Simplify your supply chain, reduce inventory and improve cash flow

For the last five years, AMR Research has published the Supply Chain Top 25, a list featuring the 25 companies that deliver the best supply chain results in the world. AMR Research measures the companies according to ‘demand-driven excellence’ and emphasises that this is contingent on three areas of excellence:

• Supply management – manufacturing, logistics, and sourcing
• Demand management – marketing, sales, and service
• Product management – R&D, engineering, and product development

The market survey and consultancy firm has established several criteria for ‘demand-driven excellence’, which they have applied to Fortune 500 companies. The criteria measure ‘operational excellence’ and ‘innovation excellence’ in relation to all three of the above-mentioned areas. The primary ideal criteria for operational excellence are ‘perfect order rate’ and ‘total supply chain costs’, whereas the primary ideal criteria for innovation excellence are ‘time to value’ and ‘return on new product launch’. In many cases AMR has been unable to gain access to these data and has instead amassed a substantial volume of other financial data, which together provide the best possible picture. The result is a list of 25 companies which, according to AMR’s supply chain criteria, rank top among the 500 biggest companies. (See the list in figure 1.)

Focus on overall supply chain

The top 25 companies typically fare better than average measured against traditional supply chain parameters such as plan, source and deliver. "However, what really singles the Top 25 from the rest is that they have expanded their supply chain to provide an integrated value chain service. This means that they focus on generating value for the customer," explains Research Director Mickey North Rizza from AMR Research.

The top 25 stand out from the rest in the following areas:

• New Product Design and Launch
• Post Sales Support
• Customer Management
• Strategy and Change Management

According to Mickey North Rizza, the top 25 companies are characterised by an extended supply chain concept whereby they strive to create cohesion and flow both upstream with customers and downstream with suppliers. "The top 25 have succeeded in simplifying their supply chain processes so there is as little waste as possible, and the overall chain is able to respond quickly to changes in customer demand patterns," says Mickey North Rizza, who adds: "This is only possible if there is cross-organisational collaboration between demand, supply and product management and between the parties in the supply chain to improve each other’s performance. When processes across companies and functions in the end-to-end chain work together then you really start to see results".

According to Mickey North Rizza, the top 25 are characterised by the following:

"The more joint value creation that takes place in a supply chain and the more integrated the collaboration between the parties, the greater the likelihood that each link in the chain will perform better," explains Mickey North Rizza, who cites a specific example of a simple supply solution that does not stem from a top 25 company, but which nonetheless has achieved impressive results.

From push to pull supply chain

At the start of the new millennium, E-fulfilment Manager Paul Annett made a decision. He wanted to transform the supply flow from 400 + suppliers from a push to a pull supply chain by:

• simplifying the supply chain
• improving service levels
• reducing inventory
• driving a working capital investment reduction

His goal was to implement a solution that generated value for all the parties across the supply chain. Paul Annett was employed by GM Holden, part of General Motors Asia Pacific Group that makes cars for the Australian and New Zealand markets. GM Holden has an annual turnover of USD 6bn and employs a workforce of approximately 45,000. Paul Annett’s solution focused on GM Holden’s spare parts operations. GM Holden’s Spare Parts Operations distribution center is located 40 kilometres outside Melbourne, has 53,000 square metres of floorage, stocks approx. 100,000 SKUs, receives between 10 and 20 containers of spare parts every day and ships about 11,000 orders daily.

IT power to supply

Paul Annett and his colleagues opted for an IT-based e-fulfilment solution from TradeBeam tasked with handling the collaborative operation with suppliers spread across most of the globe. The solution objectives were defined as follows:

• Select, prepare and deploy an e-fulfilment solution to promote demand-driven, continuous improvement of the supply chain
• Enable supplier visibility and a collaborative approach to inventory replenishment and management.
• Improve supplier relationships - focus on proactive communications and deliver value to our suppliers.
• Establish a common interface with all trading partners

Inventory reduction of 25 %

Paul Annett and his team managed to achieve their objectives. They also succeeded in achieving them without making radical changes to existing commercial conditions or agreements. The solutions resulted in:

• A simplified, agile, pull-based and demand-driven supply chain
• En estimated inventory reduction of 25 % representing a working capital investment reduction of around USD 17,000,000 sustained since 2004
• An estimated 5-year total operational cost reduction of USD 5,000,000 (assuming cash costs of 6%)

Visibility is the key

"It’s really all about providing a joint IT platform for all our suppliers so they can see sales of their products in our business through real time visibility of stock levels, thus optimising their deliveries to us and their own forecasts", explains Paul Annett, who adds: "Without a doubt the biggest hurdle was convincing our suppliers that it was a good idea for them and for us. It required a lot of communication and sales work on our part, but more than 400 suppliers now subscribe to the solution and their response has been extremely positive".

Supplier benefits include:

• Real-time visibility of stock levels
• Ability to view forecasts (26 weeks), consumption, critical and in transit inventory information
• Ability to plan your own production
• Ability to prioritise shipments
• Reduction of administrative activities, e.g. phone calls, faxes and e-mails
• Quicker response times to sudden changes in demand
• Reduction in premium freight costs
• A single digital dashboard

Supplier benefits translated into USD

Translated into financial terms, the benefits have meant:

As one supplier put it:"As a supplier the biggest advantage is being able to see product movements and customer supply needs, thus allowing you to have the stock in place for them," says Managing Director Juan Arancibia from Filter Sales Australia, one of GM Holden’s 400 suppliers subscribing to the solution. Juan Arancibia adds: "The e-fulfilment system allows you to plan your order accordingly, eliminating shortfall or overstocking - allowing us to maintain stock levels that are acceptable to both companies and reducing stock to the necessary level. All in all the solution facilitates stock management, enabling us to function as efficient suppliers with a delivery rate of over 95%. The advantages of the system are obvious".

Five things to consider

Paul Annett highlights five important points to consider when implementing similar solutions to reduce inventory and improve cash flow:

• Establish the commercial model - funded with in-house budget, via supplier fees or a combination?
• Supplier Relationships - are they healthy? If not, you may face hurdles to collaboration
• Integration - ensure data quality levels are met prior to deployment – data frequency and quality affects your reputation as well as inventory levels
• Focus on the supplier value case - selling to your supply base and supplier onboarding resources – adoption needs to be driven. It will not just happen!
• Understand Business Changes early on - assess your procurement, payables, supply chain and logistics changes early on – do your current agreements constrain collaboration?

[Figure 1]
AMR Researchs Supply Chain Top 25 2009:
1. Apple
2. Dell
3. Procter & Gamble
4. IBM
5. Cisco Systems
6. Nokia
7. Wal-Mart Stores
8. Samsung Electronics
9. PepsiCo
10. Toyota Motor
11. Schlumberger
12. Johnson & Johnson
13. The Coca-Cola Company
14. Nike
15. Tesco
16. Walt Disney
17. Hewlett-Packard
18. Texas Instruments
19. Lockheed Martin
20. Colgate Palmolive
21. Best Buy
22. Unilever
23. Publix Super Markets
24. SonyEricsson
25. Intel

See more about the survey on http://www.amrresearch.com/Content/View.aspx?compURI=tcm:7-43469