Hello, my name is Jim Tompkins and I am the CEO of Tompkins Associates and Tompkins International, and I am pleased to be with you today to present the introductory segment in our third series of this global supply chain podcast.
Our first series on this podcast focused on the reality of today's global supply chain, and the impacts of globalization on today's supply chain.
The second series built on the first series as we walked our way through the components of the supply chain: Buy, Make, Move, Store and Sell.
Today we begin the third series: Supply Chain Cost Reduction. This introductory podcast is entitled Supply Chain Cost Reduction as a Strategy.
I guess to be even more clear, I could say supply chain cost reduction is a strategy, not as an action.
But before I get into this strategy versus an action discussion, let me ask you a question:
"What do Bernard Madoff, a large tree that fell in my back woods, and The Lion King have in common?" They all have to do with the natural evolution of how things work.
Think about Madoff: without the recession, he would still be ripping people off today. The recession resulted in people withdrawing funds from the Madoff fund, and the outflow was greater than the inflow, and thus the end of the Ponzi scheme. So the recession is good, as it put an end to Madoff ripping people off.
The tree in my woods was huge, it was dead, and it was blocking the sun for smaller saplings to grow. Its falling was good, as it made room for the sun to help smaller trees grow. In a similar way the king of the jungle -- the father lion -- grew old and this made way for his son to take control. The circle of life. This is good. It is how things work.
In a similar way the current recession is good. Good you say? Yes, I did say good. I know it hurts and I know the residential real estate, the automotive industry, the credit markets, the retail sector and now commercial real estate is really, really ugly. So how can I say recession is good?
Well, it has to do with an understanding of renewal. We should celebrate renewal. Just like with Bernie Madoff, dead trees, and the lion king; renewal is a time of change and a time to start anew. So if we are supposed to learn from the recession and celebrate renewal, what are we to learn?
Two big things: First, some say in a recession the strong get stronger, and the weak get weaker. This is 100% untrue.
It is not about how you enter the recession, but what you do when you are in the recession.
Think about it like this. In the Tour de France, where do the lead changes occur? On level ground? No. On the downhills? No. The lead changes occur most frequently on the steep inclines. It is the same with business - lead changes occur when maneuvering the steepest grades.
Like now in this recession. Recession is a huge opportunity, and we must work smart and work hard now that the slope is steep. Anyone can be successful when the wind is at their back, but truly great companies become great when they are heading into the wind.
So a key is: what are you doing now when the slope is uphill and the wind is in your face? I believe what you do now as an organization over the next 6-10 months will destine how your organization will perform over the next 4-6 years.
Second, we should learn from the recession that you are forced with two choices:
1. Cost reduction as an action
2. Cost reduction as a strategy
Cost reduction as an action says, cut, cut, cut. Cut everything. Fire people, cancel R&D, stop advertising, eliminate all strategic plans, cut all capital expenditures, hunker down and ride out this storm.
To the contrary, cost reduction as a strategy says: understand that your firm has three categories of cost:
Category 1 is capital and operating costs: the traditional ongoing expenditures.
Category 2 - Talent costs: Expenditures for key resources that are required to operate your business profitably.
Category3 - Strategic costs: Expenditures for strategic profit improvement initiatives.
Category 1 is wide open for cost reduction and should always be pursued, but pursued even harder during difficult times. Today is clearly a difficult time, and I strongly believe, support, and encourage cut, cut, cut in Category 1.
Category 2 must be carefully analyzed. I see companies cut so deeply in Category 1 that the people left do not have the capacity to bring about the cost savings. I see organizations that are running so thin that they cannot accomplish a million dollar cost savings because they do not have on board the $100,000/year employee needed to realize the savings.
In a similar way, I see organizations that can save millions of dollars via a consulting project costing 20% of the savings, but they are stymied by a mandate to cut, cut, cut all consulting costs, and so they don't do it. It takes talent to reduce costs, and without it, you can cut, cut, cut but your costs will not go down, probably, they'll only go up.
Category 3 expenditures must be segregated and protected. Let me be clear -- Category 3 cost cutting is dumb. Especially in a bad economy, it is more important then ever to pursue the strategic things that will result in long-term competitive advantage.
By correctly focusing on Category 1 cost reduction, you will generate sufficient profits, even in this terrible market, to allow you to maintain your Category 2 and 3 expenditures.
This will position your organization for greater success after the economy improves.
So, yes, times are difficult, but you can gain a competitive advantage by focusing on:
1. Segregating your costs into Category 1, 2 and 3 expenditures.
2. Aggressively and intelligently going after Category 1 cost reduction.
3. Protecting and pursuing Category 2 and 3 expenditures.
Now, the question you may ask me: "How about the firm whose very existence is at risk?" My response: "That is a major issue, but not what this podcast is about."
If your organization is on the verge of going out of business, it's because in the past you have cut, cut, cut your Category 2 and 3 expenditures in the past. The fact is you are probably out of business already but just do not know it yet.
An indiscriminate "slash and burn" action plan is a strategy that does not result in companies being successful. Particularly in these very tough times, prudence, not patience, is the order of the day.
So it is wise to protect your talent and guard your strategic plans while you aggressively, intelligently go after your ongoing capital and operating costs in Category 1.
Okay, but now you are probably thinking, "Great, I get it, but why emphasize 'aggressively and intelligently' when you're going after Category 1? I get 'aggressively' as these are bad times, but what is your meaning of 'intelligently'?"
This is a great question, and in fact it's a great segueway into Supply Chain Cost Reduction. You see, there are many organizations that reduce the cost of certain supply chain elements, yet fail to increase the profitability of the firm.
Consider the following examples:
A company eliminates all overtime in its distribution centers located on the East Coast, and the result is a loss of customers on the West Coast.
A company cuts transportation costs in its distribution center by receiving product floor loaded, but the cost of palletizing upon receipt at the distribution center is greater than the transportation savings.
A company shifts production to an offshore location to reduce purchase price, but the result is an increase in the Total Delivered Cost.
A company sources a product line to reduce Total Delivered Cost, but does not consider sourcing clusters, and thus its costs are higher than its competitors' costs.
Lastly, although I could give many more examples, a company fails to include the margin from lost sales in its supply chain cost model, and therefore, makes many bad buying decisions.
These are just a few scenarios of how organizations can miss opportunities to increase profitability by not making "intelligent" cost reduction decisions.
So what is needed is a holistic cost reduction outreach. To do this and to capture immediate cost reduction opportunities, take a holistic view of your supply chain and focus on Buy-Make-Move-Store-Sell.
Under Buy: consider sourcing, customs, and trade management.
Under Make: consider lean manufacturing, waste reduction and look at your product quality.
Under Move: look at international and domestic transportation and the correct supply chain network.
Under the Store function: look at overall distribution center performance and the performance of your material handling systems.
In the Sell component: look at demand planning and inventory management.
Lastly, across all components, look at your technology support, the quality of your planning and the most basic of decisions, if you should perform this function yourself or outsource the function.
It is discussions like these Buy-Make-Move-Store-Sell and overall topics that in this series we will holistically, aggressively, and intelligently allow you to reduce your supply chain costs.
So supply chain cost reduction is not about an across the board cut, cut, cut action. Supply chain cost reduction is about renewal; about using this recession to pass the competition.
Yes, times are definitely tough, but if you apply supply chain cost reduction as a strategy, you will come out of this recession better, more able to win market share, and to be able to beat your competition. I am really excited about this series, and I look forward to our next segment in this Supply Chain Cost Reduction series on Asian Sourcing.
