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6 April 2009 | Supply - a chain without charm
Supply chain isn’t very sexy, but for a manufacturing or product distribution company, the end-to-end supply chain accounts for about 70% of total costs. So it’s obvious where operational changes should be focussed to control where the money is going;
- When it fails, a company suffers immediately because cash stops coming in from customers.
- When it works well, it adds value rather than cost.
A case study from Kestrel Logistics
Here is an example of how a supply chain overhaul enabled a company to restructure and save itself. The dyestuffs division of an American multi-national speciality chemicals company had lost money for the previous five years. The company wanted to divest the division because the drain on cash was causing serious problems for the rest of its businesses.
The warning signs were:
- Nearly $24m of the $60m of stock was slow or non-moving
- Waste was adding 10% to costs because of knee jerk planning based on the sales manager who shouted loudest
- Customer service was only 86% - high stocks but supply failures is a common symptom of pending disaster
- Poor internal and external communications
- Little or no performance measurement data
Supply/demand planning tools were introduced – simple, cost effective, in-house developments using readily available Microsoft programs that had been paid for already. A cross functional team of sales, production and supply chain management agreed a supply/demand plan that was frozen for three months to avoid frequent, costly changes. Logistics costs were renegotiated and a concerted, sustained sales/rework attack made on the stock mountain.
Within 10 months the results were;
- Redundant stock had been reduced to $5m and additional sales of $15m generated
- Customer service had improved to 99%
- Waste was cut by two-thirds.
- The supply/demand plan was published, capabilities and constraints understood
- Warehousing and distribution costs were reduced by $750k/year
The division, which achieved its first quarterly trading profit for 4 years, was divested and the funds used to acquire a complementary business that gave leading positions in several markets.
Early Problem Indicators
When going into a distressed manufacturing or product distribution company the early problem indicators for which members should be looking are:
- No performance data – if the management doesn’t know how the business is performing how will they know how it is performing?
- A lack of structured, documented supply/demand planning – if “planning” is based on he who shouts loudest.
- Customer service complaints that are more than 10% of orders – the key measure is customer service On Time In Full. If a minimum of 99% is achieved most customers will be happy. This is known as OTIF. If a company fails to meet an acceptable level it will Slowly Head Into Termination.
- Stock slow moving. If available, look at an aged stock profile. In most circumstances, anything more than a year old is probably gathering dust and costs. If an aged stock profile is not available, walk around the warehouse and ask the boys but beware the “diamond”
- Warehouse management - the indispensable “diamond” controlling the warehouse but not controlled by the management. Sometimes the “fixer” has a personal agenda, keeping everybody at arm’s length, seeming to perform miracles but running his own show by doing favours for a chosen few
It is unlikely that these issues will be terminal in the short term but they are systemic failures indicative of a general malaise in the company and will tie up valuable resources and cash.
Most of the issues besetting the chemical company case study were apparent after two days of assessment. In many cases, a professional ought to be able to give very quickly a view of what needs to be done, how long it would take and how much it would cost. If a turnaround manager thinks significant problems in the supply chain could endanger the continuity of the business he should engage a professional. If the company business is single site the survey could be done in 2-3 days. Obviously, multi-site operations would take longer. The view will enable the turnaround manager to determine how operational changes to the supply chain will contribute to implementing the turnaround strategy.
Closing comments.
If the supply chain is to be a benefit to the company rather than a burden i.e. a genuine operational turnaround, then professional supply chain management can benefit the process subject to terms of time and cost.
None of the solutions implemented at the chemical company was rocket science, just common sense – a commodity most notable for its inappropriate name. None of the solutions was expensive.
And Finally
- A company has to get the thinking right from the outset with a strategic plan that is SMART – Specific, Measurable, Agreed upon, Realistic, Time based.
- Communication, in a structured way every day at the operational level is a must – make it a diary item.
- Set business targets that support the strategy, agree a workable supply/demand plan that will deliver the business needs and then agree to deliver it.
- Justify any change by the value it brings to the business and remember KISS - Keep It Simple Stupid.
John Donoghue
Director
Kestrel Logistics-Supply Chain Consultancy and Interim Management
TMA(UK) Member
Tel/Fax: +44 (0)1883 348044 Mo: +44 (0)7713 637816
Supply chain restructuring, performance improvement, financial analysis and cost reduction, change management,aligning operations with strategy,outsourcing,service suppplier negotiation, supply/demand planning, demand management and customer service