Ideas to Avoid Broken Links in the Supply Chain

You are probably not old enough to remember that back in the late 60’s and early 70’s, business schools taught the “4 P’s” as part of the marketing curriculum.

The so called “4 P’s of the Marketing Mix” is a management concept that helps decision makers in a company control the parameters of Product, Price, Promotion and Place (Distribution) within the constraints of a business environment.

The goal is to make decisions that center the 4 P’s on the customer in order to create value. Or in a more mundane language: Make the customer happy and make money at the same time.

Today, the basic concept and goal remain the same, except that the fourth “P” has grown in importance and sophistication: It is now called the “Supply chain”.

While the old “P” for Place/distribution has a “finished product – factory to customer” focus, the new Supply Chain concept goes all the way back to factory inputs and incorporates activities from other business areas such as manufacturing and finance.

Supply chain management encompasses the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management. It also includes the crucial components of coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers.

In essence, supply chain management integrates supply and demand management within and across companies.

In his book “Competitive Advantage”, Michael Porter further elevated the fourth “P” and the Supply Chain concepts. He separated the business system into a series of value-generating activities referred to as the “Value Chain”.

In order to facilitate a company’s analysis to gain cost and differentiation advantages in the market, Porter basically took the Supply Chain elements and incorporated them into a model along with other business fundamental activities such as: Marketing, sales, customer service, information technology, company infrastructure, human resources and others.

Effectively managing supply and value chains in the global marketplace is an intimidating challenge and a science in itself.

In this article, we will not follow an academic route, but we will rather briefly explore, in no specific order, some of the practical ideas and concepts that every businessperson should always keep in mind in order to obtain the best results from his management efforts of the 4 P’s, supply chain or value chain, while avoiding broken links.

This is particularly important in a business environment such as Mexico’s, where ample opportunities for improvement exist in this subject, colloquially referred to as “Logistics”.

About Constraints

The efficient flow of materials through a supply chain is critical to a firm’s profitability. For example, consider that most of the parts and products that are shipped by air are late or lagging in their respective supply chains.

Every part, every logistics step has a financial impact on the company’s bottom line. Be it premium air freight, additional inventory, idle resources, extra employee shifts or slower billing, these costs are the consequence of a disturbance in the supply chain.

A supply chain is like a hiking line of children. The moving speed of the line is as fast as the slowest kid. The slow child is the limitation of the speed of the hiking line.

The same goes for a supply chain. Any slow moving part, bottleneck or constraint will limit the velocity, productivity and profitability of the system.

Thus, one of the key tasks of each and every person involved in the supply chain is to identify constraints in the system for their subsequent elimination or correction.

Beware that the limitations or bottlenecks take many forms in a supply chain; they may not necessarily be materials arriving late to the production line. Constraints can be in the form of paperwork, shelf arrangement, the amount of light, the guy at the corner office upstairs, the person paying suppliers or the voltage in the forklift battery charging area.

Post – Recession Woes

Nobody would have imagined until recently that the company that invented lean production and continuous improvement would experience serious quality problems and large product recalls.

The Toyota affair about a sticking accelerator pedal from a, now formerly, reliable supplier is evidence that even large corporations have let down their supply chain risk assessments.

In a post-recession stage, many of the cost and head cutting actions that most companies were forced to implement in order to stay alive will affect their performance one way or another.

Nobody should take for granted that recession surviving suppliers will be able to perform as they did prior to the economic crisis. Assessing the financial and operational general health of any giving supply chain is fundamental for large, medium and small firms as they move forward, particularly if they are in a growth mood.

Invest time and other resources in assessing your key suppliers. Review if their financial position is healthy, oversee if their engineering capability is up to speed and take a renewed interest in personal relations with the supplier’s top management. Look at them straight in the eyes and build up their commitments.

O.P.M.

In the early 90’s, I attended an academic program called OPM, short for Owner – President Management. It wasn’t long before somebody in the group re-baptized the acronym to “Other People’s Money”.

OPM is evidently a no-brainer principle of business: Accelerating the payment terms of your receivables, extending the term of your payables and leveraging at the lowest possible interest rate are among the obvious and basic actions.

But to really understand this principle, you need to observe the OPM masters in action. Many of them carry Korean or French passports.

For the OPM mastermind, the whole world is part of their supply chain. They are shrewd negotiators and usually obtain better terms in leases, utilities, government subsidies, outsourcing suppliers, employees and even taxi fares.

Also, for the OPM master, the “M” does not stand only for “Money” but also for materials, meals, mentoring and other worldly things. For the OPM master, for that matter, the “M” can also be substituted by any other letter in the alphabet.

In this day and age, think OPM!

Reverse Logistics

Many of you are probably lucky not to have had the experience of moving previously-shipped goods back from a customer due to repair, service, credit or order error issues.

Industry analysts estimate that reverse logistics accounts for approximately 5% of total logistics costs. If we consider that in the U.S. and Mexico total logistics costs are 10% and 15% of their respective Gross National Product figures, then the cost of reverse logistics represents about 0.5 % and 0.75% of GDP respectively. This is a cost of about US$65 Billion for the U.S. and about US$8 Billion for Mexico!

Inasmuch as companies evidently go out of their way to avoid product returns and voluntary recalls, they will happen. The question is: Are you prepared to handle the process of reverse logistics without further damaging the relationship with the customer?

Unfortunately, many companies do not practice a reverse logistics drill before it happens, just as they do not go through fire drills either. Making sure that your logistics team knows how to handle a major case of reverse logistics will help your company in avoiding adding insult to injury to the customer.

Uncovering Waste

When a person with a trained eye walks around a factory floor, warehouse and office, he can immediately make a general, but fairly accurate diagnosis of the level of wasted resources in the operation.

Workers standing around waiting for the next processing step, carrying work in process long distances and wasted motions by employees in the course of their work are some of the symptoms of inefficient and wasteful operations.

Identifying, uncovering and correcting the root cause of waste in an operation should be part of the culture of a competitive organization.

Like constraints, uncovering waste in an operation can be very difficult. Wasteful procedures may exist throughout the process and they may already be an inherit part of the work, going undetected for years.

If a company is only focusing on results, and does not analyze the detailed processes of its supply chain looking for waste, it is missing a clear opportunity to improve its efficiency and productivity.

It may be the time to bring in specialized outside consulting help.

The Source of all Evils

Inventory build-up is the result of the fundamental waste: Overproduction.

Excess inventory of raw materials, parts, work in process and finished products is not only a financial burden for a company, but the perfect disguise for other supply chain related problems.

Extra inventory hides late deliveries from suppliers, product defects, parts obsolescence and other deficiencies in the supply chain.

Inventory performance should be the single most audited set of variables in a supply chain. In the ideal supply chain, there would be zero inventories; everything would just flow through from suppliers, to the production line and out the door to the customer.

Inventories consume cash and credit, have a high carrying cost and represent jeopardy to the bottom line. The object of the supply chain game is to provide the fastest speed possible to the materials, without incurring shortages.Geopolitical Risk

Procurement Fraud

It is estimated that fraud in procurement activities in the U.S. account for about 3% of GDP. There are no estimates for Mexico, but more likely than not, procurement fraud is greater than 3% of GDP south of the border.

Procurement fraud is more common than you can imagine. Yet, many companies do not have strong enough controls to avoid it, and many times, when a fraud is discovered, companies opt to follow mild solutions in order to avert potential scandals.

Prevention of procurement fraud is possibly the single most productive, fastest and cheapest initiative in improving or maintaining the financial health of a supply chain.

The first step in preventing procurement fraud is to assume that it is going to happen. Follow by establishing administrative procedures that are strict and continuously audited.

Procurement fraud schemes can be usually broken through fundamental purchasing bidding policies, rigorous paperwork requirements, physical checks of inventory and off the loop revisions and crosschecks of shipments and customers’ records.

If all fails and a fraud is uncovered, do not hesitate to prosecute it all the way, otherwise, the message of “laissez faire / laissez passer” (Let do, let pass) will encourage further frauds in the organization.

Geopolitical Risk

In all global supply chain endeavors there is an element of the so called geopolitical risk. The obvious implication for the supply chain manager is to be prepared to handle uncommon and risky situations.

In the case of U.S. – Mexico trade, the challenge is to balance a secure border and the efficient flow of goods.

The governments of the two countries have implemented a series of programs to reinforce security while at the same time improving the expedition of shipments across the border.

Any company that has not already incorporated into its supply chain the programs at hand is undergoing unnecessary risk and exposure.

The “Trusted Maquiladora ” and the “FAST” and “C-TPAT” programs are fundamental to the successful and continuous operations of cross-border supply chains.

Going Green

The “Greening” of the supply chain is an initiative that has gone from a stage of regulatory requirement and a wishful marketing trait to a condition of real competitive advantage. Actions to boost the supply chain’s energy efficiency, environmental controls, social and safety efforts, ethics and codes of conduct are finding their way to the financial bottom line.

There are many areas of opportunity in need of sustainability efforts. Review, for example, your current facility and ask…is this an efficient building in terms of lights, ventilation, water consumption and cleanliness? The same goes for your transportation means, communications technology, human resource practices and recycling practices, to name a few areas.

Every aspect in your place of operations and in your supply chain has a “green” opportunity. Make sure that your suppliers and vendors follow a similar sustainability policy as you do.

From Globalization to Regionalization

Economic uncertainty, soaring oil prices, currency fluctuations and a parade of structural changes in many industries are making many global companies rethink their global strategies.

Globalization is giving way to regionalization. In the future, the supply chains will continue to shrink their global footprints and will cluster to serve regional markets.

From a logistics standpoint, the world is not flat. The world continues to be round as supply chains reposition themselves to serve a region and not the whole world.

Tired of many broken links in their supply chains from Asia to America, since some years back, Taiwanese firms, and as of recent, China mainland companies are establishing supply chain platforms away from Asia.

Not surprisingly, Mexico is the location of choice for many of these firms as the ideal logistics passage and manufacturing hub to reach North American markets.

Sergio L. Ornelas has 30 years of experience in international trade and direct foreign investment. He has business degrees from Babson College, Southern Methodist U. and Harvard; he was head of the State of Chihuahua Industrial Promotion Agency in 1980-5 and General Director for Intermex Industrial Parks through 2000. He is MEXICONOW’s editor.
He may be contacted at: editor@mexico-now.com