Consultant Best Practices Feature Article, May 2004

Supply Chain Management: Best Practices and Its Potential for Consultants
By Jane Dillner and Gillian Verga

An efficient, responsive supply chain can be a strategic differentiator to any company whose suppliers are an important part of the product they deliver. Supply chain best practices can not only lower cost and improve margins, but they can make your client a leader in their customer's eyes with: time-to-market, customer service, delivery accuracy, environmental support, and many other factors. Marketing, finance, and management consultants can enable improvements for their clients through advising their clients of these benefits. The financial consultant sees a reduction in cost; the marketing consultant sees an improvement in customer satisfaction, promotional opportunities, and differentiators; and the management consultant sees an improvement in the overall company flow. In this article, we will describe how this works.

What Is the Supply Chain?
The supply chain is a broad term that covers all of the companies involved in producing and integrating a final product. Here in Silicon Valley, we think of supply chain with respect to high technology, but supply chain management applies to all manufacturing industries: apparel, furniture, food and beverage, automotive, paper products, pharmaceuticals. All seek to optimize their supply chains. Supply chain can also refer to the sourcing of equipment, maintenance repair operations (MRO) materials for any company, or even a service company such as a freight or car rental company. Supply chain management includes internal production, planning and logistics capabilities, as well as relationships with suppliers and even with channel partners. Generally, it involves all materials and service components from the supplier's supplier to the customer's customer.

Cost Cutting
The typical purpose behind supply chain management initiatives is to improve efficiency and thus lower costs. For example, Harley-Davidson, Inc. reduced its operating expenses by $161 million annually when they focused on supply chain improvements. The company not only replaced three legacy systems in three divisions with one company-wide enterprise system, but they also implemented a supplier Web portal with almost half of their 695 parts suppliers. The new supplier network lowered the cost of transactions and, at the same time, improved inventory and delivery information. Suppliers say Harley-Davidson is much easier to work with as a customer, and the bottom line impact is a drop in operating expenses from 17.7 percent of revenue to just 14.2 percent.

In another example, Fleet Corporation, which operates nearly 30,000 trucks and provides transportation services to more than 25 million customers across North America, was able to reduce costs by 9 percent on one of their biggest expenses, procuring replacement parts for these trucks in 1,200 locations. By placing larger orders with fewer suppliers and negotiating both with dealers and directly with manufacturers, they were able to achieve low prices, high quality, timely delivery, and strong customer support. In many companies, material cost is the biggest expense on their income statement. Supply chain techniques such as these can make a big impact on profit margins.

Customer Service and Delivery
A big differentiator that wins customers over is high levels of service provided by extremely efficient and responsive supply chains. Amazon.com has built in-house supply chain systems to manage their warehouse, transportation, inbound and outbound shipping, demand forecasts, and inventory planning. They have automated every step of the supply chain process, and their information is updated real-time. This strategic advantage allows them to find the optimal distribution center to pick and ship inventory from within a minute of a customer placing an order. This saves costs by managing inventory well and optimizing freight; but more importantly, it delights customers. Less than a minute after placing their order, a customer can see when their package will be shipped, how long it will take to arrive, and whether their items will be shipped together or separately.

In another example, a Bay Area computer original equipment manufacturer (OEM) used supply chain mapping of its process to speed cycle time of customer shipments by two to three weeks. Supply chain mapping creates a flow chart tracing the product flow through multiple processes and inventory collection points. A picture of this process follows:

Once the supply chain map is completed, the team identifies opportunities to improve cycle time within its supply chain (and overall company) performance. This can include areas of low inventory, potential cycle time improvement, delivery reliability, quality, and flexibility. Using the above example, a decision was made to completely exclude shipping product from the outsourced electronic manufacturing service (EMS) back to the OEM and then to the customer. Instead, they shipped directly from the EMS to the final customer. By doing this, the OEM saved valuable logistics time and costs. The customer was also satisfied, because they received their product on time or earlier. A change like this affects far more than just the supply chain. The financial consultant sees a reduction in cost, the marketing consultant sees an improvement in customer satisfaction, and the management consultant sees an improvement in the overall company flow.

Time-to-Market
Another approach to improved delivery is complete vertical integration. Owning (and therefore controlling) all the steps in their supply chain, from the cotton fields to the weaving and dyeing facilities, to sewing finished garments gives Esquel Group, a Hong Kong-based apparel company, its differentiator: speedy time-to-market with premium fabrics. This company can prototype new fabrics in weeks and have new products on shelves in just months, which, in the apparel industry, is exemplary. This strategy is a big departure from most of the textile industry, where most companies are highly specialized. It gives Esquel an edge that has won them major high-end customers such as Nike, Polo, and Tommy Hilfiger.

Environmental Concerns
Environmental concerns are playing an increasing role in supply chain management and in the overall strategic framework of companies. The results include a long range reduction of cost. IBM has incorporated environmental matters into supplier requirements that allow for reduction of cycle time in obtaining its engineering-grade plastic resins, reduced costs and increased quality in its packaging, and assistance from suppliers in disposal operations. All of these factors reduce product cost and improve environmental cleanup issues. For example, IBM was able to establish a benchmark for an alternate slurry that decreases chemical and wastewater treatment and capital requirements for facilities. This resulted in saving approximately $1 million per year in slurry and related expenses. In addition, the reduced waste is good for the environment as well as enhancing for the company’s image and reputation.

Conclusion
By implementing tools in the supply chain toolbox for your client, such as cost reduction, delivery and quality improvement, or encouragement of environmental improvements within the supplier requirements, you can affect far more than just the supply chain. Overall productivity within the client company and to their customers and suppliers allows for visible improvements and adds to customer satisfaction and enhanced productivity. Pursuing supply chain excellence is an ongoing process at most companies and is well worth the effort.

Jane Dillner, principal of Supply Dynamics, a supply chain consulting firm in Silicon Valley, is a seasoned supply chain practitioner and combines a solid understanding of supply chain strategies with materials and manufacturing functions crossing several industries. Jane has successfully conducted and managed projects, including supplier management/selection, supplier metrics, vendor-managed inventories, inventory management, outsourcing, and global sourcing. Her consulting approach combines a profit-driven, “total-cost-of-ownership” business/functional strategy promoting productivity in global and domestic environments with team leadership and influence. Jane is a certified purchasing manager (C.P.M.), certified through the Institute of Supply Management (ISM), and holds an MBA from the University of Phoenix. Contact her via www.supply-dynamics.net or Dillner@supply-dynamics.net.

Gillian Verga is a senior consultant with The Results Group, an operations management consulting firm and was previously principal of GVCSolutions. Gillian combines strategic thinking with a solid understanding of how operations work, and her clients include high technology leaders such as SanDisk and Network Appliance. Her consulting approach combines analysis and quantitative substance with team leadership and strong influence skills. Gillian is certified in production and inventory management (C.P.I.M.) and holds an MBA from Harvard Business School. She can be reached via her Website or email: www.resultsgroup.com or gillianv@resultsgroup.com.