impeded results; and how can we avoid them in the future?"
Fourth, "what actions need to be taken to ensure that performance is improved in the short term?"
Fifth, "For the long term, what facilities, business processes, tools, information systems or other items are needed?"
Meaningfully addressing these issues with pro-active change, especially those which don't help and have to be undone, will improve the results obtained.
Often, the process will provide better understanding of the challenge and it will be appropriate to measure something a little more focused.
The most common internal measurements for the supply chain functions which most directly support sell are forecast error rate, order fill rates, SKU in-stock ratios, and inventory turnover or GMROI -- gross margin return on inventory investment.
Externally, for suppliers, the most common measurements for the supply chain functions which most directly support sell are lead time variability and first receipt order fill rates.
Jim:
Ok, but if your supply chain is not contributing to success in Sell, what do you do about it?
Ralph:
Well, unless you know for certain where the issues lie, an open-minded assessment is usually the best approach. Sometimes, benchmarking or location-to-location comparisons are very helpful. In many cases, a new set of eyes can see best -- whether someone internal, such as from another division or country, or someone external, like a consultant or major supplier. In any event, it's important to take a broad, unbiased look. You may be very surprised at what you find.
Jim:
Thank you very much Ralph, I really appreciate you spending time with us today.
That concludes our second series on this podcast, on the buy, make, move, store and sell components of the supply chain.
In two weeks, we will begin our third series on the topic of Supply Chain Cost Reduction (see our cost reduction web site for a preview). Thank you for being with Ralph and I today. We look forward to speaking to you again real soon.
