More on the correct formula for supply chain success

Regardless of the occupation of those readers that offered up their theses for the correct formula for supply chain success, there was one consistent theme across their replies: that being that there is…By Jeff Berman, Group News Editor

May 17, 2016

Not all that long ago, I wrote a column in this space, entitled “What is the correct formula for supply chain success?” 

It is an open-ended question to be sure. The premise for that column was based on a research note from Thom Albrecht, a transportation analyst for BB&T Capital Markets, that was highlighting his firm’s Transportation & Logistics Conference earlier this year.

One of the many takeaways in his research note was based on a presentation from XPO Freight President Tony Brooks. And it read as follows: “The new President of XPO Freight, Tony Brooks, suggested success in supply chains is measured wrong,” wrote Albrecht. “It’s all about cost reductions when it should be measured by inventory, working capital and time. Later, over dinner with 4 shippers, they told us they agreed with Brook’s statement and wished someone could create the right supply chain formula, instead of just transport savings.”

In follow-up correspondence with Albrecht, he explained to me that Brooks’ point was that transportation gets measured just as a cost rather than what it does for the rest of the organization in terms of managing inventory properly, ensuring that lost sales are minimized (not on the shelves), that the supply chain is efficient by mode, transit times and cost, etc.  Done properly transportation and supply chain is invisible within a good company, which keeps the focus on what that company makes and not how they get it to the stores, he concluded.

These were all great points to be sure, and it was great to get some additional perspective from Albrecht, too.

But it compelled me to see what else was out there to see what might constitute the correct formula for supply chain success. And based on the feedback I received, it turns out there is quite a bit to that question, even though an actual, definitive answer is likely to remain elusive for the time being.

I received replies from shippers, transportation and logistics services providers, and consultants and analysts types alike. But regardless of the occupation of those readers that offered up their theses for the correct formula for supply chain success, there was one consistent theme across their replies: that being that there is no one definitive formula.

A Northeast-based consumer packaged goods shipper explained that whether or not a company is experiencing sales growth maturity in metrics and the ability to fully understand their impact from a performance perspective is limited.

And having gone from a large company to a smaller one, the shipper explained that one major advantage for achieving supply chain success is the breadth of ideas and creativity one can inevitably “borrow” from counterparts and implement.

One that was already in place prior to my arrival was “Perfect Order”; a combination of On time Delivery, Case Fill, & Inventory on Hand,” he explained. “Though probably not a perfect formula, it certainly allows [us] to focus on building out a viable supply chain while not solely focusing on cost-cutting measures. Albeit a growing company often overlooks cutting fat.”

This shipper provided some very good examples without getting too caught up on the costs side of the fence, but, as he said, that is in relation to a company’s size to a degree.

Another thought about de-emphasizing costs came from Ryan Brown, a consultant at Greenville, SC-based Next Level Essentials LLC, who explained how Wal-mart’s “command of procurement” could be best used as the formula by asking these oft-repeated questions on a quarterly basis: where and how much to pay?; what will be pay?; how should we reorder and when?; and where is the best location to route the goods?

So in terms of achieving supply chain success, Brown explained that bottom line thinking marries that concept to costs savings, but that could be changing in tandem with conventional wisdom could be changing.

How? Well, he cited a VP of operations who told him once, “Don’t save me so much that you run me out of business.”

Like the CPG shipper, Brown compiled a list of questions that are very much germane to supply chain success, including: what are my underutilized assets? Are there significant gaps between actual and theoretical?; Do I have the same kind of tactical decisions being made over and over throughout the network?; How accurate are our forecasts and what impact is that having on our ability to service customers?; and Do we spend more time debating about what we think we should do vs. having the ability to make quick decisions based on analytics?

And he astutely observed that the answers to these questions may point to enterprise value well beyond working capital cost reduction, with other factors needing to be considered including higher levels of customer retention, overall network profitability, speed of issue resolution, and higher asset utilization.

What’s more, Brown explained that at a strategic level, having the ability to quantify opportunity costs is a game changer, observing that if we choose to do A instead of B, what is the overall impact on our customers and competitors?

Preston Charles, a consultant at Atlanta-based Worldwide Advancement Consulting, summed up finding the formula for supply chain success by explaining that the final answer has to do with perspective, with challenges in gaining a consensus among management.

Obviously, a logistics manager is going to look at on-time performance, and they are going to look at cost, noted Charles. “A facility manager is going to look at on-hand inventory and inventory turns.  A sales manager is going to measure success by availability of product and the ability to sell it at a competitive price.  The danger comes when one of these perspectives dominates the others to the detriment of the business.”

Charles agreed with the original these in the predecessor to this article that transport savings cannot be the only measure of success, explaining that one of his supply chain professors was correct in saying “You get what you pay for.

A exclusive dependence on the lowest cost providers or the lowest cost available modes without regard to service or total financial health is dangerous, he said, adding that this mindset could easily result in lost customer goodwill which negates the work of sales, or in the other extreme, a bloated inventory which negates the diligent work done by the warehouse managers.

But conversely, Charles opined a company who takes a little too much pride in a metric, such as their inventory turns, can create a distorted need for speed and timing, with the net result of this thinking leads to erosion of operating income because the cost of goods sold has exploded due to unnecessary freight expediting and poor modal selection. 

“This type of thinking ties the hands of logistics managers, and destroys the foresight and planning of the initial pricing strategies that sales has put in place,” he said. “The iron triangle of cost, time, and scope must be addressed and taken into consideration at all times.  Every business is different, and the decisions for a commodity supply chain may be completely different from a luxury item.  The point is that strong management will take those factors into consideration before executing their plan.”

Again, lots of great thoughts and insight while the final verdict remains not all that easily attainable. In some ways, finding the correct formula for supply chain success is akin to a chef looking for the perfect recipe. Sometimes you think you have it and sometimes you don’t.