What is the Cost of A Supply Chain Bottleneck to Your Business?

 

Bottlenecks occur everywhere in the business world.  They exist in the processes employed in every business.  They happen in production, distribution, fulfillment, and other functions within a supply chain.  Most supply chain managers devote at least some of their time to identifying and eliminating bottlenecks in their area of responsibility.  A colleague of mine – John Lafferty of CFO-PRO – devoted his recent newsletter to discussing the subject of bottlenecks.  Here is what John said:

“I believe the primary culprits that cause bottlenecks are these:

·     Inadequate infrastructure—capacity has topped out

·     Inefficient processes—the quantity of raw material (or data) processed in a given time, known as ‘throughput’ has topped out

·     Poorly trained workers—individual production has topped out

Capacity constraints affect a company’s ability to grow.  Firms that find themselves bumping up against their system’s capacity constraints soon find that growth has stopped; profits begin to decline unless expenses are cut accordingly.

Any part of your business that has a capacity bottleneck will find the production and efficiency of everyone reduced to the speed of throughput at the bottleneck.  The operation will slow to the lowest common denominator—the productivity at the slowest part of the process.

For example, if a bottleneck is reducing throughput by 30%, and your customers are unwilling to wait in line, your sales levels could be 30% lower than what they should be.  How much margin are you losing at the bottleneck?  If your normal throughput is $1,000,000 annually and the bottleneck reduces it by 30%, you have a new sales level of $700,000.  At a gross margin of 60% applied to the lost sales of $300,000, the lost profits amount to $180,000!  And this is just a one million dollar organization!

Worse yet, are you paying for “stand around” time while the under performing parts of your process “catch up” to the rest of your production?

What could you do with the money that you are leaving on the table?”

If you want to read more of John Lafferty’s newsletters, go to his web site:  www.cfo-pro.com

Transforming the Health Care Industry’s Supply Chain

Last evening I attended a very interesting panel discussion presented by the Consulting Roundtable of the University of Chicago Booth School of Business.  Most of the Roundtable programs are open to anyone who is interested.  Health care being a hot topic, this session was well attended by many health care professionals, and industry suppliers and consultants.

 

What I heard had much to do with the supply chain and business processes in the health care industry and that is why I thought that DC Velocity’s blog readers might also be interested.  Several big supply chain related themes emerged:

 

• If the panelists fairly represent the thinking within health care, they are focused more on preparing for change that they characterized as inevitable, rather than trying to undo the law that was passed.  It seems to me that the health care industry is at a similar point in improving its competitiveness as the consumer goods industry was in the 80’s when Wal-Mart began to force a lot of fundamental re-thinking, process improvement, and cost reduction.
• Consolidation has begun with respect to hospitals, physicians’ practices, and related care providers and this will continue.  However, the health care management, payments, etc. systems are fragmented and non-compatible; so at some point, for better integrated and more portable health care, more unified standards are probably going to be legislated.
• From an Information Technology perspective, there are too many different systems and few with an end-to-end solution.  Here’s a quote from Jay Anderson, VP Quality & Operations, Northwestern Memorial Hospital – “We don’t know how to provide care in a connected world.”  Transparency of information through the health care process is and will be a challenge.
• The health care legislation that was passed defined the reform that will occur related to heath insurance.  Payment reform and care reform have yet to be defined.
• “Consumers expect a retail-like experience when dealing with health care providers.”  This is a statement made by Elyse Forkosh Cutler, VP Strategic Planning and Network Development, Advocate Health Care.
• Suppliers to hospitals and other care providers will have to find ways to lower costs.  How will pharmaceutical companies and other suppliers react?
• Physicians will likely be paid less for many services.  What will be the result?

 

As the last two points indicate, there are many unanswered questions on this subject.  It will be interesting to see how it plays out since all of us are consumers of health care services.

 

If any reader is interested in more information, I will be happy to try and respond.  Here is a link to the Consultant’s Roundtable home page http://www.chicagobooth.edu/alumni/roundtable/consulting/

Wal Mart - Dominant in the U.S. and Growing in Chicago

 

Wal Mart was in the headlines twice in Chicago last week.  Locally, the City Council of Chicago approved the second Wal Mart store within the city limits.  The store will be built on an abandoned industrial site on the south side of Chicago.  This decision was made after several years of resistance from labor unions and others who felt that Wal Mart did not pay its workers enough and was anti-union.  The need for jobs and the desire to bring a modern store with grocery and household staples to areas of the city that had no major retailers finally prevailed.

 

The first Wal Mart in Chicago was opened several years ago.  It sits on the site of a factory that originally produced cans when it was owned by Continental Can and then was bought by Helene Curtis. Helene Curtis used the building as a warehouse and then a factory producing anti-perspirant products sold to Wal Mart and other retailers. Since I spent almost 12 years working just down the block at another Helene Curtis facility, I am very familiar with this Wal Mart’s neighborhood.  Other major retailers have joined Wal Mart – there is a Home Depot, CVS, Menard’s, and an Aldi grocery within a few city blocks.  The expectation is that the next Wal Mart will attract other retailers in similar fashion.

 

The second headline last week was that Wal Mart continues to dominate the list of top retailers in the U.S.  The National Retail Federation reported that Wal Mart had 2009 sales in the U.S. of $304.9 billion followed by Kroger at $76.7 billion, and Target at $63.4 billion.  Wal Mart generated almost as much revenue as the next 5 retailers on the list.  It does not take much of a crystal ball to imagine Wal Mart achieving $1 billion a day later in this decade.

 

Wal Mart has become 30 – 40% of almost every category of consumer goods that it sells.  I worked for three different marketers of consumer goods through the 80’s and 90’s and witnessed how they adapted to Wal Mart’s approach to supply chain management and pricing philosophy.  I cannot say that I agree with everything that Wal Mart does, but the resulting dominance is impressive.  Every consumer products supply chain is more efficient and delivers lower cost products as a result of Wal Mart’s leadership.  Especially in the current economy, consumers vote with their wallet. This makes competing with Wal Mart that much tougher.

 

We have all heard some version of this saying:  “Nothing goes up forever.”  If you look back several decades at the list of the leading companies in the U.S., there have been lots of changes and missing names.  What innovation in retailing might drive a competitor to challenge Wal Mart in terms of scale?  Let me know if you have an answer.

Will the Automotive Industry add some Spark to the Economic Recovery?

The New York Times Business Section article from Friday, June 18 – “Bullish signals from G.M. and Toyota” raises some interesting questions about the possibility of further improvement in the global economy.

 

Two significant items are mentioned in the article.  First, Toyota has announced that it is planning to start production of Corollas at its partially completed plant in Mississippi by the Fall of 2011. According to its web site, Toyota states that the building in Mississippi is basically complete.  The remaining work is mostly equipment installation. Approximately 2000 jobs will be created as production ramps up.  The NY Times article points out that Toyota used to build Corollas in a now-closed California plant, so these are not “plus jobs” for the industry.   Second, the article states that “G.M. said that nine of its eleven U.S. assembly plants would skip the regular two week summer shutdown.”  56,000 additional vehicles will be produced as a result, including new models that been in short supply.

 

The automotive industry has been one of the principal drivers of both the U.S. and global economies for decades so this is good news.  The trickle down effect for states that have been particularly impacted by the recession is well documented, so the General Motors announcement must be making news in Michigan, Ohio, etc.  I would expect that Tier 1 and Tier 2 companies in the automotive supply chain are already benefiting from the over-all improved sales in the U.S. this year.

 

The industry is still well short of what used to be the norm – 12 to 15 million vehicles being sold annually.  However, if the automotive industry is a significant customer for any of your suppliers, this is a probably a good time to make sure that the capacity that you need will continue to be available. 

Can Inventory be a Real Business Asset?

 

When prospective buyers conduct a due diligence review of your business, and ask about your inventory control systems, how will your answer affect their offer?  When you are seeking additional credit from your banker, how will they value your inventory?  Your inventory may not have the same value in the eyes of the buyer or the banker that it did in the past.  I discussed this subject recently with Bill Finn, Executive Vice President of Highland Park Bank and Trust, a Win Trust Financial affiliate.  He and I agreed on four actionable suggestions that will insure that your inventory has the most value to you, and when necessary to prospective creditors or buyers.

 

The key metric for managing and valuing inventory is turnover or “velocity.”  We like the term velocity because it reminds us that inventory at rest is costing your company money.  Inventory that is moving through your process - that is being picked, packed, etc. is potentially earning money.  Turnover is defined as follows:

 

Inventory turnover = Annual cost of goods sold/ Average inventory

      

There are two ways to improve turns – sell more with same amount of inventory or when sales are declining reduce inventory at a faster rate than the sales decline.

 

Inventory accuracy is critical to keeping your customers satisfied, for insuring that buying decisions are made correctly, and for demonstrating to your bank that your numbers are reliable. Annual physical inventories only guarantee accuracy for a brief time. Soon after you finish, your inventory counts can change. So, if your annual inventories only remain accurate for thirty days, you’re operating with inaccurate data 92% of the time.  The best way to develop and maintain location accuracy is a cycle count program.

 

Cycle counting is done on a regular basis, either weekly or daily depending on the size of the warehouse and the number of items.  A cycle count team – one warehouse person and someone from either inventory control or finance - should count a randomly selected group of items.  Then they should reconcile the physical count with the computer record, book the adjustment, and do a root cause analysis.  The benefit of cycle counting is that when you do it regularly, and address the root causes of errors, accuracy will improve. With cycle counting, inventory accuracy is improved, and prospective buyers and creditors gain confidence in the accuracy of your financial data.

 

 

 

A third element of effective inventory management is “chunking.”  Most companies measure ‘turns’ for the entire business and think they can mange inventory at the “macro” level.  Don’t stop there.  Inventory decisions are made at the item and product family level of detail.  You need to find the manageable “chunks” of inventory for your business – i.e. product lines, locations, customer specific, etc.  When you can measure the turns for each chunk, you can make fact-based decisions about how much inventory to buy and hold.

 

A fourth important inventory management measurement is forecast accuracy.  Forecast accuracy directly impacts the amount of inventory in your system and how many turns you can achieve. 

 

While sales people may resist the idea of forecasting sales, they do know what their customers are likely to buy over the next 6-12 months.  There is also some history regarding sales data except for your newest products and customers.  Start measuring forecast accuracy, it will never be 90+%, but even small improvements can result in inventory reductions.

 

 

Velocity…accuracy… “chunking”… forecasts...  Sounds like a lot to do when you already have a full plate, but the fact is it’s easy to implement and maintain these processes.  Bill Finn mentioned that banks will view prospective borrowers who can demonstrate good inventory management practices more favorably in the loan approval process.  Banks may be willing to loan more against “good” inventory as compared to overstocks, obsolete, etc.  And, good inventory management will free up cash for the business, even if you are not looking for additional credit.

How many times can a Hair Care Brand be Re-staged?

Bloomberg News published an interesting article last week about Proctor & Gamble’s latest efforts to reverse the declining sales for many Pantene SKU’s.  The writer, Mark Clothier, cited some information from P&G that the re-staged products will include some newly developed materials not commonly used in shampoo or conditioner.  He mentions that 17 PhD’s were involved in product development

 

Industry veterans such as your blogger have watched this happen many times with most brands in this category.  Sometimes restages produce great success, others become the last “gasp” of the brand.  There are many iconic hare care brands including Pert Plus (originally owned by P&G), Suave (developed by Helene Curtis, now owned by Unilever), and Herbal Essences (introduced by Bristol Myers, now owned by P&G) that continue to prosper by meeting the needs of a significant number of consumers.  Each of those brands has its own positioning as does Pantene which was a hugely successful restage itself back in the 90’s. Pantene has been the number one brand in the category for several years.

 

It will be interesting to see how P&G markets the new products.  While the Bloomberg article cites research and development and those unusual ingredients, I would guess that we will see little mention of that as compared to the benefits offered by the new products. Given the success P&G has had in the daily hair care category, my money is on this being the 3^rd or 4^th successful re-launch of the Pantene brand.    How many times can you re-stage a hair care brand?  I know it’s a big number, and with the number one brand, it should not be difficult.  What do you think?

Does Your Company Have a Margin Improvement Program?

Prime Advantage, a Chicago-based buying consortium for mid-sized industrial manufacturers, recently announced the findings of its fifth Prime Advantage Group Outlook (GO) Survey, and reviewed the top economic concerns of midsized industrial manufacturers for 2010.  According to the survey, “The top three external concerns facing small and mid-sized manufacturers include customer demand at 38 percent (and up from 24 percent in the last GO Survey), price pressure (32 percent) and inflation (16 percent).”  I was interested to see that sourcing concerns were highly rated and that these issues were mentioned:

 

• The ability to generate cost savings
• Managing the cost of raw materials and components

Since the fourth quarter of 2009, most of the work that I have done with clients has been focused in those two areas.  I believe that the mid-sized manufacturers who survived the recession are determined to improve margins so that they are better positioned during the economic recovery and for the next recession, whenever it occurs. What does margin improvement entail?  There are two basic options – raise prices or reduce costs.  Raising prices has never been easy, with global competition in most markets, it can be a risky approach.  Reducing total cost which includes manufacturing, purchased materials, and transportation has several benefits.  Done correctly, you take cost out of your system permanently by developing collaborative programs with both suppliers and customers.

 

Here are some suggested actions that I learned while managing Purchasing and sourcing during my corporate career:

 

• Create “costed” bills-of-material for each of the SKU’s.  A costed bill is easy to create, have your finance people look up the purchased costs for each item on the bill as well as the labor cost associated with the product.
• Identify the highest cost purchased items for each product.
• Develop the cost history for the last 3 years.  If you do not have the data, ask your suppliers to furnish it.
• Compare that history to market information by using Bureau of Labor Statistics price indices or published commodity information
• Get actual product samples of each high cost component.  Many times seeing the differences for the same type of item used in one end product versus another can be quite revealing.

 

In large companies, Purchasing will do this as part of their regular activity.  In smaller organizations, once you have completed the information gathering, decide which suppliers and/or items to tackle first.  Start with commodities that you think have good savings potential. Schedule meetings with those suppliers and plan to introduce your 2010 margin improvement program. 

 

Your plan for each meeting will be different based on the commodity, the number of suppliers that you use for a given item or commodity, and how much competition exists in the marketplace. The discussion should focus on what can be done to take cost out of the item(s) in question.  In most cases, this is the start of a process, so record the expected actions, responsible individuals, dates, etc. If you identify purchased commodities or items that have not been market tested for a year or longer, then doing an RFP and validating your current pricing is a good first step before you engage your current supplier in the effort.

 

 

Suppliers will try and respond positively when the customer – you – takes a collaborative approach.  In fact, many suppliers are taking the lead in working with their customers to take cost out of the process.  The large marketers, manufacturers, and suppliers in the consumer products industry have been working together for years.  Mid-sized companies need to adopt these practices to improve their margins and prosper in the years ahead. 

Does Manufacturing Matter?

 

Last month I participated in a lively discussion on this topic at a local APICS sponsored breakfast.  Since many of the attendees have careers that are at least in part related to manufacturing, there was admittedly some built in bias towards the answer, “Yes it does.”

It matters to all of us as consumers because in spite of the conventional wisdom that says little is still made in the USA, in consumer products in particular, that is not true.  Most readers of DC Velocity work with or for companies such as Proctor & Gamble, Kraft Foods, Pepsico, and/or their suppliers with significant manufacturing capacity in the US.  One concern expressed by many of my colleagues during our discussion had to do with reminding those not in the CPG industry that manufacturing remains an essential part of the domestic economy.

Can the government save manufacturing?  The group did not think it could or should.  We would like to see more assistance for small manufacturers that would lower the cost of doing business and provide incentives for new markets such as renewable energy.  Yesterday’s Wall Street Journal had an article on the approval of the first off shore wind farm off the coast of Massachusetts.  Two nuclear power plants were approved for construction earlier this year.  Yet both the wind turbines and nuclear plants are far from sure things.  Meanwhile China and other countries are moving ahead more rapidly.

Who is most to blame for losses over the years in manufacturing – management or unions?  We came to no agreement on this one, other than to conclude that both sides did not always take the long term view.

Last week, we saw some very positive news for US- based manufacturing.  The Tempe, Ariz.-based Institute for Supply Management's (ISM) manufacturing index rose to 59.6 in March from the February reading of 56.5.

The strong number was driven by significant growth in new orders and production, as well as larger inventories, which grew for the first time in 46 months.

The breakeven point for the index is 50, with a reading above that indicating growth in the sector. March's higher score means the manufacturing sector grew at a faster pace than the month before.

The monthly report surveys purchasing managers, and because it's a survey, some analysts say the index is highly subjective and overrated. But others view the report as a valuable indicator of broad trends and the overall health of the economy.  As a former Purchasing Manager who participated in the monthly surveys, I trust the numbers.

Overall, 17 of the 18 manufacturing industries surveyed showed growth. Plastics and rubber products is the only industry that reported contraction.

It will be interesting to see if manufacturers can continue to make progress for the balance of 2010.

Distribution Channels - A Changing Landscape

 

The I-Pad arrived this week.  I was not in line at the local Apple store, but I listened with interest to the media coverage.  The debate will continue for awhile as to the impact of the I-Pad, but there is little doubt that it is at least a symbol of a much bigger trend that has emerged in consumer products.

 

That trend is the major shift in how consumers evaluate and, ultimately, purchase products and services. This trend has important implications for how marketers should be selecting (and creating wholly new) distribution channels for their goods and services in the future. We have already seen significant changes in how books are purchased and how news is accessed, with online options having a clear impact in those categories. And most companies in those industries have been caught up short – eventually being forced to develop new business models in order to compete, indeed to survive.

 

What we believe is not fully recognized yet is that this same trend will impact a much broader range of products in the future.  I discussed this trend recently with Diane M. Meister, founder and Managing Director of Meridian Associates Inc., a Chicago-based consultancy that advises consumer products companies on scenarios planning strategies and building new business models.  www.meridianai.com (Full disclosure, Diane and I both have consumer products’ backgrounds and have known each other for several years.)

 

Diane mentioned two key drivers of changing consumer behavior that will continue to impact which distribution channels will thrive and which will need to be “reimagined” if they are to survive. The two important drivers are:

a)   A new post-recession consumer mindset that recent studies by the retail consulting firm, Alix Partners, calls a “clear-cut shift to thrift,” and

b)   The convenience – and growing consumer comfort with -- online shopping, which reaches more and more product categories almost monthly.

 

Diane explains that our “shift to thrift” has driven changes in the retail landscape that are likely to hang around awhile. Shoppers are now supporting discounters over full-priced venues in a growing variety of categories. Examples include: children’s toys (note the disappearance of retailers Zany Brainy and restructuring of FAO Schwartz in favor of the growth in toy sales at Wal-Mart and Target), clothing retailers (note the emergence of the now regional upscale Tanger Factory Outlet stores and challenges faced by Neiman-Marcus and Saks), and even groceries (growth in sales at Wal-Mart and Target again, and coincident consolidation by traditional grocery chains).

 

The importance of online access to shopping and information has been evident for some time in the purchase of books, certain insurance products, and newspapers. What is driving these changes is something all marketers must acknowledge: the increasing consumer comfort and growing trust in accessing information and making purchases online. 

 

Diane feels we are still early (perhaps in only the third inning) of a massive shift in how and where consumers will be making purchases. And that marketers across industries must stay on top of the changing perceptions and behaviors of their specific customer segments in order to be in front of the curve of these changes. Changing purchase channel options combined with the concurrent economic pressures on consumers today are creating a powerful one-two punch that marketers can only ignore at their peril.

Thinking about the West Virginia coal miners

 

Those of you who have read my bio know that I worked for Ingersoll Rand Company.  I was Purchasing Director for the Lee Norse subsidiary that manufactured equipment for use in underground coal mines.  One of our plants was in Beckley, West Virginia, south of the location of this week’s tragic event.  It’s a long way from coal mines to consumer products, but I could not do this post without asking all of us to keep those miners in our thoughts this week.  Thanks.

Readers are interested in Logistics Education

I had a very interesting question come to me from Vladi Neuschlova in Slovakia in response to my post regarding the development of the future logistics workforce.  Her question was how to describe the importance of logistics to people who do not work in the field.  I can suggest two examples that almost everyone can understand:

·     First, logistics is important to all people in their daily lives.  It is the logistics and supply chain process that bring raw materials from fields, mines, or out of the earth and converts them to the products that we all want – food, clothing, medicines, etc.  The logistics process moves all the raw materials from the source to the factories, and finally to the stores, markets, and homes where all of us as consumers use the products in our everyday lives.  In the USA, logistics costs represent about 10% of GDP, another indicator of its importance to the over-all economy.

·     Second, logistics is the process we use to bring aid to people in areas that have been affected by a natural disaster.  Unfortunately we have had 2 recent examples – the earthquakes that affected Haiti and Chile.  People with logistics experience plan and execute the movement of relief supplies, the arrival of doctors and medical supplies, and the materials needed most urgently to restore all of the infrastructure impacted by a natural disaster.  Logistics providers – airlines, ocean shippers, trucking companies, etc.-  help get the people and products to the areas in need.

Another request came to me from Keith Griffith, head of the Education Department of the Economic Development and Workforce Board of Stanislaus County, California.  His organization is working on curriculum development for the local school system.  It is interesting how many different consultants have been asked to work on syllabus writing, curriculum development, teacher’s aid materials, etc.  The State of Illinois sponsored the writing of several logistics teaching modules intended for freshman level high school students. I am more than happy to share any materials that I have.  The Council of Supply Chain Management Professionals has several DVD’s, and other material available that introduces the subject of supply chain and logistics to students for career planning purposes.  www.cscmp.org

If any of my readers has other comments and suggestions regarding the very important topic of logistics education, I welcome your input.