Hello this is Jim Tompkins, the President and CEO of Tompkins Associates and Tompkins International. I am pleased to welcome you back to the fifth part of our new podcast series entitled: New Frontier for Profitable Growth in Business, Leveraging the Supply Chain Shareholder Value.
Today we want to transition from our first objective in achieving shareholder value which was profitable growth to our second objective which is margin improvement. We covered the first action of margin improvement by discussing the reduction of the cost of goods sold in our last podcast.
The second action of improving margins covers the improvement of speed and productivity. Joining us on this podcast to cover this topic will be a new person to Tompkins and to this podcast, Lilian Wang, a Principal who for close to 20 years has worked with clients to increase speed and productivity throughout the supply chain and thus improve margins.
Jim
Lilian, there are two ways to achieve Margin Improvement. The first way has to do with reducing the costs of goods sold and the second is to improve speed and productivity. Why are supply chain speed and productivity improvement so important and such a critical objective in creating shareholders value?
Lilian
A company’s competitive advantage is best achieved by providing the most value for the lowest cost in the least amount of time to customers. We see many companies focus on improving customers’ value and reducing costs today, but rarely does the management associate tie in with profitability. Yet, we all know “time is money”. A fast and reliable supply chain will substantially improve the competitiveness of companies in five dimensions to enhance shareholder value.
1) It increase inventory turns and reduces inventory carrying costs, which reduces Cost of Goods Sold. Dan covered the subject in the last podcast.
2) It also improves companies’ cash flow. The less your inventory ties up cash and the faster your cash-to-cash cycle, the better is your free cash flow, which is the key driver of value creation.
3) It enables the growth of revenue and profit margin. A fast and efficient supply chain network enables companies to introduce new products much faster than their competitors, with better profit margin and larger market share. It directs the value delivery system to the most profitable customers who will pay a premium since they cannot wait for what they want, which forces their competitors toward less profitable customers.
4) It enhances customer loyalty. Customers are more loyal to companies who are consistently meeting their needs. Amazon is a great example of providing a good price, selection and convenience to consumers through fast and reliable shipping and delivery systems.
Customers have a choice between fast or free shipping and know exactly how long will take him or her to receive the products. No wonder Amazon net sales grew 15 times higher than 10 years ago (from $1.64 billion in 1999 to $24.51 billion in 2009) and free cash flow increased 114% year-over-year to $2.92 billion in 2009.
5) It reduces risk. When time is compressed, risks are reduced. Forecasting errors (over or under forecasting) cost business dearly and it can be minimized once the time is compressed. The farther into the future demand must be forecasted, the greater the probability that the forecast will be wrong at the time of sale.
Since forecasts made closer to the point of sale are more accurate, a sourcing strategy the apparel industry can use is to source domestically for fashionable items with more volatile demand, the less fashion-intensive items remain sourcing offshore in low labor cost countries with longer lead time.
Jim
For the next 10 years the supply chain will be the creator, the driver, the force behind increasing shareholder value. Tell me some areas in which leading companies have had success with improving their supply chain speed and productivity.
Lilian
We can improve the speed, responsiveness and productivity across all of the supply chain mega processes of Plan-Buy-Make-Move-Store-Sell. Leading global organizations look at the time compressed component and streamline the whole processes and focus on speed to market and flow to shelf quickly.
At strategic levels, they integrate it into strategic sourcing, network design and supplier relationship management. At the operational level, they integrate it into demand planning, promotion planning, products allocation, inventory optimization, distribution and transportation planning processes.
Global supply chain organizations constantly ask themselves the following questions:
How quickly can the supply chain bring products to market?
How can the supply chain be flexible and respond quickly to customer demand patterns?
Jim
These are hot topics for global supply chain organizations. For many companies who are sourcing from the Far East with a long lead time, how can they improve speed to market?
Lilian
This is a great question, Jim. There are three models that we can help them to improve supply chain agility and flexibility for speed to market. One of the strategic options we provide is the Asia Freight Consolidation model. It has multiple suppliers’ ship directly to the Asia Consolidation center to optimize container moves based on vendor booking at origin. Then the full container will be shipped to customer DC or deconsolidation center. The deconsolidation center cross-docking and trans-loading to domestic carriers to ship to stores. This provides the visibility, efficiencies and very cost effective.
Another way for speed to market is using DC bypass models. DC’s bypassing with a flow center is an improvement over traditional flows and results in less volume through domestic DCs and can result in improved speed to market. This is how it works. Repacks are built in Asia and shipped to a west coast flow center. Product arrives in the flow center and is then allocated to stores and loads are built by delivery agent and then deliver to stores. This flow pattern enhances agility and flexibility for season and trendy items and it frees up valuable space for the traditional domestic DCs to flow basic replenishment items.
Jim
This is very interesting, Lilian. Many companies have challenges in controlling quality when they source from the Far East. What are your thoughts on how to resolve this issue?
Lilian
Yes, absolutely. This came down to the 3rd model, which I think is the most value-added model to companies, the DC bypass with Asia shipments directly to pool points model. It’s a further step up to the DC bypass model, which further enhances supply chain agility and upstream visibility.
An Asian consolidation center has further capacity and flexibility to take on domestic DC responsibility such as quality assurance, sorting and building Retail Ready Packaging or Planograms Ready Packaging, reserve storage buffering, and other value added services to further significantly reduce downstream costs, enhance speed and productivity. So once the product arrives in the domestic pool points and is then delivered to stores and ready to put on shelves. It provides the fastest way to flow to store and free up valuable store associates time, so that they can focus on value-added activates for better serving customers to grow business.
Jim
We just discussed about the global sourcing and network strategies to speed to market. At the operations level, how can companies enhance speed and productivity?
Lilian
At the operational level, companies can enhance speed and productivity in demand planning, promotion planning, products allocation, inventory optimization, distribution and transportation planning processes. The most effective way to shorten the lead time for delivery of the final products is to collapse the time that all players in the chain spend waiting for each other, as well as reduce the buffer inventory they create for demand surge. This requires a trusted relationship and openness of information sharing.
Jim
I once commented that “Through strong partnerships with a commitment to collaboration will result in companies not competing against other companies, but instead companies competing against other supply chains. In fact, supply chains competing against supply chains.” So Lilian, tell the supply chain leaders listening to this podcast what they can do to improve speed and productivity by collaborating with their trading partners.
Lilian
Jim. I really like your comments. Toyota is a great example in helping their suppliers to be successful through information sharing and improve processes so that they achieve success together. Our supply chain leaders can improve speed and productivity with their trading partners in 3 ways.
Timely and quality information sharing and communication Every supply chain made up of several companies. The information exchanges continuously between different companies at different levels, such as new product specification, new orders from customer to supplier, etc. One major challenge is consumer demand varies in cycles and changes may be up or down by 10-15%. Back in supply chain, the change may be in orders getting larger and larger as each supplier further down the chain struggles to catch up from the last ripple in the demand curve.
One solution for a health care supply chain was to increase frequency of orders from monthly to weekly and daily. In addition, a size limit was also placed on the change in orders so that orders from one week to the next could not go up or down by more than a fixed amount. For products where demand varies sharply, hospitals gave their actual product usage data to distributors on a daily basis. Distributors analyze these data trends and promptly communicate to manufactures to help them plan their production scheduling. Electronic data interchange was installed between the levels so that information could be received with no delay. The lesson from this example is to accelerate the flow of goods, sharing current demand-based information, and develop a lead time that customer can live with it and then stick to it.
Collaborating with both upstream and downstream stakeholders to collapse the entire supply chain’s cycle time and remove the obstacles. If you start to look at the areas of duplicate buffer stocks with your trading partners, safety stocks can be reduced through the entire chain. However, it is difficult to achieve by each company working independently to compress its own cycle since each company has buffers for demand surge, or a supplier breakdown. Next you can look at is the major value-adding steps to further reduce cycle time. In general, the shorter the process cycle time, the more your supply chain can be driven by actual market demand.
Jim
What if a company has a limited DC network capacity but still wants to have speed to market?
Lilian
Jim, this is a very practical question. Here comes to my 3rd point, leveraging you trading partner’s strength and using Lean Six Sigma methods to reduce non-value added processes to reduce lead time and speed to market.
Each company needs to analyze their own strength and weakness. To achieve the goal to be the fastest one for new product launch, you don’t to have to do it alone. Here is a real example. A retailer wanted to launch new products first in the market but they had limited capacity in their DC network. They came up with an idea to leverage their vendor’s efficient distribution capabilities to by-pass their own DCs and ship directly from there vendor’s DCs to stores. Through the joint retailer-vendor collaboration process by using lean Six Sigma method to reduce non-value added activities, they were able to cut distribution lead time in half. The stores received a clear communication from the head office and were able to quickly receive and put new products pre-packs on the floor to immediately sell to consumers. It resulted in a great lift on sales and the return on investment was mutually beneficial for both the vendor and the retailer.
Jim
Thanks, Lilian. These are very good examples. Any suggestions to help our listeners improve supply chain speed and productivity?
Lilian
The key is choosing time consumption as the critical management and strategic parameter, defining a vision that will maximize speed to market, improve customer value, reduce inventory levels and maximize sales.
Management should be asking the following questions when you want to improve speed and productivity:
What deliverables do my customers want?
What organization and work process will most directly provide these deliverables?
How is work structured?
How information is created and shared?
How is performance measured?
When you put in a time component (such as decision cycle time, time from customer’s recognition of need to delivery, etc.) into the strategic parameter, your answer to these questions can be significantly different. For instance, instead of improve your function activities; start focusing on the whole system and its main processes and sequence.
In summary, here are a few take-away for our listeners:
Focus on improving the most value for the lowest cost in the least amount of time to customers.
Developing strategic, operational and tactical supply chain action plans.
Set up performance measures with both cost and time parameters.
Build trust-relationships with vendors and work together to shorten overall cycle time.
Timely and quality information sharing and communication.
Collaborating and leveraging strengthens of your upstream and downstream trading partners.
Continuously driving process excellence and taking out non-value added processes
Sourcing globally to speed to market through our recommended three models
Benchmarking and leveraging best practices
Jim
Lilian, these are excellent points and valuable strategies for our listener’s to improve supply chain speed and productivity within their supply chains.
Thank you very much Lilian for covering the second part of margin improvement. This then leaves the last objective of increasing shareholder value, Capital Efficiency. There’s a long list of potential actions that need to be addressed here, but the two most important have to do with reducing working capital and fixed assets. On the sixth installment of this podcast I am pleased to welcome back our own Tompkins expert on inventory, Ralph Cox. Ralph will help us guide your firm to reducing working capital while increasing customer satisfaction. This focus on inventory reduction is very, very important and the source of the free cash flow that is so important to increasing shareholder value.
Thanks for being with us today; I look forward to speaking with you all again real soon.
