In International Market, Local Supply Chain Defines Pricing Strategy

In May, I took a trip to Shanghai, China, for a project to establish a partnership between a Chinese horticultural company and a Holland breeding company. It was a win-win collaboration for both, not only helping the Holland company to break into the Chinese market with minimal resource, but also upgrading the Chinese company with new product varieties without adding R&D investment. During the meeting, there was only one concern from the Holland company: the price for the new products in Chinese market were set lower than the Holland company expected. The Holland representative could not accept the recommendation from the Chinese company. After all, the same types of flowers are sold at a premium in other global markets!  In order to understand this pricing recommendation, we visited the horticulture supply chain in that region, from flower growers, to flower market, to flower retailers. After examining the entire supply chain, the representative agreed with the lower pricing strategy today for future long term growth.

Production – Flower growers

When the Holland representative saw the greenhouses in the region, he commented: What a low cost production!  The farmers enjoy the benefits from local natural geographic condition. All things being equal, such as the amount of fertilizer used for every square meter of land or type of greenhouse equipment invested, it costs the U.S. growers five times more than the Chinese growers in labor, not just because of cheaper labor in China. The underground water system in the Eastern China region provides the Chinese growers a natural watering system. Therefore there are much less labor required to water and grow the plants. On top of it, the government subsidizes the greenhouse facility investment, which lowers the production cost even more.

In the different areas of the same region, there are significant differences among greenhouse business models. We visited the greenhouses managed by the young generation of growers, who are connected using the internet and smartphone like an iPhone or Android phones. They are educated and ambitious.  They want to grow the best plants and dominate the market. Due to the economy of scale, they can not only achieve lower cost from higher production efficiency but also receive a volume discount for plants and farming materials. From them, I see the picture of tomorrow’s Chinese agricultural industry.

Farmers working in greenhouse, Photographer: Zachary Long
Lunch and Learn with young farmers, Photographer: Zachary Long

The traditional farming model co-exists with the modern farming management. Many individual farmers manage only two or three small greenhouses in their backyard. All farming work is done by the family members. Those individual families unite together to form an organization. The organizer of the group sells their harvest together and also combines their purchasing of raw materials to lower the purchasing cost. The organizer benefits from the commissions of sales.

Chinese boy sorts flowers
Chinese boy sorts flowers - Photographer: Zachary Long

With the advantages from Mother Earth and the effective business model in the local market, the production of flowers is efficient and lean, and thus minimizes the production cost.

High quality flowers fresh from the fields, Photographer: Zachary Long

Distribution – Flower Market

A visit to the local flower market explains why premium pricing will not work even though the growers grow high quality flowers. The local market consists of the first level wholesalers and the second level distributors. Wholesalers ship the flowers by truck from their fields to the market. Distributors will buy from several wholesalers for different varieties and then deliver them to retailers.

During the consolidation and distribution process, there are two major factors contributing to damage of flowers:

1)      Packaging. There is minimum packaging for the flowers.  In other global markets, the flowers are carefully packed in paper cartons or in buckets for best protection and petals expansion. In China, the growers only use a single layer of plastic cone to cover the petals.  This kind of packaging method does not provide much protection for flowers during transportation.

Typical packaging of flowers, Photographer: Zachary Long

2)      Shipping.  From the growers to the market and from the market to the retailers, the flowers are firmly stacked inside trucks or cardboard boxes without any space to breathe. In the same size of truck, the Chinese farmers can ship almost 20 times more than the U.S. farmers can.  I joked that the extreme loadability was such an effective way to minimize their supply chain “carbon footprint”!

Flowers stacked in a truck, Photographer: Zachary Long
Flowers packed in cardboard box for distribution, Photographer: Zachary Long
Creative way of transportation? Photographer: Zachary Long

The ruthless transportation minimizes the transportation cost for flowers, damages flowers during transportation, and causes a much lower price for flowers without perfect presentation.

Customers – Retailers

Retailers and the final sales of flowers determine the brutal transportation in some way.   The majority of customers of retailers are not individual consumers like you and me, but businesses! It may be a phenomenon only in China that businesses buy a lot of flower baskets for business openings or events. So, flowers are not sold for a long vase life but a very short exhibit life of a few hours. Under these kinds of circumstances, flower quality is really not a selling point unless those flowers are used for a wedding ceremony.  Unfortunately, unlike luxury products, such as a purse, flowers are not a product defining a consumer’s social status. Therefore, consumers pay less attention to flower quality so retailers will not push upstream distributors to improve flower quality by minimizing damage from transportation.

Flower basket for business event, Photographer: Zachary Long

Summary

For any global company breaking into a new market, it is extremely important to evaluate the local supply chain in its entirety from upstream to downstream. By understanding the local supply chain, the company can define its marketing and pricing strategy without disconnecting from the local market. The Holland company would price itself out of the market without understanding the entire process from growing to transportation. Through a complete investigation into each component of the supply chain for these flowers could we fully grasp the individual dynamics of the Chinese market.  Any international company needs to fully assess the specifics, find the local expert who understands the unique market characteristics in order to implement the correct marketing strategy. This article is a case of horticultural product going into a new market. However, the learnings from this case can apply to many other products and industries who are seeking opportunities in the international market.

Special Thanks to my husband and photographer Zachary Long who provided photographic coverage in China.

Reduce Supply Chain Carbon Footprint

A green supply chain is like a mystery. The idea always conjures images of a higher cost and investment to the business. However, is that really the case? Will companies need to spend more to be green? How can green initiatives drive financial and social benefits? I hope my short article can answer these questions. In my last article, I discussed the approach to collect data in the supply chain to quantify carbon emissions. Once we can quantify and start measuring the carbon footprint of the company’s supply chain, we can find ways to reduce it and measure their improvement.

Before I start discussing the possible solutions, I would like also to express my opinion for the recent trend of using “green” as a reason to call for nationalization or deglobalization. The trend suggests that manufacturers should be moved back to the U.S. to shorten the supply chain distance thus reducing the carbon footprint. I agree that a short supply chain close to production or the end consumers can be beneficial in some cases, such as the JIT practice. However, according to IEA, International Energy Agency, international shipping accounts for approximately 2.7% of world CO2 emissions, which is small relative to the benefits brought by global trade.  Hence it’s not the reason to prevent globalization and international trade. I’m a strong believer of “competitive advantage”, which is the way to promote global welfare and technological development. “Green” initiatives should focus on innovation and waste reduction, in either technology or process. “Green” shouldn’t be used for a political reason and incur more costs for the whole society. According to the North American Supply Chain Carbon & Sustainability report, moving production closer to home is 12% of all environmental initiatives. Practically, companies will be interested in the green initiatives only when they are able to achieve a lower financial cost and a better customer satisfaction at the same time. That is true that companies can develop products more environmentally friendly and some consumers are willing to pay a premium for the green contents, such as for a Toyota Prius. However, the majority of consumers are not ready to pay more for green, especially for commodities. Hence, to enhance a company’s competitiveness, the approaches to reduce the carbon footprint of the supply chain should also aim to drive cost efficiency and customer satisfaction.

Just like the total cost analysis for supply chain, there are many trade-off decisions to be made in green supply chain optimization, and the goal is to maximize carbon emissions reduction. I’d like to suggest the environmental initiatives from supply chain functions’ point of view, represented in the below matrix.

green initiatives

As we can see, many of those initiatives are day-to-day initiatives and process improvement activities to drive operational efficiency, increase recycling, reduce waste, and enhance communication and visibility in the supply chain. Hence, the outcome of the green initiatives not only improve operational effectiveness of balancing costs and service, but also reduce the carbon footprint from movements, spaces and materials in the supply chain. A “green” KPI or measurement enables companies to associate the positive financial results to the carbon footprint reduction. Once the mystery of “green” is discovered, the cost of green initiatives won’t become an implementation barrier and companies can benefit from quick financial and social return from those initiatives. As a result, the “green” strategy is not just a social responsibility. It becomes the “sustainable” and “desirable” strategy for any company.

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U.S Pallet Industry美国托盘业现状

This article is written for Pallet Handbook, which is edited by Dr. Qingyi Wu and published in China. 此文为吴清一教授编辑出版的《托盘手册》所著

美国托盘应用的历史

自20世纪40年代以来,托盘就成为现代物资管理的一部分,人们在工厂、仓库或零售店里常常能见到各种材料和形状的托盘,为人所熟悉却不被重视,不起眼但又不可缺。人们将单件的产品堆放在托盘上,用叉车搬运或装卸整个托盘的产品。托盘就这样默默的负载着成千上万的物品在全世界各个角落周转。托盘单元化的使用在很大程度上方便了货运存储和转运,显著提高了物流效率,使托盘成为全球供应链管理中的必不可少重要部分。

在托盘货物单元化之前也有其他一体化运输方式,但托盘和叉车的配合使用却注定主导着现代物资管理方式的进程。今天,托盘被普遍应地应用在配送物流环境中,其发展是和始于19世纪末叉车的应用和发展相辅相成的。在20世纪初,托盘逐渐为人所知。木托盘的前身只是个可以固定在甲板上简单的木条板,当时木箱子,柳条箱,木桶和铁桶已被广泛地应用在规整零散货物,保护,存储和运输。而早期应用托盘是和超低叉车在美国工厂的现身是分不开的。叉车最初发明于1887,先有手动超低叉车,而后在1909年发展为全钢铁低叉车。在1915年,高位叉车首次现身。随着后来的不断改进,高位叉车可以将货品抬到好几尺高。而之后叉车继续发展可前后左右前后倾斜货物,因而带动了双向托盘在同时期问世。到1926年,现代化叉车终于成型,可以轻巧灵活的卸载放在任何高度的货品。此时,托盘就不仅仅只是用在工厂里搬运货物。使用托盘可以堆叠货物,因此大量地节约了仓库内的存储空间,戏剧化地大幅度提高了仓库和工厂装卸、仓储、运输的效率。

另外,托盘和叉车的使用同时方便了货物在火车、卡车和船运等其他运输模式中的周转。在1931年,装卸一辆装有13000箱罐头的卡车需要3天。但装卸有托盘单元化的同样货量却只要四个小时。

在1920-30期间,单元化科技萌芽浮现却生不逢时。由于正逢美国经济大萧条,高失业率、缺乏投资资本和其他一些因素,使托盘使用没有得到应有重视。但随着美国加入第二次世界大战,物资管理改革在一夜间成为最迫切的事。托盘单元化最有效的帮助美军的物流需要。托盘单元使用只需要少数人就能够实现大宗货物有效搬运,这样更多的劳力可用在军务上;托盘作业同时提高仓储使用效率和吞吐量,减少对仓储空间扩张的不必要需求。所以托盘被广泛使用在欧洲大陆和太平洋战场上。到二战结束时,托盘操作给物资管理带来的效率和收益已在全世界得到广泛认可。

当前美国托盘应用和流通的方式

随着战后美国物流业的发展,托盘更是广泛使用在各行各业供应链的所有环节中。从供应链上游原材料供应商的物资管理到供应链下游成品的配送,在生产、仓储和运输中,人们可以随时看到托盘的身影,托盘为降低生产成本和提高物流效率起着巨大的作用。据美国《托盘》杂志的最新报道,美国托盘需求量预计将于多于1%的增长率继续增长,到2012年需求量将达15亿个(总值168亿美金)。木质托盘将继续占美国托盘市场的主导,预计在2012年占总量的80%。但塑料托盘需求也开始以每年2.4%的增长速度速增,同年总量将达到1.13亿。

以下为《托盘》杂志所统计的美国不同种类托盘使用和需求量

(单位,百万)
%年增长率
种类 2002 2007 2012 2002-2007 2007-2012
总和 1360.0 1385.0 1460.0 0.4 1.1
木质 1108.0 1105.0 1160.0 -0.1 1.0
波状硬纸 139.2 152.5 157.3 1.8 0.6
塑料 103.4 117.0 113.5 2.5 2.4
金属 9.4 10.5 11.2 2.2 1.3

目前托盘流通的有两种主要方式:

1. 购买

购买托盘为流通中简单的单线模式。用户用较高的价格购买托盘使用。但在托盘破损后,用户需负责托盘销毁或请回收公司处理。以往用户可以将破损托盘在垃圾场销毁。随着各州加强环保措施时加强了垃圾场废物的管理,托盘垃圾场销毁变得越来越繁琐,给不少业主带来不必要的麻烦。

2. 租赁

租赁为后期发展起的托盘流通模式,也称为循环回收模式。用户可用较低的价格租赁托盘。托盘在送达最终用户下载货品后,托盘租赁公司负责将空托盘回收,在维修破损托盘后再次将托盘租赁。如托盘不能维修,租赁公司也负责将托盘磨碎进行科学合理废物处理。使用租赁运营方式采用较低租金付费方式不仅节约了用户在托盘使用上的物流费用,而且其回收循环利用的模式也成为持续再生能源的经典商务模式。

北美托盘标准化状况

在北美托盘市场中,同样也存在托盘不标准化的情况,尤其不同行业使用着多种规格的托盘。而国际贸易商品流通更让其它国家不同的规格托盘随着物品进出美国,给美国托盘标准化带来了一定困扰。但最普遍使用的是副食品生产联合会(Grocery Manufacturers’ Association – GMA)的托盘规格,目前占美国所有木托盘新产量的40% 。国际ISO标准也将GMA托盘规格划为其6个托盘标准尺寸之一。

以下为美国目前所有托盘规格及其使用行业

厘米尺寸(×) 英寸尺寸 (×)) 产量排序 使用行业
1219 × 1016 48 × 40 1 副食品, 大量其他行业
1067 ×1067 42 × 42 2 电信, 油漆
1219 × 1219 48 × 48 3 汽油桶制造
1016 × 1219 40 × 48 4 军方,水泥制造
1219 × 1067 48 × 42 5 化学,饮品
1016 × 1016 40 × 40 6 乳制品
1219 × 1143 48 × 45 7 汽车
1118 × 1118 44 × 44 8 汽油桶制造, 化学
914 × 914 36 × 36 9 饮品
1219 × 914 48 × 36 10 饮品,建筑瓦片, 纸品
889 × 1156 35 × 45.5 不详 军方
1219 × 508 48 × 20 不详 零售

美国木托盘回收产业

不但美国各州加强环保措施, 而且随着市场的发展,美国企业对环境保护和能源再生意识也不断加强。“绿色供应链”成为目前美国业界的一个热门话题。公司在寻求降低供应链成本的同时也努力降低温室效应和提高能源再生。不久前,美国沃尔玛公司就将“绿色供应链”作为其战略发展方针,要求其在中国和巴西的供应商通过提高工效来提高能源利用率。托盘,作为供应链中必不可少的一部分,其回收、维修、-再利用的租赁模式正好满足公司将低成本和实现环保的双重目标。由于进入市场的屏障较低,美国托盘回收产业在近十年内蓬勃发展。托盘回收成为托盘业中高利润部分,因而许多新托盘生产厂家也加入托盘回收业务。据统计,目前美国大大小小的木托盘回收公司有千余家。

以下为2000年美国木托盘行业统计,目前尚未有最新数据统计,但可以估计随着回收意识的加强和利润的吸引,必然有更多的托盘厂家加入回收业务。

全美木托盘生产厂家和回收公司总计 3031
新托盘厂家 44%
托盘和回收公司 47%
托盘回收公司 9%

木托盘占美国托盘市场的主导是有一定原因的:木托盘牢固耐用防滑,对冷冻食品产业自然是首选;木托盘生产和维修都较简单,所以耗能总量少;由于木材是自然资源,在回收时也很容易将木板打碎成为其他产品原料再次利用。托盘木原料多来自南美和美加东部,都来源于生长迅速的树木。伐木公司在一边砍伐的同时也一边种植,以确保森林资源的再生。所以木材在目前还是被公认为最为环保的托盘材料。于此同时,木托盘的循环使用模式更成为减少森林砍伐的最佳口号。

世界最大的托盘租赁公司—CHEP

企业简介及发展史

目前世界上最大的托盘租赁公司为CHEP(集保公司)。CHEP为澳大利亚公司Brambles所控股。由于美国托盘市场的重要性和战略意义,CHEP全球总部设在美国佛罗里达州奥兰多市。

CHEP的发展史和二战也是分不开的。在1941到1945年间。为了在二战间提供高效的国防供应,澳大利亚政府设立盟军物资管理协会(the Allied Materials Handling Standing Committee -AMHSC)。1945年二战结束后,美国人在他们的澳洲军事基地留下了大量物资管理器材,其中包括木托盘。有了这些先进资产管理为良好基础,再加上英联邦澳大利亚政府极大拥护商业管理机构来支持战后国家建设,我们所知的英联邦器材管理集资公司(the Commonwealth Handling Equipment Pool, or CHEP)就这样成立。1949年CHEP公司私有化,1958年Brambles买下CHEP,从此CHEP开始起飞速增长,继而发展成现今世界上最大的托盘租赁和共享系统公司,而CHEP的蓝色托盘也这样在负载着重要产品在全世界周转。目前其业务已达到46个国家,在2008一年间配送、回收、回收托盘次数达3亿,成为行业内的领导者。而其蓝色也成为托盘行业的“绿色环保”代表色。

经营范围与规模

至1990年CHEP踏入美国后,其美州业务就成为Brambles的最大收入来源,占其全球总收入44亿美金的36%。CHEP目前大概占有美国主要副产品零售业50%的市场份额,大约占全美托盘市场的40%。在美国各处常不经意就看到蓝色托盘在商店里、在仓库边、或在高速公路上,可见其极大的市场份额。目前CHEP在北美网络拥有百余家庞大的托盘维修回收和配送中心,目前其北美共享网络内的托盘库存多达1亿,足以满足大顾客任何时候的紧急需求。

CHEP1992年在市场上推出四方位叉车48 × 40木托盘,掀起当时托盘市场上一场变革,也是目前CHEP在北美生产及回收的主要产品。其主要客户为各大零售商、各著名日用产品、农产品生产厂商等等。沃尔玛、宝洁、联合利华、可口可乐等国际知名公司都用着蓝色托盘运输人们生活中的熟悉并不可缺少食品和日常用品。人们常常不知CHEP其名,但一旦提到“蓝色托盘”都会恍然说:哦,我在COSTO店里看到。

图为在仓储式连锁店COSTO店内使用CHEP托盘摆放产品。可以想像,连锁店就是这样一托盘一托盘地将产品快捷地从配送中心运送到各个分店,托盘大大地提高整个供应链运作的效率。

Product displayed on pallets in Costco store
Product displayed on pallets in Costco store

经营方式

在北美,CHEP归属于物流服务公司,其公司宗旨是为用户的供应链产生价值。就像个传统的租车公司将车在原地出租后,却在其他地方将车回收。租赁和回收托盘也是同样道理。其租赁和回收托盘的方式不仅为其他公司节约大量在供应链上的费用,更免去用户处理托盘的烦恼。

CHEP的托盘共享可用以下图表简单表示:

CHEP model in Chinese

CHEP将托盘发送到生产商,生产商使用托盘将物品发送到零售商,零售商可将整托盘产品存贮,当最终托盘上的产品全部售出并堆积了一定量的托盘后,零售商即可通知CHEP的客服中心提取空托盘。CHEP收回空托盘后在维修中心分类检验。有些托盘可能只需要清洁一番即可再次使用,有些托盘需要一定维修换了某些部件后才能使用。而对那些破损严重不能再修的托盘,维修中心将托盘内的钉子取出后将托盘绞碎,而那些木碎片再一次成为有用产品,成为其他产品的原材料或者作为花园里的铺路材料回归自然。CHEP的托盘就这样完成一个生命周期。

CHEP成功占有市场的一个原因就是和沃尔玛的成功合作。沃尔玛作为全世界最大的零售商对其供应商有极大的影响力。沃尔玛要求其供应商尽量使用CHEP托盘来统一其供应链中的托盘运输。可以想象如果沃尔玛美国56000个供应商使用不同尺寸规格不同质量的托盘给4100多家沃尔玛商店供货,必然会剧烈影响装卸、仓储、运输效率。供应商为降低费用使用低质托盘会在运输物品时给沃尔玛带来不必要的货品破损。而供应商在使用租赁托盘降低其货品成本的好处也使沃尔玛直接受益。在沃尔玛成为使用托盘共享的最大收益者时,CHEP也直接受益,渗入沃尔玛众多供应商的供应链。但也可以想像,如果一旦沃尔玛选择其他托盘将对CHEP将会是如何的打击。

领先秘诀:供应链增值

CHEP能成为业内领先的原因和其最先进入租赁回收模式分不开。但CHEP也善于在供应链中发现增值机会并最有效的利用这些机会来节约成本或增加收入。

CHEP庞大的维修中心网络遍及各地,选址宗旨是靠近其生产商或零售商客户来缩短不必要的交通费用。托盘在随着大量用户产品配送到各地的同时,也记录下许多宝贵的货品流通信息,更给CHEP一些有利的资讯可以和运输商和客户合作来最大的优化交通运输费用。以美国市场为例,美国生产基地多位北方而消费地在南方,运输商一辆车满载货物从北到南,而到南方后却少有产品送到北方,所以常常是空车返回。而CHEP正好大大利用这种回头车价位低的机会,将南方的空托盘便宜的送回到北方生产基地使用。CHEP享受到便宜的运输费,而运输商也不空车回头,将原本浪费的资源得到了最好的利用。

几年前,CHEP推出了一项服务叫着“全托盘管理 (Total Pallet Management –TPM)”。CHEP在生产商或供应商的配送中心设立服务点。在TPM直接分类检验所有空托盘。完好的空托盘可以直接发给本地或其它客户再次使用,而需要维修的托盘才送回服务中心维修。这样一来,CHEP免除了将好托盘送回服务中心检验的交通费。而更重要的益处是CHEP在服务时同时接收其他无主托盘(统称为白托盘)。以往客户只将蓝色托盘送回CHEP网点,而在TPM模式下,CHEP将白托盘也回收变卖,更进一步地扩大其收入渠道。不得不说是绝妙的一步好棋。

挑战和前景

12%的高额利润必然会吸引竞争对手使CHEP受到市场竞争的挑战。目前最凶猛的竞争对手为iGPS。iGPS为前CHEP元老所创立,所以其销售模式和方案和CHEP基本一样,只是托盘使用的是塑料托盘。CHEP目前在美国市场上出现一些质量问题,iGPS乘虚而入夺走几个CHEP的长久大客户。同时iGPS对他们的塑料托盘进行整个生命周期的环保分析,宣称其塑料托盘对能源再生的贡献高于木托盘。但由于目前iGPS托盘库存有限,没法像CHEP那样保证供货,所以在追赶CHEP的道路上还有一段距离。托盘租赁市场利润虽高,但初期建立库存的资产投资要求高,所以也阻碍许多竞争对手的市场进入。所以看来CHEP在全球托盘业,特别是在北美,必然还会长时间处在领跑地位。

Reference:

http://en.wikipedia.org/wiki/Pallet

Overview of the US Pallet Industry, Marshall S. White, PhD, Unit Load Design Virginia Polytechnic Institute & State University

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How Supply Chain Service Drives Customer’s Loyalty – My customer Experience with Zappos

Being a supply chain professional, the “sad” thing is that I always translate my real life experience into supply chain practices and theories. This time, I would like to tell a story of my Zappos ordering experience and how I see their supply chain service.

I was shopping for a pair of shoes for my wedding. I didn’t buy the shoes from a local store because I wanted to find something cheaper. The first thought coming to my mind for online shoes shopping is Zappos, which can explain the good reputation of Zappos being the leader of online shoes shopping.

The goal of supply chain management is to provide the right product at the right place with right price. Online shopping eliminates the barrier of place, but it requires an efficient delivery. On their easy to navigate website, I found the style of shoes I was looking for at a discounted price (supply chain theory: availability of right product at right price). It showed three pairs in stock for my size, so I placed my order online.  In 10 minutes after completing the entire transaction, I felt I should have waited to search more options, so I wanted to cancel the order. Then I realized Zappos didn’t provide me the option to cancel online. I had to call their 24 hours customer service hotline. With my professional habit, I also measured how long I was waiting while calling customer service, roughly 30 seconds. Since 24-hour service is provided, the waiting time of less than one minute is more than acceptable, although I wished they provided me the option of online cancellation to eliminate my call to their CS.

Shortly after I cancelled the order, I decided to order the shoes again. What an unpredictable customer behavior…However, when I tried to place a new order online, I noticed that their stock availability became two. My supply chain instinct told me that their stock availability was not updated simultaneously when my first order was cancelled. I decided to call CS and see if they could reactive my old order, instead of placing a new one.

Samantha in CS answered my call (now she @samiamquinn is my twitter follower @BettyFeng and following because of my tweet about Zappos CS). Over the phone, I could feel her warm personality and joyful smile, totally contradictory to the cold voice of a CS from CHASE credit card I recently experienced.  She placed a new order for me and upgraded my order to VIP for next business day delivery. Samantha explained that since my order was placed after cutoff time, I should receive my order on Monday morning. As someone working in logistics, I fully understood what cutoff time meant, so I didn’t expect my order to be batch processed until the next morning and picked up by their carrier UPS at the end of the next day.

To my surprise, I received shoes from Zappos the next morning! I have shopped online many times before but never experienced such quick delivery. As a regular customer with knowledge of supply chain management, Zappos order processing and fulfillment amazed me. The order was placed at 10:30pm in the night, shipped out of the Zappos warehouse in Shepherdsville, KY, and delivered to my home in Orlando, FL at 11:15am the next day.  The whole process can be illustrated as the following:

Zappo Order Flow

The email time stamp of order shipping confirmation was 2:30am, so it’s from a 24 hours operated warehouse. I looked up all of flights from Louisville to Orlando in the early morning for more insight. It seems only the flight was leaving at 5:46am and arriving at 10:03am could make the final delivery at 11:15am.

Needless to say, with my knowledge in order management, I understand how many activities and challenges are behind this 13-hour process from order to delivery.  The speed of order processing and delivery is something extraordinary. For regular order processing, it normally takes one or even two days lead-time to let the system batch process customer orders and check their credit,  then have the warehouse pack the product and ship it out by the end of the business day. Below are three key components to enable Zappos make a delivery at such speed:

  1. 24 hours customer service. I’m guessing Samantha in CS kindly manually processed my credit and dropped my order to a delivery request. Generally the late night order is after the cut-off time so it’s unlikely to have been processed by a system batch job.
  2. 24 hours warehouse operation. This is the most important factor for their incredible speed. Without 24 hours operation in the warehouse, the delivery request will not be picked, packed and shipped by early morning for a late night order.
  3. Close partner relationship with UPS for early morning pick-up, or multiple pick-ups in a day. This is most likely the reason why Zappos’ warehouse is located close to UPS’ main global hub in Louisville, KY.

Like Zappos’ logo indicated: powered by service. Zappos uses customer service as their brand to achieve customer loyalty, especially when customers have a lot of choices. Zappos demonstrated to me an exceptional example of customer service not only through their CS rep, but also through their supply chain. Their supply chain system and management for order fulfillment is overall robust and agile, except the fact that I can’t cancel an order online and their stock availability can’t be updated immediately after order cancelation. I mentioned in my earlier article that supply chain is a revenue driver, because supply chain services of order fulfillment and on-time delivery directly impact customer satisfaction and loyalty. I know the case I just experienced with Zappos was extraordinary, but you can expect that I will be their long term customer after such a great experience and will happily recommend Zappos to others. I also believe that a company willing to do extraordinary things for their customers with a higher standard of supply chain service will be competitive and successful for the long term.

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Identify Hidden Costs From Total Acquisition Cost

For any rational consumer who makes a purchasing decision for a product or service, total acquisition cost (TAC) is often part of the decision process.  The goal is to obtain the best product or service with the least total costs for the long term.  These kind of decisions happen every day in our daily life,  from a decision whether we should buy energy saving light bulbs, to a more expensive but gas efficient car, or to a much more pricey new house but with much less requirement of future maintenance. In the business world, the theory is the same.

The definition of Total Acquisition Cost (TAC) can vary. But generally speaking, TAC in supply chain management should be the sum of total costs associated with receiving and using of a product or service, including ordering administration costs, ordering size costs, product costs, inbound shipping costs, assembling or conversion costs, quality costs and maintenance costs.  Unfortunately, many companies tend to focus on product costs and quality costs as their procurement success measurement, which are obvious and easy to measure and capture, but overlook other hidden costs in TAC.

In this article, I will use two examples to explain where we can identify some hidden costs from total acquisition cost.

Logistics costs as hidden cost

This is a very straight forward case of embedded cost analysis for the company using vendor managed inventory (VMI). The analysis is simple but requires significant trust, transparency, and collaboration between the company and their suppliers. The suppliers are asked to breakdown cost components for VMI raw materials as below:

  • Product costs
  • Shipping costs
  • Revolver hub costs (warehouse costs)

The embedded costs are hence broken down into different phases of the supply chain. In this case, the product cost is not the focus, but the logistics costs, which is hidden as part of the final pricing. After understanding the embedded logistics costs of raw materials, the Logistics team goes to its logistics providers for a quote, including shipping and warehousing, on the condition of meeting the same logistics service level used by suppliers. Once a lower logistics cost is identified, Procurement uses it as leverage to negotiate with suppliers. Suppliers need to either match the logistics costs or use the recommended 3PL by the company. This is a great example showing collaboration with suppliers for cost reduction. I believe many companies are conducting similar exercises to identify hidden logistics costs in their purchased materials.

Administration cost, order size costs as hidden costs

The costs of ordering administration, order size or assembling are difficult to capture and often not part of acquisition consideration. But those costs can become surprises some day and hurt the company bottom-line. It can potentially damage the relationship between suppliers and customers.

I’m using a case of pallet rentals in a logistics operation to illustrate those costs. A pallet is not a key material for many companies but it’s utilized in everyday operations to carry and ship important products. Pallet pooling is not a new concept. It allows companies to focus on their key supply chain activities and enjoy a lower logistics cost through renting pallets, instead of buying. The value proposition for this system is to decrease logistics costs, while supporting environmental sustainability.

It’s a great business model if there were no other hidden costs.

For any company using pallet pooling, the additional administration costs can come out of the blue. It’s not a simple activity of placing PO. It includes all other activities of “reporting, reconciling, correcting, and possibly conducting your own audit.” (Andrew Mosqueda, A Cost Analysis of Rental vs. White Wood Pallets). There is a lot of room for reporting errors or variables in a pooling system because pallets float from upstream 2nd or 3rd tiers of suppliers to downstream wholesales or retails. It can cause substantial effort for companies to maintain the program. If companies lose track of pallets because of shipping them to clients outside the rental network, the costs of “loss of equipment” will end up more than buying new pallets.

Ordering size requirement is another invisible cost in TAC. If there is a fuel surcharge for a full truck order or LTL surcharge, the inbound shipping cost per unit becomes higher for small batch orders. If companies choose to increase order sizes in order to lower surcharge costs per unit, inventory carrying costs will increase, such as storage, insurance, tax, and extra rental fee for this rental case.

It might be extreme to use a rental case to explain ordering related costs. The point is that intangible costs, such as ease of doing business, suppliers’ flexibility and services, are definitely part of total acquisition cost. In the long run, all of those hidden costs either pass along to consumers to decrease your competitiveness in the market, or hit bottom-line to reduce your profitability. Hence, for companies that would like to trim down total acquisition cost for their procurement, start with identifying hidden costs first before jumping into negotiate new pricing with suppliers.

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Key drivers of profitability and competitiveness in supply chain

Since the recession began, supply chain management has been back on the agenda of companies’ boardroom. There is no doubt that it’s the perfect time for company leaders to exam their supply chain model, supply chain network and identify the hidden costs in the chain. By reshaping the supply chain strategy of companies, the supply chain can become the “cash” chain.
The below chart represents key drivers of profitability and competitiveness in the supply chain. There are three aspects that supply chain can do to drive “cash”: reduce expense, increase revenue, and improve assets liquidity. Companies should look into all aspects, encourage innovation and risk taking. Companies can not only streamline the processes to achieve a lean and efficient organization, but also make their supply chain organization into a revenue stream.

Profibility
Supply chain as cost drivers

This is the first thing that every company will jump into. “Cutting costs” becomes the slogan of the company. Many companies assign certain dollar amount to each individual as performance objectives. There is nothing wrong with that, except company leaders need to be aware of the existence of functional silos, and commit to transparency communication within the organization. As we all know, there are many tradeoff decisions to be made within supply chain, such as the traditional tradeoff between warehouse and transportation. Remember, pressure can increase the political level inside the organization and sometimes force people to make a decision based on making their numbers. High level leaders are responsible for the big picture of the whole supply chain and support the least total cost decisions for the organization. Unreasonable measurements or targets can discourage employee morale, damage organizational heath and sometimes lose supply chain talents for future growth.

Below is analysis for key drivers for supply chain as expenses and opportunities for cost reduction:
a. Transportation
There are many areas to be looked at in transportation to achieve cost savings. It has been discussed in detail in my article “Five Ways to Achieve Cost Savings in Transportation”.

b. Inventory carrying costs
It’s an area that many companies overlook and don’t even calculate and understand their inventory carrying costs. As standard rule of thumb, inventory carrying cost is 25% of inventory value on hand. When high inventory level is unavoidable during a recession, it’s a great opportunity for the company to look into their inventory carrying costs to identify opportunities. Below charts present all components for inventory carrying costs. I will discuss more into details in a separate article.

Inventory carrying cost

c. Variable production and warehousing cost
Variable costs are cost of labor, material or overhead that changes according to the change in the volume of production units. I believe many companies conduct ABC (Activity Based Costing) analysis to find out standard variable cost. Variable cost reduction can be done through process improvements to reduce wastes in production and warehouses, such as waiting time, movements, etc.

d. Raw materials
Raw material is considered as part of inventory. It includes direct and indirect raw materials. Collaboration and partnering with suppliers can lead to total inventory reduction in the chain to achieve a win-win situation, such as VMI or ERP. Scrutinizing suppliers in a difficult time will jeopardize companies in the long term.

Supply chain as revenue driver

Many companies recognize their supply chain as cost driver, but fail to see the prospect of supply chain as a critical role to drive revenue.
a. Supply chain service
Supply chain service level directly impacts customer satisfaction. Order fulfillment and on-time delivery are two major service metrics to measure company supply chain efficiency and effectiveness. Higher service levels bring higher customer satisfaction which prevents loss of revenue and leads to future sales. It’s worth noting that there is an exponential relationship between service level and cost. However, there is normally a predefined service level agreement between companies and their customers or trade partners.

b. Supply chain solutions
When business development is trying to break into a new sales channel, supply chain supporting capacity can often be brought up as a question. Example: A company wants to enter into a new market which can only order small LTL orders, but at much higher frequency. If the company has become accustomed to TL orders all the time, those LTL orders will become a market entry barrier due to increased logistics cost. Under this kind of circumstance, supply chain, as its supporting role to revenue increase, needs to be flexible and innovative to provide a solution as an enabler for market expansion without hurting the company’s bottom line. In this case, working with 3PL for LTL consolidation can often be the solution for the challenge.

c. Recycling or reverse logistics.
It’s one area that is easily neglected by many companies. Recycling, picking up disposed goods from the customers and reselling, can not only improve customer satisfaction and lead to new purchase, but also bring the company a new channel of revenue by reselling disposable goods to a safe recycling channel. It also helps companies to fulfill their social commitment for environment sustainability.

Supply chain as assets management

Asset management can be the most challenging task for supply chain because it would take a much longer time to make changes in company assets, such as leasing contracts for warehouses. Better asset management in supply chain will require will require organization transparency and a communication from upstream to downstream to minimize functional silo.

a. Fixed cost of DCs and docks
For a company with excess inventory, it’s costly to acquire more space for storage. For companies with extra space due to less demand, it won’t be easy to close DC in the short term and there is also a risk for a higher acquiring cost when the market is back. So companies can seek partner opportunities with each other to overcome the difficult time together. A project I worked on in the past is to provide a customer storage solution. With certain incentives, the customers purchase several months of inventory shipped directly from the manufacturer. They utilize their empty spaces to make storage revenue and the products are used for their future demand. While the company with excess can avoid the cost of new warehouse space and one leg of transportation from storage to the customers. Certainly this kind of process needs to be carefully managed to avoid skewing demand and other possible negative impact.

b. Fixed cost of plant
This is the most difficult part of all costs reduction opportunities because it may lead to the close of a factory or downsizing the workforce. It’s the last thing I like to see and propose because I’m also one of the millions who lost their job during the recession. The company should try their best to use other methods such as work sharing or payroll reduction to work with employees to overcome the difficult time together. However, as a business person, I can also understand “competitive advantage”. If closing a plant is the best thing for long term growth and efficiency, we just need to face the reality and move on.

c. Cost of private fleet
It’s very similar to the fixed cost of DCs and docks. When it’s not possible to reduce the size of the private fleet in the short term, partner with suppliers or customers to share the capacity to reduce costs.

d. Inventory management
Inventory is the biggest issue to any company during a recession when consumption drops dramatically. It’s a big topic and there are many things that can be done in inventory management. It not only requires day-to-day tactical inventory management to minimize inventory DOS and maintain a targeted customer service level, but also requires some strategic decisions from higher levels to achieve inventory goals.
I. Use demand driven forecast, instead of sales & marketing driven. Many companies include their marketing goal in their demand forecast which produces an inflated the demand forecast. Inventory overflow is unavoidable when the market is down. Face the reality, and forecast based on customer demand.
II. Centralize inventory management, instead of decentralize. A decentralized ordering or inventory management can normally cause higher inventory in the entire supply chain. Centralized inventory management will lead to better forecasting at an aggregate level and hence result in a lower inventory.
III. Inventory optimization and classification. ABC classification can improve inventory turn while maintaining fulfillment service levels. Optimization will lead to SKU reduction so companies can focus on their critical products for better service and lower cost.

Established metrics leads to total supply chain excellence

Besides all of these actions and factors to enable supply chain to become the “cash” chain, leaders should not forget to establish well-designed metrics for the entire organization to achieve total supply chain profitability and competiveness. Company leaders need to be aware that high costs in some areas are normally the symptoms of root causes, and many times, those problems are caused by the wrong metrics in the organization. Requesting cost savings without removing the root causes and establishing accurate performance metrics, the cost savings initiatives can be a failure. For example, production cost per unit is a great measurement of manufacturing efficiency, but it can result in high inventory when manufacturing ignores other cost components in supply chain and over produces in order to reduce cost per unit to meet their metric. This kind of story actually happens every day, and it’s a daily battle for many supply chain professionals. The right metrics convey the right positive incentives and drive the right decisions. When overhauls in supply chain need to be done at a strategic level to achieve day-to-day tactical operational efficiency, company leaders have the obligation and responsibility to face reality and to make the right strategic decisions for the organization.

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Green=Competitive?

All,

Is Green Supply Chain really make a company more competitive? Take the poll below, and please leave comments if you have extended thoughts. I will make a result summary later. Thanks all!

[polldaddy poll=1711880]

RFID-GPS Hybrid Tag

It was a product development paper when I was at busienss school two years ago, co-writen with my teammates Somnath, Reagan and Brad.  It maybe very immature from eyes of experts since we finished the paper in a very short period of time. Since then I haven’t done much research about RFID-GPS tag market. But I like to post the article here for sharing and for my further research.

Mission Statement

The new RFID-GPS hybrid tag will include both RFID & GPS advantages to apply to or incorporated into a product, animal, or even person for the purpose of tracking and location navigation. It will locate the objective no matter it’s in door or out door. The tag user can log into internet to track the object location, or the tracking information can be fed into customer tracking system. The product cost will be the biggest concern for the customers. The hybrid tag will be priced at the same level of the traditional RFID. Hence the new product provides the customer additional value of GPS tracking by paying the same cost of RFID. It can be considered as 2nd generation of RFID tag.

Key Customer Benefits

It combines the advantage of both RFID and GPS. RFID can be used mainly for indoor tracking. GPS in the tag is used for outdoor movement tracking and short-term storage of recent location history. Through web portal, the customer can track the objects in real time in 24/7. The hybrid tag will improve the customers’ inventory management, asset management and enhance their operational efficiency to achieve cost saving.

1. Key Business Goals

  • Time to Market – One year
  • Desired financial performance – be profitable in 3 years
  • Quality requirements – small size tag but store and transmit reliable data for product tracking

2.  Target Market

  • Retail – it will enhance the supply chain management by providing inventory visibility no matter the products are in door or on the road. It helps retail to improve their customer service by providing accurate product availability information.
  • Tool, container and equipment pooling industry – the hybrid tag can help to track the location and leasing length of the leased products. The information will help them on asset management and also help them charge the customer accurately based on the exact leasing time.
  • Livestock industry and pets owner – track the location of the animals

3. Assumptions and Constraints

The assumption for RFID-GPS hybrid tag development is that we don’t have R&D cost constraint. The major constraint for future development and production is the supplier power because we will rely on our hardware suppliers and software suppliers to achieve our cost objective for this new product.

4. Stakeholders

  • Suppliers – Suppliers of RFID and GPS, and the software developer.
  • Partners – GPS cellular communication service to send tracking information
  • Customers – users of RFID-GPS hybrid tag for their product
  • Customer employees and consumers – concern of personal privacy

Market Analysis

Potential market size

The market size is huge because the tag can be broadly used on merchandise, leasing tooling and equipment, and animals. In 2008, RFID market size will reach $7.26 Billion, which can be translated as future market size of RFID-GPS hybrid tag. Similar to the launch of RFID tag, we can work with the retail, such as Wal-Mart, to launch the hybrid tag.

Currently there are researches for RFID-GPS hybrid tag, but there is no product in the market yet. If we can be the first producer of the tag, we can be the leader in the market. Our goal is to obtain 20% of the $7.26 billion market before other competitors follow up, so time to market is very critical for us to win.

The customer requirements are:

  1. Low cost. Although RFID-GPS hybrid tag can provide the customers tremendous benefits from improved supply chain and asset management, the customers are still concern the cost of implementing new tag.
  2. Small size. The size of the tag is important for merchandise. The smaller, the better is for the customer to replace the tag in the products.
  3. Tag memory capacity. The customer will like comprehensive information to be stored in the tag for intensive movements tracking recording.
  4. GPS navigation accuracy. Only the accurate location information can provide the customer value added information, otherwise, it will mislead the direction and create unnecessary waste.
  5. Easiness for information tracking and data collection. We need not only to provide the hardware quality and price, but also to provide convenience and easiness for the customer to obtain tracking information and data thought web portal. If the customers requires, we can also feed the information directly to their information systems.

Price target

The customer is concerned that additional tagging system will be transfer the cost to the consumers, although they understand the advantage of a fully implemented item-level tagging system to help to increase inventory visibility and reducing shrinkage due to theft, damage, etc and expiry of perishable. The biggest disadvantage of traditional RFID tag is the distance range of the RFID reader, while GPS resolves this problem, especially when the product is on the road. Thus the additional GPS tracking system in the tag will help the customer to achieve deeper cost saving.

Currently traditional RFID tag price is ranged widely based on memory capacity. It can be as low as 5 cents per tag. The low cost will allow the tag to be used at unit level. Since we’re the first one to launch RFID-GPS hybrid tag, the competitive product is the traditional RFID tag. We need to price the hybrid tag comparable and competitive to RFIF tag in order to convert the customers from traditional RFID tag to RFID-GPS hybrid tag. We will price our new product to be as same as the traditional RFID tag but providing additional value of GPS tracking. While a monthly service fee will be applied to the customers for GPS cellular communication service.

Product Definition

Both RFID (Radio Frequency Identification) and GPS (Global Positioning System) are existing technologies. With the price drop in 2006, RFID tag is becoming inexpensive, especially for the merchandise. But RFID has limited tracking range because its position is tied to location of the antenna or reader. GPS, in the other hand, has the advantage to locate and measure the movement of an object by utilizing satellites transmitted signal. The RFID-GPS hybrid tag will combine the advantage of both technologies and allow the user to track an object at real time without geographic barriers.

The bill of material of RFID-GPS hybrid tag will include RFID memory chip, an antenna for receiving and transmitting the signal, GPS reader and GPS logger, which will store movement data. Currently there is a technology called chipless RFID allowing for discrete identification of tags without an integrated circuit, thereby the tags can be printed directly onto assets at lower cost than traditional tags. The biggest challenge will be the power supply for GPS. An alternative solution need to be provided as power supply in order to receive and send GPS signals. At the same time, we need to develop the internet portal to provide customers the tracking information and data, or develop a software program to feed information to the customer’s tracking system.

The compelling value of the RFDI-GPS hybrid tag is the real-time tracking capability for the object in door and out door without geographical barrier. The tag will help the customer to reduce their over all cost by completed inventory pipeline visibility, improved asset management and streamlined operations efficiency.

Product Development Plan

In order to be the winner of the new product, we need to be quick to get into the market. Both RFID and GPS are existing technologies, but it would still be challenging to implant both of them into one single small tag. The target product development lead time is one year through close partnership with our suppliers and partners. Below is the estimate timeline for the development phases:

  1. Portfolio and concept approval: 2 month
  2. Program approval and prototype: 6 month
  3. Pilot and launch – 4 month

The schedule is tight because we also need to source reliable suppliers and contract the partners at the same time. But establishing an aggressive goal of time-to-market will help us to be the leader of 2nd generation of RFID tag.

Currently there are plenty of RFID & GPS receiver suppliers in the market and many of them are located in low cost countries. Since many of merchandises are also produced in low cost countries. The tag, as a component of the finished goods, would be reasonable to be produced in low cost countries, close to our customers’ sourcing locations. For software development, we can utilize current RFID web portal program to include location and movement information through GPS tracking. At the same time, we need to negotiate a partner of cellular communication network to provide GPS tracking service.

In terms of resource required for this new product, other than R&E and development investment, we need engineer talents knowing the technologies of RFID and GPS to design the tag and work with our suppliers to develop the product. The procurement team will help to source reliable manufacturing suppliers. We also need information and communication system engineers to develop the web portable.

Market introduction will target to the retail and tooling leasing companies. Wal-Mart was the first one to adapt RFID technology and we believe they will be interested in the new hybrid tag. Tooling leasing company, such as CHEP, has been applying RFID to monitor their assets utilization. Again, the new tag will enhance their asset management. We can partner with them to launch and test the new products.

Financial Considerations

The estimated market size of traditional RFID tag is going to be $7.26 billion in 2008. When hope to capture 10% of the market, revenue of $1.45 billion for the first year, 20% in the second year and expand to 30% of the market share in the third years to $2.18 billion. Another revenue stream is the monthly fee for GPS cellular communication. We can negotiate with the network partner to share the monthly fee revenue. The monthly service fee can be structured based on the size of GPS data transfer. The customer will pay a fixed monthly fee first to cover a fixed amount of data transfer and then pay addition fee based on actual additional data. The estimated service fee will be $5 million annually.

Since it’s a start-up business, the fix cost to support future business need to be included when we calculate NPV. We estimate $40 million as the initial investment for product development. The variable cost for the future business will be the tag production cost. The SG&A cost will include web supporting, data transfer cost and marketing & administration cost. The estimated net income will be 10% of our revenue. But we might experience a declining gross margin when the competitors follow and will drive our net income margin down to 8% in the third year and remain this rate going forward. With an annual interest rate of 10%, NPV shows positive as 3 million at the end of forth year. At the sixth year, NPV of this business reaches to $22 million. GPS service fee income will be the incremental income for the company.

Regulatory, External Considerations

The major risks of this product development are the competitors’ entry and continuous product improvement because we don’t have our own manufacture and reply on the supplier for manufacturing. We can patent our design but the competitors can develop their own design for the similar product. In order to remain our competitive advantage, we need to differentiate us by providing continuous product development, and the world-class web tracking and data transfer service for our customers.

Another concern is the privacy of the customer employees and consumers. Because of the 24/7 real time tracking, the employees, such as truck drivers who carry the objects, will be monitored all the time. In retail, when the merchandises with tag are sold, the tracking signal needs to be removed from the tag through a signal remover. So the process of signal removal needs to be followed to avoid any consumer concern.

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From Coffee to Business Process Improvement: A Story of Office Coffee

Employees on the third floor were not happy, especially in the early morning. The coffee kettles, two for regular and one for decaf, in the breakroom were always empty! It’s almost unacceptable for an anxious coffee drinker to wait even five minutes for a freshly brewed cup in the morning. Even worse was that there are others waiting in line in front of you so you might even need to wait for the next kettle to brew. So, people are cranky, unhappy, and even cursing because coffee was not available when people needed it. Time is money, but without coffee in the morning, work won’t be efficient!

It’s totally a supply chain breakdown issue, so a few Six Sigma Black Belts set out on a mission to fix it. The new process is focused on regular coffee because there is much less demand for decaf. Many sigma tools can be applied in this analysis, such as normality analysis of waiting time per person, fishbone analysis, Pareto, regression and correlation analysis between waiting time vs. office hours. A typical six formula can be developed such as Y(coffee waiting time)=Xs of (number of kettles, office hours, number of  coffee addicts, coffee grounds and filter availability, etc. )

According to the rumor, there were quite a lot of hours involved with group brainstorm and heated discussion among Black Belts. A rather complicated new coffee making process, which is like the two-bin system of supply chain management, was produced. The company generously paid for a big desktop mat with nicely printed color coded flow and process. Below is my simplified version to illustrate the idea.

Coffee Making Process

The mat was placed in front of the coffee kettles so it’s very eye catching for everyone serving coffee. The kettles were also relabeled with clear signs of “regular” vs. “decaf”. People were laughing at the change. Many felt it’s a waste of resources in designing the process and printing the mat, but people started to follow the process flow. You know what? The fresh coffee availability was much more improved! The chances of being out of coffee in the early morning were decreased dramatically. Whoever craved coffee in the early morning could now be blissfully caffeinated. Yes, there were still times of process breakdown when a few were not following the process to make a new kettle when the first one was empty, or coffee availability tends to be lower in the afternoon. But overall, the situation is getting better and employees on the third floor were happier. The company was happier too, by investing a little bit of printing cost, the total office productivity improved!

It’s a coffee making process implementation in the office breakroom, but it reflects some supply chain, LEAN and business process improvement disciplines and practices:

  1. When a two-bin replenish system is implemented, the re-ordering process, when and how, is the key to maintaining high stock availability.
  2. Obvious signs, colors or labels are always useful in LEAN implementation.
  3. When a change is implemented, it’s not always welcomed at the beginning. Change management may be necessary in many cases.
  4. Any process improvement opportunity should be encouraged. It might be a small improvement but result in a huge increase of customer satisfaction.
  5. I think the Human Factor is the most import learning from the office coffee making process. Human factor is the most critical X in Y, no matter if the Y is fresh coffee waiting-time in the office, or products availability for our consumers. A well-designed process can be easily broken because of human manipulation and interruption. The coffee making process relies on many individual coffee drinkers to brew coffee when the first one is empty. Like any processes in the real business world, the expected outcome of a well-designed process relies on many individual employees consistently following instructions. For many manual processes, training and retraining are always required for process enforcement in order to achieve the same standard outcome. Cross-functional communications are always critical to make sure information flows properly and that following the steps can be executed in a timely manner. On the other hand, employees are those who will develop continuous improvement opportunities to streamline processes to achieve better result with a shorter lead-time.

OK, enough learning from this office coffee process. Now it’s time for me to make a coffee for myself at home. Waiting time: 2 minutes.

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Will Home Depot Achieve Its inventory Goal Through Supply Chain Transformation?

I just read two articles regarding Home Depot supply chain transformation. Home Depot’s supply chain overhaul to free up cash, improve inventory by Rachel Ramos at Atlanta Journal-Constitution dated Sep, 2008. Another article Aggressive Supply Chain Transformation at Home Depot by Dan Gilmore, editor of SupplyChainDigest, dated Jun 2009.

Both articles discussed that high inventory at Home Depot stores forced the company to transform its supply chain network from the previous direct-to-store model to a traditional RDC model. The direct-to-store model made sense to Home Depot in the past because of its high sales in each store. With network expansion and competition, per store sales dropped and a decentralized ordering model caused high inventory problems for Home Depot. The aggressive supply chain transformation started in early 2007 and should be able to help Home Depot improve their current inventory turn from 4 to a higher number.

Out of curiosity, I looked up the financial reports of both Home Depot and Lowes to get their inventory turns data. I used the standard formula of inventory turn of COGS/average inventory. The below table shows the result:

HDInvTurn

What can those numbers tell me?

First of all, there was not much improvement in last two years compared to 2006. In the first two quarters of 2009, Home Depot had inventory turn lower than 1 in both quarters, which can translate to an annually turn lower than 4. It can be explained due to current economy downturn. The RDC model didn’t seem to fix the inventory problem. So, if inventory is not in stores, they might be accumulated in RDCs.

Second, we see a declined number from Lowes. Same story for first two quarter of 2009, Lowes even had a lower inventory turn number than Home Depot did. Lowes has had the traditional RDC model since the beginning. So, I can conclude that the RDC model will not be the only fix to improve its inventory turn.

Supply chain network remodeling to RDC model can definitely help Home Depot to improve the right level of inventory at stores and offer consumers a cleaner shopping environment. It will also help to improve forecast accuracy at an aggregate level. However, Home Depot seems to have more to do in order to increase their inventory turn from 4 to 5. From my point of view, there are at least two more things that Home Depot should do beside supply chain network redesign:

1. Inventory optimization through SKU ABC classification.

70% of 35,000 SKUs having a lower than one sales one store per week represents an opportunity. Even though Home Depot doesn’t plan to cut any SKU to meet customer satisfaction, it can use traditional ABC classification and establish different inventory turn targets for different types of SKUs. Those 70% of SKUs normally will represent about 20% of sales for Home Depot. They should be classified as B or C SKU, which can be allowed a lower inventory turn to reduce ordering administration. However, for A SKU, which normally account for 20% of SKU but about 80% of revenue, should be closely monitored to meet a much higher inventory turn target. From SKU ABC classification, Home Depot can focus on their key SKUs to improve overall inventory turn and at the same time to satisfy customers’ needs.

2. Supply chain technology enhancement.

I agree with what Mark Holifield, SVP of SC, said that the biggest challenge is culture change. However it might be a good time for Home Depot to invest on a robust supply chain system to accurately reflect customer demand at each store in a timely manner and hence result in a better demand driven forecast. Wal-Mart had a surprising inventory turn of 8.8 in 2008 and looks like to be able to achieve the same level based on the number of tuns in the first two quarters of 2009. As we all know, Wal-Mart is a huge pusher for supply chain technology and RFID. I’m a believer that utilizing technology will drive workflow automation and thus drive process and culture changes. An advanced supply chain information system will give Home Depot the competitive edge in the competition.

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