@ Supply Chain Management

Understanding supply chain risk: A McKinsey Global Survey (Free registration required) is a new article put out by McKinsey & Co in the McKinsey Quarterly online magazine. They surveyed executives at publicly and privately held businesses across a range of industries in September 2006.
The key findings:

Nearly two out of three executives say they face increasing risks to their ability to supply their customers with goods and services cost effectively

The executives identify a wide variety of risks; topping the list is the availability of well-trained labor.

The executives most likely to say that their company’s level of risk has risen are those in retailing, manufacturing, and energy; those in the energy industry are by far the most likely to say their risk has increased significantly.

The executives rank labor, regulation, and suppliers as the top three supply chain risks on which they focused during their most recent round of planning.

Executives at the smallest companies (those with annual revenues under $500 million and with fewer global resources) are also particularly likely to say that labor is a problem.

The degree of disconnection between risk and its mitigation may be one reason that executives rate “fairly poor” their company’s ability to mitigate their key supply chain risks, 39 percent say they are at best slightly capable of doing so. Furthermore, 41 percent of executives say that their company does not devote enough time or resources to mitigating risk-nearly five times the number who say that too much time and too many resources are allocated.

More than half of all respondents say their company either undertakes no formal risk assessment or conducts only a qualitative assessment.

Only 18 percent of respondents believe that the Sarbanes-Oxley reporting requirements3 help them reduce their supply chain risks.

I’ll just plug my fellow blogger riskape on this topic – Riskape. I’m sure that managing supply chain risk in a systematic manner is high up there in the area of real needs for supply chain professionals and I’m sure that I’ll be devoting more time to that as well.

Tags: Supply Chain Risk, McKinsey Quarterly, Supply Chain Management, Supply Disruption

Fiscal Visibility In Supply Chain = Money Saved is the title of a new opinion piece by author Michael Stolarczyk who also blogs at BlogonLog.
Michael notes,

A typical apparel company, for example, might source fabric from China, manufacture garments in Malaysia, send them to Italy for custom design work, then ship final products to a 3PL warehouse in the United States for delivery to major department stores around the country.

The above is an example of how dramatically the options for manufacturing, coupled with logistics options and supply chain technology, for any firm anywhere has shifted in less than two decades. However, this shift has also laid the axe to traditional notions of ownership and control driving up risks across the supply chain and thus inventories (in part to cover the lead times and in part to act as a buffer to rising risk) as well. You might have been used to bull whip effects in a supply chain on a domestic scale. What about bull whip effects on an international scale and what effects will such phenonmenon have on local economies that form part of such global supply chains?
Also remember that a customer’s notion of product availability has not been downgraded as a result of the increased lead times and coordination that firms have taken upon themselves. Instead, if anything, a customer’s notion of product availability and customer service has migrated northwards fueled by better communication and awareness i.e. trends are communicated in real-time these days.
So how have companies executed upon their strategic decision to outsource or offshore or some combination of the two?

“Poorly,” notes Michael,

The need for advanced solutions may seem obvious, but a surprising number of companies still have a long way to go when it comes to global supply chain technology sophistication.

and,

On average, large companies report their global supply chains are only 50 percent as automated as their domestic supply chains.

and,

The interesting news continues — only six percent qualify their global supply chains as highly automated, and a full 90 percent of all enterprises report their global supply chain technology is inadequate to provide timely information required for budget and cash-flow planning!

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In Managing the Financial Supply Chain – Part 1 and Managing the Financial Supply Chain – Part 2, I reviewed the first two parts of a recent Supply Chain Management Review article titled – Managing the Financial Supply Chain by Roland Hartley-Urquhart in their online magazine.
In this concluding post of the series, I want to review Roland’s proposed solutions and recommendations for managing the financial supply chain. Roland proposes three main solutions for managing certain aspects or processes of the financial supply chain. They are:

1. Early-Payment Programs
2. Inventory-Ownership Solutions
3. Virtual Consignment Financing With Assignment of Proceeds

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In Managing the Financial Supply Chain – Part 1, I reviewed the first part of Supply Chain Management Review recent article titled – Managing the Financial Supply Chain by Roland Hartley-Urquhart in a recent edition of their online magazine.
In this post, I want to go deeper into Roland’s article about Managing the Financial Supply Chain because of its critical importance in how the efficacy and direction of progress of supply chains are decided under the headings of New Processes & New Competencies, Forex Risks and Capital Cost Inefficiencies
So a firm has decided to go the route of outsourcing or offshoring some of their non-core competencies, what is the immediate effect of such a strategic decision on the financial processes within the firm.

New Processes & New Competencies
As Roland notes,

In conducting this analysis, companies need to recognize up front that global sourcing and production outsourcing complicate the value exchange process. In particular, they increase the quantity, velocity, and complexity of interenterprise financial transactions, leading to higher administration costs. As global sourcing and outsourcing continue, the number of financial transactions handled within the four walls of the enterprise decreases. At the same time, the number of transactions handled by outside vendors increases.

What’s more, in the case of applying JIT to an outsourced supply chain, the following could be expected to occur:

When global sourcing and outsourcing are combined with just-in-time supply chain practices, the velocity of payment transactions is accelerated because the smaller consignments require additional payments or the aggregation of many discrete transactions.

Roland notes a shift from the traditional payment terms such as using Letters of Credit (LC) to open account i.e. making payments the purview of the buyer rather than international banks that have always been the traditional intermediaries of such transactions. However, moving away from using the traditional intermediaries implies that the work performed by these intermediaries have to be brought inside the firm’s four walls i.e. the creation of new competencies within the firm in order to handle the outsourcing/offshoring of non-core competencies. Moreover, along with the creation of a new competency within the organization, this change also introduces the vagaries of international finance.

In addition to complicating financial transactions, global sourcing and production outsourcing introduce a higher degree of risk into the supply chain. To cite one prominent example: Saks Inc.’s lack of centralized controls and visibility into its sourcing operations’ procure-to-pay process contributed to the company’s alleged illegal collection of excess vendor markdowns. In addition to facing numerous legal and regulatory battles and distractions, Saks saw its total market capitalization drop by 20 percent immediately following the announcement of the scandal in 2005.

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While surfing the web for logistics related software, I came across the site hosted by the International Centre for Innovation and Industrial Logistics (ICIIL).
ICIIL has some information about an open source logistics analysis software that is being developed University of Vaasa, Finland and ABB Corporate Research Center.

ASDN – “Agile Supply Demand Networks” is software for analyzing and developing logistics networks. This rapid modelling tool should help decision-making in network architecture design and performance management.

The project home page is located at http://asdn.sourceforge.net and the source codes (Java) are distributed via SourceForge: ASDN

Tags: ADSN, Logistics Analysis, ABB Corporate Research Center, University of Vassa, Finland, ICIIL, International Centre for Innovation and Industrial Logistics

Supply Chain Management Review has an article titled – Managing the Financial Supply Chain by Roland Hartley-Urquhart in a recent edition of their online magazine.

Understanding and managing all aspects of the financial supply chain is an essential ingredient for business success. While that statement has always been true, it takes on a new level of importance in today’s world of global sourcing and production outsourcing. The recommendations offered in this article can help supply chain professionals more effectively integrate the physical flow of goods with the financial flow.

As the previous series on Creating the Optimal Supply Chain amply demonstrated, there are three essential flows in a supply chain – Material, Information and Financial flow. While the first two are often frequently dissected and analyzed, the third is comparitively less so and thus I thought that I would do a piece on that.
Voila!!
Never have truer words been spoken:

Global sourcing and outsourcing have the added benefit of generating cash for many companies, as investments in plants, equipment, and working capital shift from the brand owners and original equipment manufacturers (OEMs) to their trading partners, who in many cases are overseas. While these benefits can’t be denied, business leaders need to assess the unintended consequences of their global sourcing and outsourcing strategies beyond direct cost and capital savings. In particular, they need to recognize that the labor cost advantage of moving these activities offshore masks hidden costs and risks within the financial supply chain.

And furthermore the implications for the supply chain are clearly:

While global sourcing and outsourcing may reduce the cost of the actual product—the “first cost”—they often decrease the capital efficiency of the value chain. Specifically, plants and equipment are often far more expensive to finance in emerging market countries. In addition, inventory tends to get pushed downstream to suppliers, which often have a higher cost of capital. Furthermore, global operations can add weeks to the value chain, tying up as much as 30 percent of product price in working capital.

There is no denying savings in direct costs and capital savings when it comes to decision making around offshoring or outsourcing – its simply ludicrous to do that. However, that is only one portion, the very visible portion, of the Total cost picture and that is what is frequently forgotten.
So what are some of the hidden costs that are implicitly present in offshoring or outsourcing?

Global sourcing and outsourcing also weaken control over the financial supply chain. This reduction in control can affect shareholder value, erode competitiveness, and introduce new business risks. Common challenges include the complexities around Sarbanes-Oxley compliance, complex chargeback management processes, and implicit foreign exchange risks.

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