Online Retail Sales Rise

Here is a snippet from Times report on black Friday: “Online sales fared considerably better this past weekend. ComScore, a digital research firm, estimates that cyber sales on Black Friday totaled $595 million, making it the second heaviest online spending day so far in 2009 and up 11% from Black Friday 2008. PayPal said it saw a 20% increase in the amount of money people spent using PayPal to purchase items this Black Friday from last year and a 140% spike in the volume of payments made by mobile phones. The mobile-phone transaction increase indicates that buyers shopping at brick-and-mortar sites were likely price-checking items with their mobile phones and then purchasing the item where they found it the cheapest.”
Read more: http://www.time.com/time/business/article/0,8599,1943398,00.html?xid=rss-topstories#ixzz0YNpsSOTt

Of course that means more pressure for the retailers to manage all their sales channels optimally. Multi-channel retailing is more than just having brick and mortar stores along with online retail stores to capture orders. It is about developing capabilities that present a single consistent shopping experience to the customer and managing a single optimized supply chain for efficiently leveraging assets across channels. Click here to read the whole story on multi-channel retail capabilities.

 

© Vivek Sehgal, 2009, All Rights Reserved.

 

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Green Supply Chains: Beyond the Cost of Energy

When you talk about green supply chains, a lot of attention is being paid to the cost of energy. A lot of companies believe they are pioneering the green supply chains primarily because they have become aware of the cost of energy and are explicitly working to control it. Energy used in transportation, lighting, manufacturing are quite visible. Retailers are talking about optimizing their transportation efficiencies, in turn reducing the energy used and saving a bundle. Some of them are also looking into store design as well: Wal-mart started using skylights a few years back to reduce the lighting needs during the day. Manufacturing companies are also looking at various ways to reduce energy consumed, some of them have taken a pioneering approach of not only looking at manufacturing alone but review the design of their products with sustainability in mind. One example is P&G: in redesigning their Tide detergents, the company managed to save water by concentrating the detergent, which also yields considerable savings in packaging (smaller detergent packages for the same number of washing loads), transportation costs (less weight and volume), warehousing (less volume).   

{Click here to download or print this article}

What P&G example shows is that there is more to a green supply chain than reducing vehicle-miles in the distribution network.

I propose building an industry-wide data model that would capture the sustainability in a single number. In my book on enterprise supply chain management, I called this index as the Carbon Cost Index. Here is the basic concept:

This carbon cost index will model and support the effort to measure and control the human carbon footprint and related costs, legislative or otherwise. The following scenarios are likely possibilities to measure, impact, and control the carbon footprints of supply chains. A single corporate supply chain does not generally reflect the complete product life-cycle. Therefore, viewing the requirements of a green supply chain from a single corporate supply chain point of view constrains the scope of the thinking itself.

When viewed from a product life-cycle point of view, supply chains consist of three main phases of production, distribution, and disposal. Between the phases of distribution and disposal is the product usage, but since that phase is directly controlled by the consumer, I am excluding it from the supply chain point of view. Eventually, we must build a green index that reflects all these three phases of a product life-cycle in a supply chain. This index, can then be used variously for designing green supply chains across industries as a sustainability measure that goes across industries, corporate supply chains, and consumers to create sustainable business practices.

  1. Energy profile (Production). The energy profile will model the total energy requirements of producing the raw materials as well as the manufacturing process that converts them into finished merchandise. Such data will be typically supplied by the manufacturers, through a process very similar to the product specifications that the manufacturers provide today. The existing data pools like GDSN may be expanded to include this data for the energy profiles of the manufacturing process and the energy profiles of the raw materials.
  2. Distribution profile. This will capture the carbon footprint of the material movements required to manufacture a given product, with elements such as the distances traveled by the raw materials from their source to the factories, and by the finished goods to reach the retailer’s warehouses and stores from the factories. The modes available on these routes and energy profiles of these modes may affect such scores. It may also capture the distribution unit profile based on packaging that affects distribution costs.
  3. Recycle profile (Disposal). This profile will model the material’s recycling characteristics, types of facilities required, and regional laws governing recycling requirements by collecting data on the recycling profiles for the merchandise as well as for the packaging materials.

The Carbon Cost Index then will be a composite reflection of the above profiles that can be used in several planning and optimization functions for the supply chain processes. Of course, having such data available will also change the supply chains processes. For example, how sourcing may get affected if such an index were available today. And, assortment that may require matching products with a recycle profile that is aligned with the local regulations and available recycling facilities. Futuristic, yes, but I think that is where we must go for sustainable growth.

 

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

 

Off-sourcing: Is it For You?

Off-sourcing in itself is not a new phenomenon. It is estimated that more than 3/4 of American corporations are engaged in international sourcing. However, the changes in the last couple of years warrant that the decisions for off-sourcing be re-evaluated. The changes in cost of fuel, regulatory environment, and the recession are several reasons driving such evaluation. To evaluate the off-sourcing decisions made in the last few years, it is imperative to understand the drivers, considerations, and the effects of off-sourcing on the supply chain. We cover these aspects as follows.

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What drives off-sourcing?

The most overwhelming reason for the companies to off-source is the lure of reducing the cost of merchandise. A recent study by Grant Thornton (International sourcing: Offshore or near shore?) found that lower costs were the driving factor in the off-sourcing decisions for 79% of the respondents in the survey. That is an overwhelming number, but it is not surprising. What is surprising is how little the companies usually know about the total cost of their off-sourced products. Most companies do not have any established process or system to collect and compute the total landed costs for their products. While the cost of merchandise is easily obtained from the purchase orders, the other costs like transportation and warehousing are harder to establish and accurately allocate to products. Most companies have questionable processes to capture and allocate these costs. The value of ordered products is the most commonly used factor for allocation of logistics (transportation and warehousing) costs. However, these costs should be better allocated using the handling and storage characteristics of the products rather than simply using their value. A set of outdoor garden furniture is always going to have a substantially higher cost of transportation, handling, and stocking in the warehouse than a Wii game system, even though they may both have comparable purchase costs. The solution lies in capturing transportation costs using the weight and volume characteristics, warehouse handling costs using activity based costing, and warehouse stocking costs using the number of days and space utilized by a product stocked in the warehouse.

But, these three components only make part of the total cost of the products, other costs such as the cost of receiving, unpacking, and making it ready for the sales floor and the cost of promotion and clearance. These costs become significant for the off-sourced products simply because of the longer replenishment lead-time, which means that the demand forecasts driving the replenishments must be made for longer time horizons which tend to be less accurate than the short-term demand forecasts. Less accurate demand forecasts mean higher promotion and clearance budgets and in some cases, additional logistics costs associated with warehousing and dynamic inventory re-balancing to move products within the network where they can potentially fetch better prices. All of these factors add costs that are complex to model and capture, and harder to correctly allocate for any meaningful comparison among products.

No wonder the same report (International sourcing: Offshore or near shore?) found that, “nearly half of respondents (47%) see off-shoring as neutral or detrimental to their ROI”.

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Considerations for Sourcing Decisions

Given the firm has a clear understanding of the total costs, what other factors should be considered for making sourcing decisions? Here are some considerations that would directly affect your total costs and should be considered for any off-sourcing decision. Not only do they affect the direct costs, but they also add process complexity that the corporation must be ready to deal with.    

  1. Regulations and Trade Agreements: What are the regulatory requirements for the products under consideration? Most of the international trade is subject to additional taxes, excise duties, value added taxes (VAT), etc, find out how this adds up to the total cost of the products when off-sourced. Find out if there are any trade agreements favorable to the products under consideration. These agreements may reduce your duties and taxes, or provide other financial incentives. The international trade is also subject to regulatory process requirements which means the importer typically has more paper work to prepare and file with the customs. Managing the extra paperwork is bound to add to your costs as this requires more processes, systems, or a contract with a service provider.
  2. Type of Merchandise: Not all merchandise is equally suitable for off-sourcing. Products that are innovative, fashion, and highly seasonal in nature may not be suitable for off-sourcing due to volatile nature of demand. These types of products require the ability to quickly react to the demand by either increasing the supplies or shutting them down, both of which are easier with shorter replenishment times. Other products that are more utilitarian in nature and have relatively stable demand may be good candidates for off-sourcing.
  3. Financing and Payment Terms: Off-sourcing may involve financial terms that are typically different from those in domestic sourcing situations. Make sure that the added complexity of procedures, advance financing, and/or guarantees are considered in making the case for off-sourcing.
  4. Multi-modal Transportation and Port Management: Managing the product at the port: loading, unloading, customs-clearance, and onwards shipment adds to the costs as well. Managing multi-modal transportation needs more complex systems for planning, optimization, and execution of the shipments. While this can be outsourced to a 3PL provider, corporations may lose the opportunity to optimize their transportation spend.

Finally, ensure that you have the systems in place to provide inventory visibility for the products in transit, which may allow you to dynamically plan their final destination as the ship moves closer to the home port to better match with any changes in demand during the time in-transit.

Off-sourcing: Effect on Supply Chain

All sourcing decisions affect the supply chains in several ways. They affect the costs as well as the ability of the supply chain to respond to changes in demand and supply. Evaluating how the supply chain will react to off-sourcing and ensuring that it is designed to address the process requirements involved in the off-sourcing is paramount for a successful execution of such decisions.

  1. Costs: Off-sourcing almost always will have additional supply chain costs in freight, inspection, financial instruments, drayage management, trade tariffs, and costs related to managing these processes. Make sure that these have been thought and properly estimated for an objective decision making exercise.
  2. Lead-time: Off-sourcing also typically results in much longer replenishment lead-time to the plants, warehouses, and stores. The effect of a longer lead-time on the supply chain is the reduced ability to react to changes in demand and supplies. This causes considerable strain on the processes, calls for more accurate demand forecasts, relatively stable demand, and reliable supplies.
  3. Risk: Increased costs, replenishment lead-time, and length of the supply chain all add to the supply chain risk. Longer chain and additional nodes provide new points of failure in the supply chain and substantially increase the risk of disruption, making it prone to factors that are not typical in domestic supply chains such as international politics, wars, and piracy. 

Summary

Many companies are considering or reevaluating off-sourcing due to changes in the business environments such as cost of fuel, regulatory environment, and the ongoing sluggishness in the economy. Successful reevaluation requires that the managers clearly understand the drivers, considerations, and the effects of off-sourcing on the supply chain. Only an objective analysis of all these aspects can help establish the true value of off-sourcing for a company.

 

 

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

 

Warehousing Efficiencies: Metrics and Controls

Enhancing warehousing efficiencies can reduce costs and enhance supply chain flexibility. To do so, managers must understand how to measure and control the efficiency of the warehousing functions. This was the subject of several posts last week.

It is now available as a single downloadable article. Click here to print or download this whole article.

Alternately, you can still access the individual posts as follows:

Measuring Warehouse Efficiencies

Affecting Warehouse Efficiencies, Part 1- Labor

Affecting Warehouse Efficiencies, Part 2- Inventory

Affecting Warehouse Efficiencies, Part 3- Slotting

Affecting Warehouse Efficiencies, Part 4- Product Flow

 

© Vivek Sehgal, 2009, All Rights Reserved.

 

Affecting Warehouse Efficiencies, Part 4: Product Flow

Last week, I talked about the three main categories of warehouse efficiencies. These were operational, stocking, and fulfillment efficiencies. In this series of four posts, I am presenting the levers available to an organization to enhance these warehouse efficiencies. There are four main levers to target and affect these efficiencies. These levers being Labor, Inventory, Slotting and Product Flow. Each of the four posts discusses one of these levers and expands upon the functional capabilities that must be developed to enhance warehouse efficiency. In Part 1, the role of Labor was covered, part 2, inventory management was covered, part 3 covered slotting, and here is  final and concluding part of this discussion: Product Flow Analysis.

Flow Analysis:

Product flow analysis within the warehouse allows the warehouses to optimize the product flows through a warehouse. The objective of such an exercise may be to reduce the cost of handling within the warehouse by reducing the manual touch-points and increasing automation, determining the most efficient disposition of incoming inventory or finding cross-docking opportunities for quick pass-through. Like slotting, flow-path analysis should be conducted as part of warehouse planning to determine the best flows for product categories using demand patterns and other product attributes, some of which are discussed below. Determining optimal flow-paths and re-evaluating them as demand-patterns, product-mix, or product-attributes change ensures that the warehouse operates at its best, making most use of the available automation and other handling equipment.

  1. Product Handling Attributes: Product handling attributes determine what kind of equipment will be needed to handle the flows. Conveyable products may be easier to automate while others may require manually operated fork-lifts. Flow-path analysis considers these constraints to determine the best disposition and flow of the product within the warehouse from receiving until it is shipped.
  2. Flow-velocity Attributes: The demand and promotion attributes can affect the flow-paths to efficiently handle the products based on their flow-velocities. Fast moving products must be able to flow quickly to their stocking, staging, or shipping areas. If product is on promotion, an efficient handling within the warehouse will ensure that replenishments are most efficient and increased volumes due to promotion can be effectively handled.
  3. Inventory Consumption Policies (LIFO/FIFO) and shelf-life: The inventory consumption policies of first-in-first-out (FIFO) or last-in-first-out (LIFO) affect the flow-path decisions since they directly affect the disposition and shipping of the product based on their receiving order. Similarly, if the products have expiry-dates and must be shipped within a fixed number of days after receiving, they may be required to go to a specific area of the warehouse. These areas may be climate controlled or otherwise monitored for perishables to maintain product quality.

Improving product-flows in the warehouse directly improves the operational and fulfillment efficiencies in the warehouse. This fourth and the last part of this series concludes the discussion on the levers to drive the warehouse efficiencies.

 

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Affecting Warehouse Efficiencies, Part 3: Slotting

Last week, I talked about the three main categories of warehouse efficiencies. These were operational, stocking, and fulfillment efficiencies. In this series of four posts, I am presenting the levers available to an organization to enhance these warehouse efficiencies. There are four main levers to target and affect these efficiencies. These levers being Labor, Inventory, Slotting and Product Flow. Each of the four posts discusses one of these levers and expands upon the functional capabilities that must be developed to enhance warehouse efficiency. In Part 1, the role of Labor was covered, part 2, inventory management was covered, today’s topic is Slotting.

Slotting:

Slotting is the science of placing the products inside the warehouse. In all warehouses, there are bound to be locations that are closer to the receiving or shipping docks, convenient to access or easier to reach. As the number of such locations is relatively fixed, it would make sense to utilize them for products with the highest velocities. Slotting is the ability to judiciously determine the best placement of products in the warehouse based on different product attributes such as their demand, planned promotions, dimensions, weight, volume, orientation, affinity, co-placement constraints, crushability, and so on. While some of these attributes are static in nature, other like the demand and planned promotions change with time. The capability to optimally slot a warehouse increases the stocking as well as operational efficiencies. At its best, it should be achieved dynamically so that the routine warehouse activities of receiving, putting-away, picking, and shipping are continuously result into an optimally slotted warehouse as the demand patterns change.

  1. Maximize Warehouse Cube: Slotting necessarily fulfills two necessary functions. The first capability consists of analyzing the products to be warehoused and determine the size, type, and number of locations that would best serve to maintain the desired inventory levels. This maximizes the warehouse cube and helps in planning the correct number of racks, carousels, active and reserve locations, floor-space, and so on.
  2. Maximize Warehouse Operations Efficiency: The second capability of the slotting function is to continuously monitor demand patterns, past and projected, and direct new receipts to most optimal locations by dynamically selecting locations based on product and demand attributes. This helps in maintaining a warehouse that is always optimally slotted for best operational efficiencies. If a slotting solution cannot provide a dynamic slotting capability, it still can add a lot of value to slot when demand patterns or product mix changes, and execute the warehouse activities to attain the optimal placement of products. In the latter case, the solutions typically provide the ability to analyze the cost of additional activities against the expected benefits of re-slotting the products.

Slotting optimization directly enhances the operational and stocking efficiencies in the warehouse. Indirectly, it may also improve the fulfillment efficiency by ensuring more accurate location records for the products in the warehouse.

In the fourth and the last part of this series, I will talk about the opportunities to enhance warehouse efficiencies through flow analysis and planning in the warehouse that is a primary lever to drive the operational efficiencies.

 

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Affecting Warehouse Efficiencies, Part 2: Inventory

Last week, I talked about the three main categories of warehouse efficiencies. These were operational, stocking, and fulfillment efficiencies. In this series of four posts, I am presenting the levers available to an organization to enhance these warehouse efficiencies. We would be talking about the four main levers to target and affect these efficiencies. These levers being Labor, Inventory, Slotting and Product Flow. In each of the four posts, I will focus on one of these levers and expand upon the functional capabilities that must be developed to enhance warehouse efficiency. In Part 1, the role of Labor was covered, today’s topic is Inventory.

Inventory Management:

Inventories in the warehouse consist of a substantial amount of working-capital tied up in the supply chain to ensure that the demand fulfillment rates can be maintained at desirable levels. Ability to fulfill store and customer orders is central to the existence of warehouses in a supply chain, but this must be balanced against the need to reduce system-wide inventory costs. Fulfillment metrics measure this ability of the supply chains to balance the service levels against the inventory. Inventory efficiency at the warehouse balances between the conflicting requirements of high fill-rates and low inventory costs. The following capabilities can help in maintaining both.

  1. Inventory Optimization: Inventory optimization solutions provide the warehouses with the ability to compute and maintain optimal inventory levels that are sufficient enough to maintain the target fill-rates. The inventory solutions typically work by analyzing the historical variance in demand, supply, and replenishment lead-times. These solutions compute the inventory levels required for the projected demand to maintain the targeted service levels. Optimizing inventory can typically reduce inventory in the system by 10-20% while still maintaining desirable service-levels. The problem becomes more complex when the supply chains have many levels and the inventory must be computed at each stocking point of each echelon of the chain.
  2. Inventory Visibility: Inventory visibility across facilities is another primary tool that replenishment managers can use to enhance warehouse inventory-efficiency. Inventory visibility enables dynamic source-selection for fulfilling demand in the supply chain. The conventional supply chains model stores tied to a specific warehouse for replenishment. This rigid relationship forces higher inventory levels in the system because each order must be fulfilled from a pre-determined source. Inventory visibility makes it possible to source orders from alternate sources, thus allowing lower inventory levels while simultaneously maintaining comparable service-levels. Solutions integrated with logistics can also account for the cost of such changes to make the best decisions.

Better inventory management processes directly affect the fulfillment metrics of the warehouse which are primarily focused on its ability to address demand. The examples of such metrics are fill-rates, on-time fulfillment, pick and ship accuracy, and so on.

Next time, I will talk about the opportunities to enhance warehouse efficiencies through better slotting management in the warehouse that is a primary lever to drive the stocking and operational efficiencies at a warehouse.

 

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.