Supply Chain as Strategic Asset

My second book on supply chain was released over this weekend. It is titled, “Supply Chain as Strategic Asset: The Key to Reaching Business Goals”.

This book investigates the relationship between some of the well-known business strategies and how they affect the selection of the supply chain strategy. As technology is the de-facto enabler of business capabilities in current times, therefore, the book also provides a good overview of the prevalent practices in developing and pursuing effective technology strategy that will best support the business needs.

The objective of this book is to explore the relationship between the three strategies: business strategy that sets the goals, supply chain strategies that define the business capabilities to achieve the business goals, and the technology strategy that enables building the business capabilities effectively. I believe that senior executives who understand this synergistic relationship can transform their companies most effectively by prioritizing the capital investments that are fully aligned with the business goals of the firm and hence provide the best returns on the investments. The book is full of real-life cases from the industry supporting the view points presented to create an effective supply chain strategy.

Next steps:

Read Read Excerpt- Chapter 1 (PDF)
  Read Excerpt- Index (PDF)
  Read Excerpt- Table of Contents (PDF)
Buy Buy at Amazon
  Buy at Wiley
  Buy at Barnes & Noble

Related Articles:

 

© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my books on Supply Chain Management at Amazon.

Advertisements

Supply Chain as Strategic Asset: The Key to Reaching Business Goals

Bookmark and Share

I recently spoke to Logipi’s (www.logipi.com) founder Dustin Mattison about my new book on supply chain. This book reviews the concepts of business strategy and explores the relationship of the business strategy with supply chain strategies. It also establishes a process that firms can use for planning their functional evolution so that they can pro-actively create advantages sought by their business strategies rather than reacting to the demands of the business. In the discussion with Dustin, I talk about what is special about this book and the main takeaways.

Click below to listen to the interview or scroll down for a script. And, come back to check for more on the takeaways from this book explained with examples from the industry.

Vivek Sehgal New book on “Supply Chain as Strategic Asset: The Key to Reaching Business Goals”.

Dustin: Vivek, we can start by you introducing yourself to the audience.

Yes, absolutely. My name is Vivek Sehgal and I work for Manhattan Associates, that is a best-of-breed solution provider in the supply chain applications area. We have over 1200 customers world-wide and most of the largest retailers use our solutions. I have a long supply chain consulting background and have also written two books on supply chain, one of which is coming out in this December.

Dustin: Tell me a little about this new book on supply chain.

Dustin, my new book on supply chains is titled “Supply Chain as Strategic Asset: The Key to Reaching Business Goals”. It is currently in print and scheduled for release in December this year. It is being published by John Wiley & Sons and will be distributed through all major book retailers as well as online through Amazon & others.

As the title suggests, this book is about building competitive advantages. It talks about how companies can deliberately design their supply chains to build capabilities that will create the competitive advantages they need. In doing so, of course, the supply chain becomes a strategic asset for them, directly supporting their business goals, and aligned with their corporate strategy.

Dustin: There are similar books on the subject, what is special about your book?

There are quite a few things that make this book unique. This is the first book that brings together the business, functional, and technology strategies and explores their relationship. You will find a lot of books on business strategy, a few on technology, but almost none on functional strategy. The problem is that while the business strategy establishes the goals of the business, it does not say what business capabilities are required to achieve them? That is the role of the functional strategy that I explore and since technology provides the underlying platform for enabling most of the business capabilities: today’s executives have to understand the whole spectrum of strategic planning – from business to functional through technology – to be able to lead. Conventionally, the link between the business strategy and functional strategies has not been understood and explored very well – but the fact is that the functional or process capabilities are the tools that help firms achieve their goals and therefore, to pro-actively build competitive advantages, it is essential to understand what capabilities must be developed to support their business strategy and compete effectively in the market-place.

I will take an example. Conventionally, the supply chain capabilities in most companies grow in an organic fashion. You need an order capturing process today, so that is built, then someone needs to address the customer questions on fulfillment status, so an addition is added to track the fulfillment process and so on. But an organically grown function is never going to provide any competitive advantage to you. Why, because it is reactive by nature – it only solves those problems that have already been encountered by your business & others in the industry, it is not forward-looking, it is not innovative and it does not pro-actively address the needs of the future. And, that is a very typical model of how the functional capabilities in the corporations are built. In this situation, there is no planned evolution for building supply chain capabilities – in other words, the firm has not taken the time to analyze its needs based on its strategy and establish how it should evolve its supply chain capabilities to support those business needs.

Dustin: Ok, so you are saying that the current state of affairs where functional capabilities organically grow to respond to business needs is inherently deficient — because it is reactive by design. What would be some other main takeaways from the book?

In fact, there are a few that I would like to mention:

  • Most industries while developing their functional capabilities look at the industry best practices. But think about it: pursuing these best practices can only bring capability parity — not competitive advantages, because these practices are based on what the industry does today, not what it will need tomorrow! Of course, we just talked about how the model of organic evolution to respond to business needs is inherently deficient — because it is reactive by design. If you want to create competitive advantages, you will have to pro-actively build your capabilities.
  • Next takeaway I would mention is specific to supply chain, I review the current strategies that center around lean, agile, speculative, postponement. I think, this view of supply chain strategy is deficient and misleading. Because, in practice, you obviously need a supply chain that is lean but also agile simultaneously – to me these are not two exclusive attributes, but two firm requirements that a supply chain must provide. The other two strategies of postponement and speculation are equally misleading – because those options are a consequence of the industry and the product attributes – for example, if you manufacture pencils, you will be following a build-to-stock or speculative model. This is pretty mush true for most utilitarian products where the postponement is not an option – for this reason, I do not consider speculative and postponement as real supply chain strategies. For understanding supply chain strategy, we must go back to basics: the only objective of supply chain is to manage variability, which means the objective of the supply chain strategy must also be to manage variability to support the goals of business strategy. Since supply chains only control four common components (demand, supply, inventory, resources), these remain the only levers for managing variability and furthering the goals of business strategy. So if you wish to create competitive advantages through supply chain capabilities, you have to think beyond the best practices, beyond the templates, and beyond the lean and agile concepts. The only way to create competitive advantage is by creating superior processes through deliberate design and do this pro-actively. And how do you know that a process superior to another — when it has the ability to create at least one of the advantages of Time, Cost, Efficiency, or Quality.
  • My next takeaway is that supply chain strategy must be derived from the business strategy – and not in a vacuum or by claiming that we need a lean or agile supply chain because that is meaningless. And remember that the competitive advantages through supply chain must be built into the processes by pro-active design (not by pushing industry best practices or organic growth of capabilities). Current practice in most companies is to bring in supply chain solution vendors — with consultants pushing industry best practices (that you would remember lead to parity, not advantage), and companies’ internal staff intent on transferring their existing processes onto the new technology (leading automation of existing processes, not competitive superiority) instead of transforming through analysis of their requirements driven by business goals and designing superior processes. None of these current practices are going to help you create competitive advantages.
  • The last takeaway from the book will be that for an optimal ROI on capital investments, both the business and functional strategies must exist and must be aligned — because that is the only way to avoid investments that do not contribute anything towards achieving the business goals.

I would really like to talk to each point with real-life examples — some of these concepts are not obvious unless explained with the help of examples. Possibly next time?

Dustin: Sure, that sounds good, we can continue the discussion next time and you can elaborate these takeaways with examples. Thanks for today.

Thanks Dustin and I look forward to continue the discussion next time. Thank you.

 

© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my books on Supply Chain Management at Amazon.

Why Should the CFO Worry About Inventory

Bookmark and Share

As supply chain practitioners, we appreciate the significance of inventory in maintaining the supply chain flows and the service levels. Let us review the importance of inventory towards the corporate financials. Inventory is one of the components directly reported on the corporate balance sheets. It appears under the current assets and gets consolidated in the total assets of a company. Good inventory planning practices can significantly lower the inventory in the supply chain without having adverse effect on the supply chain’s ability to fulfill demand. This is typically achieved by deploying inventory optimization solutions that allow the firms to model their entire network, and the demand and supply at each node along the network with the targeted service levels for all the flows. Good demand forecasting capability forms the foundation of an effective inventory optimization function.

Reducing inventory reduces the current assets of a firm. A drop in the current assets reduces the total asset basis that translates into higher returns on assets, and it reduces the working capital (which is the difference between the current assets and current liabilities) which means lower interest expense on borrowings that are typically used to finance the working capital. Managing inventories through an efficient supply chain can produce all kinds of interesting financial rewards, consider for example, the case of Wal-Mart. In year ending January 31, 2010, Wal-Mart reported current assets of 48.3B and current liabilities of 55.5B. Since working capital is calculated as current assets minus the current liabilities, this means that Wal-Mart has operations that produce more cash than they need to run these operations!

image

Inventories affect a few other financial numbers as well (see the figure above):

  • It affects the return on assets (ROA). The ROA measures the profitability of a firm relative to the assets it uses to generate the profits. It is calculated as net-income divided by the total assets of a firm. When the inventories are reduced, the total assets of the firm are reduced, thus increasing the return on its total assets. This is also supported by the SCMR’s survey mentioned earlier in this appendix.
  • Inventory also affects the cash-conversion cycle of a firm. Cash conversion cycle measures the time that the firm takes to convert its investments into return. Cash conversion cycle is generally measured in days as the sum of inventory days (days inventory outstanding) and days receivables (or days sales outstanding) minus days payables (or days payable outstanding). Reducing inventory reduces the days inventory outstanding – keeping the other two terms constant, any reduction in inventory will naturally result in shortening the cash conversion cycle.
  • Since maintaining inventory in the supply chain costs capital, any reduction in the inventory levels reduces the need for working capital. Need for less working capital reduces the interest expenses of a firm. The interest reduction translates into higher net profit, because the interest is deducted from the earnings before interest, taxes, depreciation and amortization (EBIDTA) to calculate net profit. Lower working capital requirements also lead to lower short-term debt. Lower debt levels improve a firm’s debt-ratio as well debt-to-equity-ratio.
  • Reducing inventories increases inventory turnover of a firm. Inventory turnover measures the number of times the company is able to sell and replace its inventory over a period. It is calculated as cost of goods sold divided by average inventory valued at cost. When compared to the peers within an industry, a higher inventory turnover ratio represents strong sales and effective inventory planning and replenishment functions.

There are several supply chain processes that affect inventory and help reduce total inventory in the supply chain while maintaining the fulfillment or service levels to replenish the stores.

Better demand forecasting, inventory planning, and replenishment planning processes together help in reducing inventory in the system. Good demand and supply planning practices with the help of the correct tools have been shown to dramatically reduce inventories. Any reduction in inventory directly reduces the current assets and positively impacts the returns on assets.

Supply chain network optimization can also help reduce inventory levels by optimizing a network that is most efficient for replenishing the stores. This is a one-time benefit, and as the supply chain network consisting of stores, warehouses, and suppliers continues to grow, the supply network must be reevaluated to keep pace with the changes. However, frequent changes to the supply chain network are impractical due to heavy capital costs and long lead-times required to set up distribution centers.

 

 

 

© Vivek Sehgal, 2010, 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.

Convincing Your CFO for Investing in Supply Chain

Bookmark and Share

Listen to my interview with Logipi founder Dustin Mattison – on the irrefutable proof of supply chain’s impact on corporate financials.

Vivek Sehgal Irrefutable Proof of the Relationship Between Supply Chain and Finance from Dustin Mattison on Vimeo.

 

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.

Integrated Supply Chains (Part 1)

Bookmark and Share

A few weeks back, I was invited to GSU for a lecture on integrated supply chains. I did not think much of it till I started preparing for my lecture. What exactly is an integrated supply chain? Is it a supply chain that is automated? Supply chain with integrated processes? Will a supply chain qualify to be called integrated if it shared its demand with its suppliers? Can a supply chain that has deployed a single version of master data be called integrated? What about a supply chain that does not have a single source of master data, but does provide a consistent analytical environment to consolidate and report its performance metrics? Do companies that have a Chief Supply Chain Officer have integrated supply chains?

To truly understand the complexity, let us review a few more scenarios:

  • In May 2009, Wall Street Journal reported Best Buy in an article saying that, “it could have sold more electronics equipment in three months ended Feb. 28, but its suppliers deep cuts made it difficult to keep shelves stocked”. Does that show a broken supply chain for the electronics industry? The quoted article also shows how the electronics supply chains typically spread over the globe and consist of several echelons of independent vendors who must work together to make sure the shelves at Best Buy are stocked with what the consumer wants. It goes on to say, “…when economic crisis struck, tech companies up and down the line contracted as sharply as possible in hopes of being the ones to survive, and “forced to guess at demand for their products in a plummeting market, everyone hit the brakes, hard. An examination of the electronics supply chain — from retailers all the way back to makers of factory machinery — shows that, at almost every stage, companies were flying blind as they cut”.

Clearly that shows a broken supply chain across an industry that boasts of some of the best companies quoted regularly in Top 25 supply chains by AMR. Best Buy, Apple, Dell, IBM, HP, Nokia, Samsung, Sony – all appear in AMR’s Top 25 supply chains for 2009. So what gives? If they are the leading supply chain companies, then why the trouble with Best Buy as reported by WSJ?

  • Sears Holdings annual report for 2009 reports that, on January 31, 2009: Sears Holdings operated 39 domestic supply chain distribution centers, of which, 11 support Kmart locations, 24 support Sears stores and four support both Sears and Kmart stores. This is after five years of the companies’ merger in 2004. The story is no different for most retailers with multi-channel operations where most of the retailers have failed to consolidate supply chain assets for their online and store channels. Can they claim they have an integrated supply chain? Home Depot, Wal-mart, Macy’s all have fulfillment operations for their online retailing that do not fully leverage their store supply chains. 
  • What about companies that have automated processes, but use different systems across geographies, across business functions, across lines of assortments? The world’s largest home improvement retailer recently deployed SAP for demand forecasting & replenishment for their Canadian operations, but continues to use their legacy systems for the US operations, they have separate demand forecasting systems for replenishment, price optimization, and promotions planning; and separate systems for online & store assortments –- can such an assortment of systems for a single supply chain process lead to an integrated supply chain?

These scenarios bring forth an important concept, that the question of integrated supply chain must have a  well defined context. It must be asked within a well-defined scope of partners and processes, even business units. As the supply chains can theoretically extend through almost infinite tiers of suppliers and buyers, where should one put the boundary? What about the processes within the four walls? Should supply chain processes integrate with merchandising? What about finance? Should they integrate across business units? Without such a boundary constraining the supply chain, how can one determine the extent of integration? But, isn’t any such boundary arbitrary and therefore questionable?

Is your supply chain integrated? What would you say?

In part 2, let us explore the subject further and review a possible way to think about what an integrated supply chain may mean and how to build one.

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.

Putting the Chain Back into Supply Chain

Bookmark and Share

I was recently interviewed by Dustin Mattison, founder of Logipi, which is described on their website as “a place to find inspiration, ideas, opportunities and resources to help you create the change you want to see in your supply chain”.

The subject of the interview was, why silo-based thinking is at the root of many company’s supply chain issues.

You can hear the actual interview below, or read the transcript of our conversation.

Vivek Sehgal On Putting the Chain Back into Supply Chain.

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.

The new Sears: Missed Opportunities?

Sears has issues around low ROA and low profitability, but most of their investments are into initiatives that don’t directly address either of the issues. A case of misaligned investments or lack of understanding?

Based on the earlier detailed financial analysis of SHLD with its closest competition, I believe that Sears must focus on the following two areas immediately:

  • Optimize operations (symptoms: poor cash-flow, poor return on assets, poor profitability)
  • Optimize inventories (symptoms: low inventory turnover, declining revenues, poor profitability)

Both of these areas can be greatly impacted with focused supply chain initiatives (see related articles, Who is Your CFO’s Best Friend?, Business Strategy and Supply Chains, Need Working Capital: Try Inventory Optimization, and Optimization: Transportation versus Inventory). However, what is surprising is while SHLD has been vigorously investing in their online initiatives, their annual statements don’t seem to support any concerted effort to create supply chain capabilities. Most of the capital initiatives seem to be supporting the K-mart store resets to offer Sears brand merchandise in K-mart stores, creating Lands End store-in-a-store within Sears stores, creating and enhancing online properties (gofer and services), and creating customer-facing multi-channel capability. While all of these are great initiatives, do they really create any specific competitive advantages for Sears that would allow them to persist and grow in a hyper-competitive retail environment such as exists right now? From my perspective, these initiatives are targeted more towards enhancing sales (though that does not seem to be working either since SHLD sales have been dropping) more than reducing costs – which is counter intuitive for a mature retail chain (see Pillars of Retail for context) in the current environment. The picture below summarizes the investments and their most likely effect.

image

An integrated multi-channel strategy is, in fact, a great way forward. However, there are quite a few advantages that a conventional retailer can leverage in creating a multi-channel business through their supply chain capabilities (see Multi-channel Retailing: Are You up to the Challenge).

Within the supply chain capabilities, Sears will do well to first create the execution capabilities that can address their return on assets by creating the execution efficiencies and reduce their operational costs enhancing the profitability of operations. These are also relatively easier to create and maintain, simply because they can be deployed without having to necessarily undertake serious data-cleansing and consolidation challenges, which can seriously undermine supply chain planning initiatives. In a following phase, SHLD can train their focus on creating the planning capabilities which will eventually reduce the inventories in the system and create a supply-demand matching system that is lean and agile to react to changing demand patterns while addressing the need to keep costs low. Once the basic capabilities are established, these can be tuned, optimized, and continuously enhanced to support the corporation’s online initiatives by allowing SHLD to consolidate their supply chain assets and leverage them for all channels irrespective of the physical nature of the channel.

 

© Vivek Sehgal, 2010, All Rights Reserved.

Want to know 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.