“Avoiding Hidden Margin Erosion” in Mid-Market Supply-Chain Operations | by: Brad Huff | Supply Chain Digital

According to the Middle Market Indicator (MMI), 85 percent of middle market executives cite the ability to maintain margins as a somewhat to highly challenging issue..

This should be no surprise, considering mid-market companies are squeezed between large and small cap businesses: they must streamline product manufacturing and delivery operations as much as larger companies, yet be as nimble as smaller companies. As a result, they have a unique set of challenges that make margin management even more critical..

Today’s combination of increasingly complex supply chain operations and the availability of more accessible/affordable technology means mid-market companies can and should take a deeper look into these areas as a means to maximise margins..

Mid-market supply chain operations explained

Hidden Planning and Forecasting Areas:

Mid-market companies often must focus so tightly on delivering quality products and services to their customers that investing resources into analyzing and fixing what appear to be minor supply chain issues might not seem practical or even feasible. It’s true that each of these less obvious areas does not cause significant margin erosion on its own; however, many mid-market companies can suffer from a number of combinations of these issues. When evaluated in that context, the impact on profitability can be noteworthy…

Evaluating materials based on landed cost instead of the item’s unit cost is a growing trend in planning and procurement. Materials planning based on landed cost allows companies to factor transportation and logistics costs into the contract item cost for more visibility into actual materials expense..

Forecasting is also an area that can impact margins. Without reliable forecasting processes and tools, a company can easily order the wrong quantity of materials. “Projecting heavy” unnecessarily consumes warehouse space, increases the risk of waste or loss, raises taxes, and impacts inventory turns. “Projecting light” drives up procurement and transportation costs, as well as increases the risk of materials run-out. Fortunately, there are a number of low-investment ways to increase accuracy, such as increasing collaboration with customers to gauge future demand, integrating marketing plans and projections to prepare for order spikes or lulls, or increasing forecast sharing and communication with suppliers via a collaboration portal or other automated workflow system..

Hidden Inbound and Receiving Areas:

Ordering and receiving inefficiencies, such as a lack of automation and collaboration in critical areas, play a quiet yet potentially large contribution to reduced profits. Automating workflow tasks between buyers and suppliers such as sending, receiving, acknowledging and approving purchase orders can enhance processing speeds by more than eighty percent while reducing costs by approximately 83 percent..

But the benefits go beyond the initial savings. Automation also increases purchase order throughput and allows you to focus efforts on quickly resolving issues that require human attention. Configurable workflow helps to ensure compliance so what is shipped always matches what is ordered. With simpler implementation and more user-friendly interfaces, these solutions can consolidate product and order communications to help minimize disputes as well as empower planners to better forecast demand..

Carrier and delivery windows:

According to Refrigerated Transporter, “Supply chain compliance is now a vital component of logistics transactions and supplier relationships.” Requiring fixed materials delivery windows from suppliers is a growing trend in supply chain management that impacts margin on both the buyer and supplier side..

In recent years, improvements have been made in receiving dock scheduling systems in an effort to help warehouse managers and supply chain professionals streamline operations and reduce unnecessary cost. As a result, more companies now require dock reservations for inbound orders, including financial penalties for suppliers who deliver off-schedule..

For example, in 2010, Walmart joined other retailers in imposing a penalty on suppliers that failed to deliver products within the company’s prescribed four-day window. Under the policy, suppliers whose products arrive at Walmart before or after that period face a three-percent penalty based on the cost of the goods..

Before the policy went into effect, Walmart requested delivery within the four-day period, but suppliers had no incentive to actually adhere to that schedule. Although it was not the first to adopt this policy, Walmart’s status as the world’s largest retailer prompted a domino effect that continues to affect supply chains to this day…as late/early delivery fees are now the norm for many industries..

Installing a functionally strong shipment collaboration solution can help to reduce and/or eliminate these less obvious/hidden logistics areas that eat into margin. These types of solutions allow order fulfillment thresholds such as delivery windows, order quantity, and carrier selection/mode to be configured and validated prior to shipment release..

Advanced Shipment Notices (ASNs) and package/container traceability are also typically included, along with pre-formatted, compliant labeling to further reduce receiving dock errors…As a result, all stakeholders across the buy side and the supply side have real time visibility for more accurate resource and materials planning through the rest of the supply chain..

“Modern Supply-Chain”: “No-more a mere Support-Function” | by: Pradeep Chechani | ET Retail

Gone are the days when Supply-chain used to be Restricted to Warehousing & Logistics..However, even today, there are few Indian Retailers who continue to Restrict #SupplyChain, to its old form…In the process, they have failed to create a differentiating factor for themselves…!!

How can a #SupportFunction, such as Supply-chain create a Differentiating Factor..?? Arguably, its no longer a Support Function now….!! Lets see How Supply-chain is being able to create a #WinningFactor for a Retailer in its #NewAvatar…!!

The following are the Functions which have been put into the Supply-chain kitty in this #ModernEra :

Vendor Management: #SupplyPartner, is the mast of any Retailer-ship…Merchandise is the main reason why a customer walks into the store, converts into a purchase and repeats the process multiple times. Within this vendor evaluation is a big process. Tying up with the right kind of vendors will ensure that a retailer provides the merchandise to the customer on a continuous basis, in the right quality and at the right price. A vendor can do this seamlessly if he is involved in the strategic and tactical decisions and processes of a retailer…

Volumes can be channelized to select few vendors so it becomes mutually beneficial. All this obviously leads to cost savings mainly in the COGS (Cost of Goods Sold).. And the percentage savings in the COGS contributes directly to the bottom line. Biggest impact of savings comes from here…!!

Order Management: Supply Chain is better equipped to bring the order into the store in the right time. Close coordination with Merchandise Planning & Buying teams is required. Warehousing & Logistics and replenishment can be planned in a better way..

Quality Assurance: Entwined with the order management process, QA logically falls under the supply chain function. Product technocrats are required at Quality Control levels. A quality assured process ensures that there are minimum delays in the manufacturing cycle of a product. This works well for the suppliers as well. A scientifically implemented Supplier Relationship Management system ensures time savings topped up with cost savings as well…

Inventory Management:Traditionally, almost 30% of the working capital is invested in Inventory. Optimising inventory can reap huge benefits for a retailer in interest costs and cash flows. Auto Replenishments, Drop Shipments, VMI (Vendor Managed Inventory) are a few ways how better cash flow can be attained. For merchandise with fairly stable demand an auto replenishment model can implemented with auto orders being published on suppliers which meets the EOQ (Economic Order Quantity) and Delivery frequency. Drop Shipments are prominently used by ecommerce retailers where the vendor is issued an order once a sale is made. The inventory in this case lies with the vendor. VMI is an arrangement where inventory lies in the retailers premise but is managed by the vendor. These arrangements however are spearheaded in terms of negotiations by the merchandisers. Such kinds of push & pull supply chains are used for best utilization of inventory…

Reverse Logistics:As the volumes of modern retail is increasing, reverse logistics is becoming a big cause of concern. Retailers have started to dedicate space within their warehouses for this devil. One of the best preventive practices available here is RDDD (Revert, Divert, Dilute, Dispose) not necessarily in the same order. Where Revert stands for RTV (return to vendor), Divert is when a retailer can optimise the concerned inventory to other physical location, Dilute is where markdowns are made to sell this merchandise and Dispose when the shelf life has expired and the retailer has no other option but to dispose. However things like merchandise lifecycle, broken sizes, saleability, vendor agreements etc need to be thought through before implementation of the same…

Supply Chain for E-commerce businesses:#Ecommerce has opened a new set of challenges for modern supply chain…Supply Chain is a very critical part in this business and is still evolving to cater to Ecommerce business needs….Service which includes timeliness of delivery of the required product without any damage is one of the main factors for customer satisfaction…

Apart from the above factors the following pose a challenge to modern supply chain:

Courier: As & when the volumes on ecommerce are increasing this is becoming more & more challenging. First challenge is penetration into Tier C towns & rural India. Second challenge is reverse logistics. Almost 30% of deliveries get returned from the customers door itself. This also increases the probability to damage.

Customer Order Shipments: Ecommerce retailers require customer orders to be shipped from vendors. However this becomes difficult for a manufacturer who wants to focus on his core business that is manufacturing. As a result, consolidators are springing up who collate the inventories from various merchandise manufacturers/vendors. This gives respite to the ecommerce supply chain in terms of working capital and customer order shipments. However this increases the overall supply chain cost to some extent.

Just to summarise, there no rocket science to realise that #Modernisation, of supply-chain for a retailer can give an edge…..Coordinated #SupplyChain, will lead to timely order transmission and receiving merchandise in the right quantities & quality…. This will give a big boost to the sale…!!

Hence it is advised that due strategic importance should be given to this function….Specialists should be involved at early stages who can take supply chain and thereby the business to a different level altogether…!!

“Retailers” believe “Supply-Chains Not Optimal”: Strategic Role of “SCM in an All-Channel World” | ET Retail

A majority of #GlobalRetailers believe that their Retail #SupplyChains, are currently “Not Optimal” in the current Retail environment, said a survey conducted by PricewaterhouseCoopers (PwC) for JDA Software…!!

As per the survey titled ‘CEO Viewpoint: The Strategic Role of Supply Chain in an All-Channel World’, 83 per cent of worldwide CEOs believe that their retail supply chains are currently not optimal for today’s changing retail environment..

” Digitally-connected Consumers have turned #RetailModels upside down as Omni-Channel Shopping has transformed Supply-chain from an important business concern to a mission critical one,” the survey said..

The survey pointed out that 50 per cent of CEOs recognise that their supply chain can be a strategic differentiator…!!

“As #MobileCommerce, comes of age, one of the biggest challenges facing CEOs is managing the transformation to Omni-channel retail,” it added..

However, as per the survey, only 34 per cent of CEOs consider the rise of omni-channel shopping to be an external threat while only 22 per cent said it will have a direct impact on their organisation.

” The rise of Omni-Channel is one of the most #Transformational Shifts that has occurred in Retail in recent times,” JDA Software chairman of the board,commented on the survey findings…

“Retailers who don’t understand the #StrategicAlignment, of their supply-chain with #ConsumerExpectations, are in danger of becoming non-competitive,” he added.

Survey said CEOs Top Priorities are ” centered on more traditional areas of growth” –” by entering into new regions and markets”, “by opening more Stores”, OR ” through Mergers & Acquisitions”…

” These priorities highlight potential #MissedOpportunities, for more than two-thirds of CEOs who failed to consider Enhancing #DistributionCapacity and Supply-chain as ” a key contributor to drive Profitable Growth”, the survey said…

CEOs think THREE Fundamental Risks will have the most impact on their organisation over the Next THREE Years :

  1. Increasing competitive threats (41 per cent).
  2. Margin erosion and cost reduction (39 per cent).
  3. Attracting and retaining customers (24 per cent).

This global survey was conducted amongst 409 Retail Chief-Executives…!!

“Fit Transformation”: Making Your “Company Strong, Agile & Lean” | A.T. Kearney

“ Transformation is a heatedly discussed C-suite topic. A balanced approach that looks beyond cost can convert transformative energy into the light and motion needed to tackle the future ”.

We all know the story. A company, facing stiff competition from an upstart, begins to furiously cut away at its cost structure. Or a corporation sets off on a frenzied search to identify synergies and decides to integrate several business lines. Or maybe talent in a vital department seems to keep slipping away, triggering a detailed re-examination of the area’s leadership and processes.

Business transformation has been talked about for a number of years now, but never so much as in the past decade. Financial market crises, technology breakthroughs, consolidation of the supply base, or disappointing business performance are just a few of the reasons why companies are tackling this challenge with renewed urgency. In our experience, many start by focusing improvement efforts on one function or another, but such an approach is almost always insufficient. Things start off well, but the techniques applied quickly lose their impact or, through the law of unintended consequences, end up doing more harm than good.

A sequential approach, increment by increment—although sometimes necessary because of limited resources—can also lead to unsatisfactory results such as a lack of coherence, unnecessarily delayed results, or a failure to address a problem’s root causes. Other times, well-conceived strategies miss the mark due to the organization’s inability to execute them.

Exhausted by their efforts and frustrated by their failures, many are now desperately seeking a coordinated business transformation approach to keep up with events and edge out competitors.

A New Twist – 

Companies are complex, living organisms. Just as a disorder in the pea-sized pituitary gland can affect a range of bodily functions and an organ transplant requires the systematic re-connection of numerous blood vessels, interventions in one area of your company can affect surrounding “tissues” or even have major systemic effects. In business transformation as in surgery, interconnections must be carefully considered, and the instruments and techniques chosen must be suited to the task.

To do this, Fit Transformation : 

1. Translates your company’s strategy into the right combination of organizational strength, agility, and cost, by determining: (i) the strategic objectives that define the overall goals for the business, (ii) the sources of value that help the business meet its objectives, and (iii) the operating model guidelines that will enable the business to deliver that value 

2. Aligns the different building blocks of your operating model, including : 

  • Structure and governance, such as the organizational setup or performance management scheme
  • Processes
  • Technology enablement (for example, to automate processes or to mine and analyze data) 
  • Resource configuration, which covers aspects such as the company’s make-versus-buy model, strategic alliances, and geographic footprint
  • Capabilities and culture, including training programs and staff motivation

3. Manages the transformation, galvanizing the imagination, enthusiasm, and commitment of the workforce to transfer ownership and ensure a sustainable transition from today’s reality to the desired future

Balanced translation – 

Many companies start transformations by ruthlessly stripping out costs, and they end up so lean that they become weak and unresponsive. To be sure, cost-cutting is often necessary, among other reasons, to respond to market pressures and to combat the natural tendency for non-value-adding structures and processes to build up and outlast their usefulness. But cost reductions cannot be the main transformation objective in every place and at every time, or the company could damage competitive differentiators—for example, customer service excellence, product quality, or the ability to quickly adapt to market changes—that might place the top line at risk.

That is why we believe in a fit organization, which balances leanness with strength and agility (see figure 2). The trade-offs among strength, agility, and leanness must be defined not only at company level, but also among divisions, business units, and functions.

To achieve balance, Fit Transformation takes strategy as a trigger and an input, yet examines it in detail. The strategy, of course, must be directionally correct, but Fit Transformation is more concerned with the strategy’s proper execution than with its design.

The company begins by understanding the strategic objectives that define its overall goals. The next step is to identify the sources of value that can help the business achieve those goals. Once those value sources are determined, the implications for the company’s operating model are drawn out. This sequence of steps is conducted systematically and is crucial for proper scoping of the transformation.

Shortcuts in translation can lead to a scope that is too narrow to be effective or, worse yet, so broad that it overwhelms the organization. If something is not working properly, it needs to be fixed, but as the popular saying goes, “If it ain’t broke, don’t fix it.” One large government agency asked us to help them launch more than a score of initiatives to improve their service to the public. After a thorough examination, we convinced them that such an ambitious program would be self-defeating, as the internal disruption would trump any possible benefits to the public. In the end, they trimmed the list by more than 40 percent to ensure focus and results.

Sometimes, companies discover that if they focus on building deep capabilities and market responsiveness, the cost advantages fall naturally into place. That’s what happened at a North American big-box retailer, which found that it lacked capabilities to better understand its customers. For years, the company had been spending nearly $20 million annually for third parties to conduct focus groups on its behalf, with less than satisfactory results. Once it realized that gaining customer insights was a crucial competence, it decided to build a strong capability in-house. The company set up a 15-person unit, and it designed a widget for its point-of-sale terminals so that sales associates could collect quick, on-the-spot feedback from customers. With the unit now fully operational, the company receives 150,000 pieces of valuable customer input per week—and all for only $3 million a year.

All-encompassing alignment – 

Alignment is achieved across TWO dimensions :

1. First, the different building blocks of the operating model are aligned with one another (see figure 3). For instance, resource configuration decisions (such as geographic footprint, shared services models, and outsourcing) consider not only costs but also, for example, the impact on customers’ experience in order to preserve coherence with the company’s customer service strategy. When processes are redefined, particularly those that cross functional boundaries, governance issues—such as decision authority and performance objectives—are also examined to make certain that accountability remains intact. And if the IT governance model is decentralized to meet business units’ needs, coordination mechanisms such as committees are designed to ensure interoperability and keep support costs in check.

Our work to transform the supply chain of a global petrochemicals manufacturer illustrated just how important the inter-dependencies can be between the different parts of the operating model. The company’s strategy to meet its growth challenges in a tightening market required it to build a state-of-the-art supply chain, with strong integration between supply chain planning, sales and operations planning, logistics capacity planning, and procurement. Redesigning structure and governance to bake in end-to-end accountability was just the start. Processes, too, had to be re-engineered from a customer-centric perspective, so that customer demand (rather than production output) would drive them. The supply chain network’s resource configuration also had to be adapted to decrease lead times and improve delivery reliability. And none of this would work without a high-performing technology-enabled solution, with easy single sign-on functionality and full fail-over capability.

2. Second, alignment is ensured across functions, taking care to break down silos. During the transformation program itself, techniques such as cross-functional workshops and targets help to achieve that alignment. Later, mechanisms such as team-weighted (as opposed to individual) goals, governance systems (such as a cross-functional B2B board in a functionally oriented organization), and job rotation programs are used to make alignment stick. Steve Jobs understood this well. After he returned to Apple in 1997, he reorganized his product development organization around the actual products, with designers, engineers, manufacturers, and marketers all reporting to one manager. He also made sure that key candidates were interviewed not just by their own department’s manager, but also by those of related departments.

The CEO of one global consumer packaged goods (CPG) company discovered the importance of alignment and coherence the hard way when he decided to organize around brands rather than countries. As it turned out, changing the organization chart—despite the political headaches—was the easy part. He came to us for help a year later, when he learned that brand managers were still getting information six months after the country teams. When we met with his people, our conversations revealed that decision rights in many areas had not been modified to reflect the new brand emphasis, nor had the supply chain and IT systems been adapted accordingly.

Comprehensive, grounded transformation management – 

The mere mention of the term “change management” is enough to make people groan. To many, it conjures up images of vaguely New-Age exercises and orchestrated workshops to reach predetermined conclusions. To others, it’s an afterthought that leaders simply talk about while they try to sell the most recent wave of corporate initiatives to their employees.

But change management to support Fit Transformation is neither one nor the other. Rather, it is a systematic, focused approach that starts, from the very beginning, to engage people from the top down and from the bottom up—and to take change viral—by identifying and activating the change engines, both formal and informal. The approach comprises four dimensions to spur and embed change (see figure 4): 

Spread. This dimension sets the direction and need for change. Senior executives develop and communicate a clear vision and compelling case for change, organize the effort, assign resources, and oversee the results. Their involvement must be highly visible and hands-on.

Shift. The sense of responsibility for achieving change is shifted to individuals throughout the company by making them feel part of the process. Often this means skipping the “tell, teach” process, instead bringing people in early to get them invested both emotionally and professionally in the transformation.

Executives at one heavy industry company put this into practice by designing the new operating model, but leaving it only 90 percent complete. They then handed it down to others to finish the remaining 10 percent, while retaining some flexibility to be challenged on their original design.

At a healthcare industry player, the transformation program involved board members and leaders from all operational management levels across its 10,000+ employee network. Leaders from the main business units were assigned to cross-functional teams on top of their day jobs. Collectively, they ran nearly 40 different self-led projects, which were center-supported rather than center-driven.

Deepen. The deepen dimension seeks to modify people’s attitudes and behaviors, not just the way they perform specific tasks, in order to move toward a true, emotional commitment to the change. To be effective, companies should invest significant time and effort to understand what generates their staff’s commitment and what they need to succeed. Fit Transformation employs a number of interventions—cultural assessments, informal network analysis, and tactics to bring about behavioral shifts, among other techniques—to manage the softer elements that ensure that change is more than just skin-deep. Companies that invest heavily in deepening transformation are rarely disappointed in the return they receive.

Sustain. Finally, an ecosystem and controls are firmly implanted in the company so that the transformation takes root. Program funding is shifted into the normal budgeting process, continuous improvement methodologies are implemented, and long-term outcomes are monitored.

At the petrochemicals manufacturer mentioned earlier, we provided the transformation teams with training design standards to assist them as they developed their technical instruction materials. On our advice, they designed and implemented a reference documentation library, and they established a learning center within their organization.

Change management, when done properly, endows the entire organization with self-replicating change capabilities that extend far beyond completion of the immediate transformation program. 

Ready for the Future – 

Fit Transformation is a complex undertaking, but when performed by experienced practitioners, it is one that is manageable.

A detailed understanding of your industry’s dynamics and your company’s strategic challenges makes sure that the transformation covers everything that is required—but no more than is necessary or than the organization can assimilate.

Armed with an accurate diagnosis and a deep understanding of how the different parts of your company work, a plan is mapped out to reach the desired end state. And by making your team an active participant in diagnosing the problems, discussing the desired outcomes and options, understanding how and why they work, and putting them into practice, successful results are practically assured—not only in the short term but well into the future.