Best Practices
Who Cares if you Scored A HAT TRICK in a 5-3 Loss?
Back in February, hockey fans across the country enjoyed a thrill of a lifetime when Team Canada won Olympic Gold with a decisive win over Team USA. Every four years since 1952, we sent a team with the hope of regaining bragging rights for a game we believe in our hearts is ‘our game.’ It sure wasn’t a lack of talent that prevented the Canadian teams from winning over the years. Arguably some of the most talented players in the history of the sport had a shot at winning Olympic Gold for Canada. In recent years particularly, Team Canada really was an “all-star” team in every sense of the word, sporting the best of the NHL. Yet every four years, Canada’s hopes fell short of the illusive dream, proving that stacking the team with great players is not the same thing as putting a winning team on the ice.
Any player who makes it to the NHL is classed among the best in their sport. It takes a blend of skill, speed, strength, conditioning, a lifetime of practice, passion for the game, plus something called ‘puck sense’… an intuitive perception for the flow of the game. Yet all the skill development and training in the world doesn’t make a journeyman into a legend of the game like a Gretsky. Only a handful of players have had the ‘gift.’ While most players know where they should be at any given time on the ice… Gretsky seemed to know where everyone else was as well. While players all know where the puck is… he seemed to know where it was going to be. Throughout his career, he controlled the play because he seemed to process more information about the dynamics on the ice and did it faster than anyone else in the game. And yet as great as Mr. Gretsky may have been, he never won a championship alone… but he sure added a lot of horsepower to a team’s potential.
Let’s look at how the same idea applies in Supply Chain Management.
Perhaps your company has built a great management team. It is a group of men and women who are considered the best in their field. There is a manufacturing guru who can crank out the volume of blue and red widgets, keep the quality and costs absolutely consistent, plus keep it all on schedule. There is a sales wizard who has a nose for finding customers and opportunities no one else knew existed. The CFO has cash flow down to a science, inventories are under control, and life is good. However, the issue of supply chain management somehow falls outside the box when it comes to the impact across the entire company.
The very word “supply chain” implies that the concept is a continuum or a process… finding a source of input materials that is cost-positive and dependable – manufacturing a consistent finished product at the lowest cost – and moving it to the end user on time and at the lowest price. The effective supply chain optimizes all of these ensuring the best use of capital from beginning to end of the process – the collecting of the dollars from the customer, covering all of the costs, intentionally or unintentionally built into process.
However, all too often supply chain decisions are localized. Sales managers often react to the immediate demands of customers, even if it means risking the disruption of manufacturing schedules. At the same time, your plant manager knows that longer lead times can mean big league savings in just batch processing and inventory management alone. In the scramble to solve a short-term dilemma, traffic staff finds a motor carrier that can rush goods direct to a remote market. While that may maintain a customer and keep the sales department happy, who knows how it may impact profit in the process. Your all-star team is handpicked because they are good at what they do. They have just scored another goal in a tight game, but how are they doing on the season. Supply Chain Management isn’t like golf… it’s a team sport. Like hockey, stacking the team with great players, is not the same thing as putting a winning team on the ice.
If you have strong management in the key areas of your company, how do you make the supply chain decisions that work for the company, not just each department? The answer, as my colleague Martin Kelly from iWheels Logistics discussed in the winter issue of Logistics Quarterly, is knowing exactly what your costs are today, and then setting benchmarks and Key Performance Indicators (KPI’s) to measure changes that occur, either by design or because we live in a dynamic world. They are the ‘league statistics’ and they can tell you more than if you’re just winning or losing. They can tell you whether you’ve got a shot at going to the Stanley Cup finals. Let’s take a look at a real case study.
Our example is a company that manufactures plastic bags for the retail trade. This company makes them all… from drug stores to shopping malls, from big bags with handles to fancy ones with draw strings. These bags are definitely a commodity item. The company’s sales focus is clearly volume and the market is all across North America. Customers view the product as straight expense because they are not being re-sold for a profit. The market is extremely competitive and is driven by customer demand. With wide distribution and diverse customer base some customers are more costly to service than others. The company operates five manufacturing facilities and four warehouses. Some of the warehouses are located directly next to manufacturing facility because there is just no space in the plant left for storage.
The management structure is relatively common to medium size entrepreneurial companies. The CEO is both the biggest sales producer and the ultimate decision-maker. The company employs over 400 employees. They are mostly laborers, but there are few key technical people as well… all in all, a good team. Some of the plants specialize in different types of packaging products. That means the technology in one facility may be different from another and the raw material may come from different sources. Logistics and transportation are considered plant issues. And as such, everyone grumbles about the cost but know that “cheaper” may mean sacrificing customer service and ultimately their perception of the company’s performance.
The company sells both direct to end-users as well as through distributors. It is clearly driven by volume. The customer base is a mix of large retail chains with multiple stores. Some make a central buy, but have the product dropped shipped to the local outlet. In other cases, the bags might be shipped to a distribution center. Plus there are a large number of mom & pop customers across the USA and Canada. Most of the sales come in over the phone and immediately pushed through to manufacturing. They are often custom orders with unique printing or packaging requirements.
A critical factor in the company’s operation is buying the resin, which represents 60% of the cost of the product. It is a volatile market and costs literally fluctuate daily. Larger customers tend to understand the impact of resin prices on the cost of the poly-bags they need. As a result, when they see the cost of resin going up, they place large orders and stockpile. When costs go down, they immediately want to see a cheaper bag. It is the primary area of focus for management attention and intervention.
In this roller coaster market, “being competitive” is literally an issue of a few pennies here and there. Stripping cost out of the supply chain has more impact than just profitability. It’s about survival. So where does the company start? Well, they start with what they know. First, they have freight bills and they have a record of customer shipments. This gives them the total cost of shipping product to customers and if they are lucky, they may be able to isolate costs to specific customers. Simple math pegs the transportation cost for all of the bags shipped to all customers across North America at 6.1¢/lb. Their goal is to reduce the cost to a nickel.
However, there is a lot of information we don’t know, such as the cost of dealing with any individual customers. We don’t know whether the bottom line for the large volume buyer warrants the high discounts after all of the service demands are factored into the equation. The company moves inventory from one warehouse to another as many as three times before shipping to customers, but that cost is not reflected in the cost of shipping goods to market. The company might know its total freight bill, but it does not distinguish service vs. costs between regions, direct sales to major customers or bulk shipments to distributors. We don’t know the actual or opportunity cost of taking a big order, juggling the production schedules paying an inflated spot price on resin… because the priority is on sales volume. Are the same service (and cost) standards being applied to “expensive” customers as to strategic partners? Are order patterns changing, costing more per unit for the same revenue returns?
One thing we do know is that any and all supply chain related decisions are going to impact customer service, manufacturing and certainly profitability. What we do not know is how they will impact on other customers, product quality or even the bottom line if we don’t have benchmarks and KPI’s. With the right measurement tools, good service options can be investigated and improvements tracked. With no benchmarks, benefits tend to get lost in individual issues without the benefit of seeing the big picture. While everyone on the team is trying to do the right thing – having good measurement around the whole process ensures each team member can see the impact of good business decisions.
To return to the hockey analogy for a minute, corporate success is about more than just great individual effort. It’s about controlling the flow of the game. We have all heard the phrase, “the whole is greater than the sum of its parts.” Supply chain management is a classic example. What good does it do if manufacturing is meeting deliveries, but quality is suffering… if sales volumes are sky-rocketing, but delivery promises are just unreasonable and jeopardize manufacturing cycles… if purchasing has finally found a carrier that saves a nickel a mile, but customer appointments are being missed? If Paul Henderson’s big goal came in the sixth game and Canada lost the seventh game to the Soviets, do you think anyone outside of Toronto would remember Paul’s hockey achievements? Do you think anyone remembers who scored the goals for Team USA after Canada won the Gold?
So back to the original question. Where is the value to the company, when one of your all-stars scores a “hat trick” but you still end up losing the game… or even worse finishing the season out of the play-offs? With the right team goals and the KPI’s to measure effort, your team may have championship potential. As a bonus, you might also see an improvement in individual performance stats. But if your management team is making decisions without them… then sorry, you’re still just playing road hockey.