Archive for July, 2010

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Do you know that carrying excess Inventory costs financially?  Well, you may not see the cost of carrying inventory in your Profit and Loss statement, but trust me it hurts you big time financially.  According to one survey conducted by IMR in conjunction with Harding & Associates indicate that almost 45% of the respondents have no inkling of what is Inventory carrying cost and how it is calculated.  Joseph Mazel of IOMA believes that, “The higher the number used to calculate carrying costs, the more potent it is in reducing inventory.”

But what is Inventory Carrying Cost (ICC)?

“Inventory carrying cost (ICC) is the cost of holding one unit of an item in stock for one period of time” – Waters, D.

Inventory is a tangible asset that is intended for sale. For most retailers, wholesalers and distributors, inventory is the largest single asset on their balance sheet. We do come across business leaders who are comfortable in carrying buffer inventory by sacrificing a portion of their profit margin in the form of inventory carrying cost.  Some believe that carrying buffer inventory is a kind insurance to ensure better service levels.  In my opinion carrying right inventory may improve the service levels.  But the trick lies in determining the right inventory.  There is a cost associated with carrying excess inventory and that cost is known as Inventory Carrying Cost.

Why Companies hold Inventory?

The main objective of holding inventory is to maximise the customer satisfaction by avoiding loss of sales due to lack of inventory.  However, there are six basic reasons why companies hold inventory and they are:

  • Globalization;
  • It enables the firm to achieve economies of scale.
  • It balances supply and demand.
  • It enables specialisation in manufacturing.
  • It provides protection from uncertainties in demand and order cycle.
  • It acts as a buffer between critical interfaces within the supply chain.

All the above reasons are compelling business reasons to support the top line revenue growth, to maximise customer satisfaction and at the same time to improve the gross margins.  Inventory holding helps organisations to achieve first two objectives.  In order to achieve the third objective, Inventory carrying should be optimised.  Excess inventory carrying means an additional cost of carrying which shrinks gross margins and cash flows.  It’s the emphasis to improve the bottom line performance and enhance the organisation’s cash flow position.

There are six different types of Inventory we carry.  They are:

  • Cycle Inventory – Average amount of inventory used to satisfy demand between shipments.
  • Safety inventory – Inventory held in case demand exceeds expectations.
  • Seasonal inventory – Inventory built up to counter predictable variability in demand.
  • In-transit Inventory – Inventory in transit between origin and destination.
  • Speculative Inventory – Inventory held for the reasons of speculation.
  • Dead Inventory – Non-moving inventory.

When we see the value of inventory in the balance sheet as an asset it could include all above different types of inventory.

Components of ICC:

Inventory carrying costs influences many decisions in Strategic, Analytic and Operation levels.

Strategic Decisions: Profit Margins, ROI, Make or Buy, Global or local sourcing etc.

Analytical Decisions: Total Cost of Acquisition; BTO (pull) or BTS (push); Where and what amount to store, Annual Operational Budgets etc.

Operational Decision: Lot Size; Price Break even analysis, EOQ, Evaluating promotional deals and lifetime buys etc.

As inventory carrying costs encompasses several critical decisions, it is necessary to determine what cost should be included in inventory carrying costs. Generally,  ICC is reflected in a percentage of the value of an item.  It contains several components.  The ratio of such components may vary depending on the organisation,  product involved and location.  The components of ICC would typically include the following:

The general thumb rules used for Inventory Carrying cost would be 25% per annum.  However, one has to customise the formula based on various factors.  The dominating factor of Inventory carrying cost is the cost of money, followed by local taxes, Warehouse costs, Obsolescence, and Pilferage etc.  Supply Chain Manager all over the world is concerned about carrying additional inventory. Inventory carrying is directly linked to gross profit of an organisation and profits would go up when inventory carrying is reduced and the profits diminish when inventory carrying goes up.

As mentioned in one of my articles, it is very easy to convert cash into Inventory.  However, it is very challenging to convert Inventory into Cash even though it is considered as a tangible asset.  There are several ways one can optimise inventory levels. I have already written an article on Managing Inventory, hence I am not going to spend time on how to optimise inventory.

Industry wise Inventory Carrying pattern:

Inventory carrying varies industry to industry. I was involved in a research supervision while I was teaching, based on the data collected by a student, I would like to compare the inventory carrying trends of Retail, IT/High Tech, and Automotive industries.  All of them are considered as growing industries.  The average data pertains to year 2000 to 2005.  By analysing the gross profits and inventory turns, the numbers reveal great opportunity for improving inventory carrying in Automotive, IT/High Tech and Retail.  The data pertains to the global players and they have the clout to dictate terms to their suppliers and manage better inventory turns.  The below-given data may be used for reference purposes only.

TO: Turnover; GP: Gross Profit.

Optimising the supply chain and inventory management delivers the benefit of freeing up working capital that could be used for business expansion activities.  When we reduce inventory, we are not only freeing up invested capital but also creating opportunities to reduce expenses and improve profitability and maximise cash flows.  We announce productivity numbers, we announce sales achievements, we announce profit margins periodically and we seldom come across Inventory Performance announcements.

Inventory needs our attention! Inventory reduction improves profit margins, maximises cash flows and reduces operations cost.  Let us just do it!

Cartoon Source: ReadyToManage


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Today’s business success to a large extent is driven by supply chain efficiency. The role of the Supply Chain has never been as critical as it is today.  Supply Chain Managers world wide are facing the daunting task of satisfying customers as well as stakeholders. Supply Chain speed and flexibility have become two key factors that deliver the competitive differentiation and increased profitability.  Apart from keeping customers or stores properly stocked and deliver the perfect order every time in a globalized business environment, supply chain managers are expected to continuously monitor supply chains in order to identify risks that would hurt the profitability of the organization and develop suitable strategies to counter them.

What are Supply Chain Risks?

In one definition, “risks” are simply future issues that can be avoided or mitigated, rather than present problems that must be immediately addressed – Cornelius Keating

Supply Chain risk mitigation is also about proactively working to avoid future risks. We have internal risks and external risks within supply chain. Let us examine some of the internal risks:

  • Skewed demand forecasts;
  • Excess inventory Carrying;
  • Procurement Fraud;
  • Poor component Quality;
  • Frequent production line stoppages;
  • Poor Product Quality;
  • Loss of Productivity;
  • Crisscross movement of goods;
  • Increasing supply chain costs;
  • Inefficient product lead time;
  • Diminishing product margins;
  • Wrong product mix;
  • Poor Supply Chain Visibility;
  • Appalling customer Service;
  • Rigid & Sluggish supply chain performance.

The above are some of the internal risks which are known to all of us and there is no need to spend time explaining each risk.  Some of them could be risks and some of them could be called as present problems/challenges.

Supply Chains do face some external risks and they include:

  • Globalization;
  • Terrorism;
  • Failing economies;
  • Uncertain Political environment;
  • Rising Legal and Regulatory Risks;
  • Cheap Fakes.

I may have to explain why Globalization is a risk.  Globalization means increasing competition and severity of competition varies from region to region thus making supply chains complex.  Complex supply chains deliver multifaceted risks.  Further, global sourcing is becoming more popular thus putting extraordinary stress on supply chain lead times coupled with global terrorism.

Fortunately, the very trend (globalization) that increased risk also becomes a solution to manage the risk.  For example, increasing cost of labour could lead to outsourcing the activity to low cost countries thus avoiding cost risks.  However organization is not shielded from outsourcing risks.

The attack on the morning of September 11, 2001 has changed the way business is done world wide.  An element of uncertainty has crept into the supply chain which has resulted in additional costs, increasing buffer inventories, delayed production schedules and long lead time to market.  The uncertain demand and global competition is making planning process complicated and terrorism has added one more dimension to the demand forecasting.

“For example Ford had to idle several of its assembly lines intermittently as truck loaded with components loaded with components were delayed at the Canadian and Mexican borders.  Toyota came within hours of halting production at its Sequoia SUV plant in Indiana, since a supplier waiting for steering sensors shipped by air from Germany, but air traffic was shut down.  Ford and Toyota and other manufacturers were vulnerable to transportation disruptions because they operate a JIT inventory discipline, keeping material on hand for only a few days and sometimes only a few hours of operation.” – (Source: “Supply Chain Management under the Threat of International Terrorism” by Yossi Sheffi)

The health of Economy plays a vital role in making supply chains more efficient. Inflationary Pricing threatening to destabilize some Supply Chains and according to Marsh’s Supply Chain Risk Management Practice, three macro-economic trends are creating troubling domino effects in companies’ supply chains and they are:

  1. Beware of country actions and labour unrest;
  2. Beware of fuel prices triggering work slowdowns and logistics delays;
  3. Beware of bankruptcies and delays in your supplier base.

Failing economies making supply chains world wide vulnerable.  We are not talking about one economy here; the world is concerned about unpredictable chain of economic failures.  Mexico in 1994, Southeast Asia in 1997, Argentina in 2002, recent Greece economic failure could lead to wave of defaults across Europe thus leading towards global economic disaster. Another disadvantage of globalization is chain of reactions.

Fake products are destroying business all over the world, heavily contributing to black economy which complicates how we operate our supply chains.   According to International Chamber of Commerce (June 2010), worldwide €700 billion were lost in sales annually due to Counterfeiting and Piracy and a recent study by Frontier Economics revealed that counterfeiting and piracy cost G20 governments more than €100 billion a year in lost in tax revenues and place 2.5 million legitimate jobs at risk.  Loss of sales due to fake product supply, demand forecasting is challenging and thus resulting in supply chain inefficiencies.

Further, ever changing regulatory requirements putting additional stress on supply chain.  Technology companies are increasingly face environmental mandate that required eco-friendly products thus increase in costs in R&D and product recycling. FMCG business is required to re-label their food and beverages packaging in order to report traces of common allergens.  Global warming is influencing automotive standards.  All regulatory requirements may cost supply chain, in order to negate the disadvantage of additional costs, supply chain manager are expected to identify new areas to improve supply chain efficiency and reduce costs.

Apart from internal and external risks, in my opinion there are two more risks which are our self creation.  They are:

  1. Product Proliferation;
  2. And scrambled merchandizing.

Product Proliferation

Product proliferation is the bye-product of product differentiation.  In order to gain competitive advantage in the market place, organizations are introducing product differentiation resulting in product proliferation thus competing with one another in the same market.  In simple, two products belonging to the same organization compete due to product proliferation.  This trend is prevalent in Technology, Retail and FMCG industry.  The risk involved in managing product proliferation is not recognizing demand decline stage and efficiently determining the EOL (end of life) for the product.  Ideally, any new product introduction (NPI) should determine EOL for an alternative product thus product balancing can be maximized.

“Product proliferation can erode margins by 18 to 25 percent and is the root cause of all complexity within an organization.” – EMCIEN.  Further, product proliferation could deliver following supply chain inefficiencies:

  1. Additional R&D time and costs;
  2. Ineffective Product Life Cycle Management;
  3. Customers preferring new product and ignoring old models;
  4. Increasing variations creating planning challenges;
  5. Product mix related challenges;
  6. Decreasing margins due to increasing costs and obsolete inventory carrying costs.

Scrambled Merchandizing

The market segmentation no more exists due to scrambled merchandizing.  Every one is selling any product.  You find consumer electronics products in grocery store and stationary in a FMCG store and surprisingly butcher selling electronics and magazines/drinks and food products.  The latest trend is grocery store selling petroleum products.  On top of it, hyper stores were launched, which is a combination of super market and department store, selling groceries and general merchandize.  Increasing SKUs making it complicated to control the inventory and planning efficiently.  Thus today’s supply chains are complex compared to 19th and 20th century supply chains.

In order to avoid catastrophic business disruptions, organizations today are focusing on implementing enterprise wide supply chain risk management programs.  The emphasis is on prevention and control.  By creasing a visible and integrated supply chain, half of the job is done.  Visibility and integration delivers planning efficiencies and cost savings.  By proactively probing into inefficiencies using tools such as variance analysis, activity based costing will allow us to identify the problem early and that allows us to work on solution before it becomes unmanageable. Proactive behaviour and risk preventing programs also delivers low insurance costs. Insuring adequately is part of risk management program.  Supply Chain risk prevention program should be individually customized based on several dynamics.  The mantra to success is proactive thinking and establishing a visible and integrated supply chain.  Further, establishing enterprise wide supply chain risk management programs and educating all supply chain personnel about the importance of prevention is critical.  Organization could develop several strategies, but ultimate it is the people who should understand the importance and implement the same.

Cartoon Source: smallbusiness.podbean.com/2009/08/

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Procurement/Purchasing is a critical function within supply chain.  I was part of some great organizations where Procurement aggressively contributed to the supply chain success by providing sustainable cost advantage over competition.  In order to maximize the competitive spirit among the suppliers, organizations classify the suppliers into three different categories such as Strategic suppliers, Tactical Suppliers and Transactional Suppliers. This classification helps organizations to develop customized strategies for the three categories.  Some organizations do classify suppliers into two categories. The first category is known as Relationship purchasing and the second category is known as transactional purchasing.  Depending upon the organization and product characteristics, companies classify the suppliers in order to maintain healthy relationship and micro manage each supplier in order to avoid organizational fraud in the procurement process.

But what is Fraud?

According to Chartered Institute of Management Accountants (CIMA), “Fraud Risk Management: A guide to good practice”.

“Dishonestly obtaining an advantage, avoiding an obligation or causing loss to another party”

In short fraud means gaining undue advantage over competition deceitfully.  Some fraud could end at winning the business, some may extend up to compromising product quality, and some may go beyond and systematically demolishing the organization.  In my opinion fraud cannot be committed by one party.  Both supplier and a representative/s of buying organization would be involved in order to fulfil their personal objectives.

The possibility of procurement fraud is a great threat to integrity of any organization.  The fraudulent practices within the organization could work against Total Customer Experience (TCE). TCE deals with providing satisfactory experience to customers in the buying process apart from providing quality products and services.  The fraudulent process may lead to compromised product quality which in turn could harm the TCE.  Hence, it is essential to recognize the fraud and eliminate such processes in order to maximize the TCE. Supply Chain Managers world wide recognize the importance of maintaining integrity in the buying process and constantly look for indications of procurement fraud.  Again, it is not a rocket science to identify fraud, it is just common sense.  Some of the indicators include the following:

  • No formal supplier audits and visits;
  • Supplier payments unchallenged;
  • In a multiple supplier environment, one supplier being favored;
  • Product specifications favoring one particular supplier;
  • Suppliers enjoying questionable influence within buying organizations;
  • Increasing production line rejections;
  • Inconsistent delivery schedules;
  • Huge variance in total cost of the product when compared with competition;
  • Supplier hospitality to select few in the organization;
  • Change in life style of procurement staff;
  • Increasing Inventory levels;
  • Absence of alternative source of supply.

The Fraud Prevention:

We all agree that “prevention is better than cure”.  In order to prevent fraud, organizational culture plays a vital role.  Organizations which encourage integrity and transactional transparency end up avoiding fraud to great extent.

What is Employee Integrity?

Truthfulness of an employee in discharging his/her day to day job responsibilities without favouring any one and maintaining transparent business process and also exposing his/her actions for audits.  There are several tests to test the integrity of a prospective employee at the time of recruitment.  I personally believe a clever guy can fake the test results.  In my opinion, organizational culture encourages integrity among employees.  A corrupt organization will never encourage integrity within their workforce.

Cartoon source: http://www.opendemocracy.net/content/articles/260/images/0164_Bendell_cartoon2_240702.gif

Transactional Transparency:

Transactional transparency is about establishing clear and visible business process in executing the transaction to enable truthfulness.  In case of procurement process, there are several ways one can establish transparency.  Some of them include:

Approved Vendor List:

One of the important steps in the procurement process is to identify and establish pool of approved vendors who meet the criteria identified by the organization.  The selection criteria include; sustainability, quality, competitive pricing, integrity and willingness to collaborate.  In case of multiple suppliers for the same component/product, all are treated based on their past performance recorded through Supplier Performance Score Card.  Never allow procurement from outside approved vendors, if necessary qualify the new vendor and add the vendor to the approved list.

Creating checks and balances:

It is important that “checks and balances” are created in the process.  This means distribution of power among the executives and also able to audit/influence the actions of another executive in the business process.  According to Cary Meiners, VP of Financial and Professional services at St. Paul Travellers, an insurance company, “For example, you can’t have the same person approving contracts and doing the audits.”  This means there are no checks and balances in the process.  Encourage more external audits in order to develop a robust business process.  The audit reports from these external audits should reach the top management.

Take employees/customers feedback seriously:

Every organization will have whistle blowers.  Allow employees involved in the system should be allowed to share their feedback without fear.   Organizational fraud is most likely detected by the tip from an employee than by the audits.  What is the guarantee that auditor is not part of the fraud?  Hence, allow feedback to flow though seamlessly and at the same time avoid rumour mongering.

Some times poor quality feedback from customers could lead to procurement fraud detection within the organization.  Take customer feedback with regard to product quality seriously.

Observe Employee Life style change:

Easy money makes people to invest on their life style needs.  If the employee displays un-proportionate wealth or assets, it is an initial indication of easy money.  A deep investigation could reveal the secrets of unexplainable life style of an employee.

Disband cartels:

Fraud is generally a group activity.  According to Association of Certified Fraud Examiners (ACFE) one of fraud report, “When multiple perpetrators conspire to commit a fraud, this makes it easier to circumvent anti-fraud controls”.  Identify such groups who work towards their collective individual goals by defeating organizational objectives.  The ACFE estimates business losses at $400 billion per year or about 6% of total annual revenue in US alone.

Reward Ethical Behaviour:

Organizations develop practice to reward employees not only for meeting financial goals but also for ethical behaviour. Procurement personnel should know that meeting price competitiveness is not only measure of success and integrity at work place will also get them rewards.

Employee Dishonesty Liability Insurance:

It would be a smart move to insure organization against the fraudulent practices of an employee or a group of employees involved in the procurement process.

Above are some of the fraud preventive recommendations. Of course, they do not make organization fraud free.  According to Schnatterly, “There are always going to be smart people who are going to find ways of getting in under the radar”. However, above steps will help organizations to dodge the bullet if not make organizations bullet proof.

Who are these fraudsters?

“Male employees commit four times as much fraud against their employers than do female employees. Business losses due to fraud by employees over 60 years old are 28 times greater than those by employees 25 years old or younger. Approximately 58 percent of reported fraud is committed by non-managerial employees, 30 percent by managers, and 12 percent by owner executives.” (Source: Criminal Law, Business Fraud and Theft – http://criminal-law.freeadvice.com).

“According to a report by KPMG’s forensic division, the procurement function of an enterprise is the area that is targeted second most by fraudsters. According to national head of the forensic department of KPMG in the United Kingdom stated that the procurement function always faces a higher possibility of fraud, as this is the way in which many enterprises spend money.

David Sherwin, an Ernst & Young partner, concurs with the previous statement and adds that collusion between the procurement function of the enterprise and suppliers is the most common form of corporate fraud of all. It appears that procurement functions are globally targeted by the perpetrators of fraud and that this occurrence may cause financial and other economic damage estimated at millions of rands.” (Source: “A procurement fraud risk management model” by AC Venter, Department of Auditing, University of Pretoria).

“The first and worst of all frauds is to cheat oneself” – Philip James Bailey. Unless we exercise personal integrity, it is very difficult to avoid fraud practices. In order to encourage personal integrity, organizations should encourage and reward ethical behaviour.  There is no full proof methodology/model/process to prevent fraud in the system, but organizations should focus equally in preventing as well as detecting and eliminating the fraud from time to time.  Apart from encouraging personal integrity, organizations should create checks and balances in the system and encourage transparent business processes to avoid fraud. I would like to end this article with my favourite quotation, “Rather fail with honour than succeed by fraud.”

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Carter McNamara defined organization as, “Basically, an organization in its simplest form (and not necessarily a legal entity, e.g., corporation or LLC), is a person or group of people intentionally organized to accomplish an overall, common goal or set of goals. Business organizations can range in size from one person to tens of thousands.”

Organization means people.  In order to direct a group of people towards a common goal, we need a manager.  Who is a manager? Is there any difference between Manager and Management?

In my opinion, management is, “a strategic activity of setting the goals for the organization and effectively Planning, Managing, Controlling and Supporting people and manage other resources to achieve the targeted objectives.”

As people are very precious element of the resources pool, we need a person who can manage all resources including humans in a most effective way to contribute to the success of management.  And that person is the Manager. Hence, I would define a Manager as, “a person responsible for making things happen with the help of a group of people he is responsible”.

Is there a difference between a Manager and a Leader?

The basic difference is that a Manager will have subordinates and where as a Leader will have followers.  And the manager is appointed and the leader is chosen.  Can a manager become a leader?  Certainly, but very rarely!

As we are discussing about the role of a Manager, let me share my thoughts on how a manager can be effective in making organization efficient.

Manager of Deliverables

Manager’s primary objective is to manage and achieve targeted outcome of a given task.  Performance of a manager will be measured periodically based on certain key parameters.  Is this is the only task of a manager?  No.  S/he has to manager their routine jobs such as, selling products, executing logistics plans, administering human resources etc.  As we all know that Manager is responsible for a group of people, he may have to excel not only as an individual team member but also collectively as a team manager.  He has to make the team deliver the targeted results and also contribute to the team’s success.

In short a manager will have a dual role as an individual team player and as a team manager.  Manager is responsible for planning and developing a strategy and also executes the same with the help of his team.  Manager should be ideally a visionary, who can see tomorrow and develop contingency plans in advance to counter any adverse results.

In lean organizations, we come across managers and people managers.  A manager need not be a people manager.  S/he is given the title of a manager to reflect his/her hierarchy level with in the organization.  S/he may not manage a team.  As explained above, s/he may not handle the duel role.  However, s/he would be responsible for managing the outcomes.

Manager as Coordinator

The manager has to effectively play the role of managing the team to deliver meaningful and fruitful results.  The manager should understand individual strengths and weaknesses of the team members and allocate work efficiently to extract the best out of the team.  The work allocation should be balanced and at the same time aligned to the corporate goals.

Manager should ensure that the structure of the organization allows it’s basic activities to be carried out; giving directs; defining responsibilities; making decisions and backing these up by an efficient system and training the staff.  Every individual will have his/her own style of doing things.  However, it is the responsibility of the manager to make sure that this group of individuals adopt the standard process in delivering the tasks.  I feel this is a very critical responsibility of a Manager.

Manager as Catalyst

As well as managing and coordinating the activities of the team, a manager must act as a facilitator.  Understanding diverse skill set of the team and taking advantage of the same to achieve the common goal is the most critical function of a manager. The manager as a catalyst must focus on maintaining team harmony and make use of team’s energy to achieve the given task within set parameters.  Manager also becomes a change agent as a facilitator.  As humans feel uncomfortable if they are drawn out of their comfort zones, it is the responsibility of the manager to educate the team about the objectives of the organization and encourage them to hone the unexplored capabilities of the team.

Contributing and adding value to the process is different.  Contribution is merely delivering identified tasks.  However, the manager should make sure that each member delivers value addition in order to gain competitive advantage for the organization.

The manager as coach

An efficient manager will understand the ability of each individual in the team and extract the best of out of the team.  A team may consist of brilliant who may be haughty, average guys who may be conservative and good guys but technically week.  Manager as a coach should make sure that brilliant guys share the knowledge with technically week team members and act as a change agent to draw the conservative team members out of their shell/own world and make them adapt the change.  As explained earlier manager has a duel role, he should skilfully make use of his/her time to perform the individual duties as well as efficiently make use of team strengths to address weaknesses and at the same time stand out as a change agent to drive the new thinking.  The goals are mere milestones, the journey to achieve those milestones is critical.  The manager as a coach may have to make sure that the journey is enjoyable and mutually profitable.

In order to succeed as a coach, the manager should develop curtails skills and they include:

  • Listening Skills,
  • Clarity in communication to avoid barriers,
  • Negotiating Skills,
  • Developing empathy,
  • Ability to influence others.

The manager as politician

In short a manager should also be a  juggler. As often office environment is politically contaminated, the political skills of the manager will rescue him/her from a critical situations.  Managers are required to often engage in negotiations with the key stake holders of the organization.  Being politically correct would help the manager to end up with best possible results through such negotiations.  Being politically correct will help managers to get things done from cross functional team in order to achieve his team’s goals.  Getting things done through a formal process is highly challenging in a matrix organization.  Manager who is able to maintain informal channels and get things done informally is considered as successful manager.  Further, manager in the role of a politician should be able to resolve the conflicts within the team without hurting any one’s emotions.

The manager as a Leader

As mentioned earlier, seldom managers are leaders.  Ideally, managers should be leaders in order to take the organization into next level.  We have seen some illustrious leaders who managed their teams efficiently to achieve the glory; they include Henry Ford, Jack Welsh of GE, Steve Jobs of Apple Computers, Michael Dell of DELL Computers, Ratan Tata of TATA, Dhirajlal Hirachand Ambani of Relliance industries and many more.  All above mentioned illustrious leaders could be considered as a business leader, but they do manage large teams in achieving the shareholder’s expectations.

Power is bestowed on a manager in order to manage the teams effectively.  In my opinion the manager should put to use the “power” in order to extract the best possible results from the team and not to threaten the team to succumb to his/her authority.

A true leader would empower the team to discharge their duties effectively and help organization to achieve the targeted goals.  A true manager should never be worried about sharing the wisdom and making each team member a leader.  A true leader will never feel threatened working with an intellectual group of team members. A true leader and successful manager will provide Direction, Motivation and Guidance to the team.

Management is doing things right; leadership is doing the right things.” Peter F. Drucker

Writing a conclusion for any article is challenging.  Let me try my best here.  “Managers are made and the leaders are born”.  In order to make a leader organizational culture & vision plays a vital role.  If a particular manager is not successful, it is not individual responsibility.  It is the collective failure of the organization.  Manager thrives if right environment exists in the organization and they will never remember that they have power to command the team.  They will get things done without even thinking about the power.  Right Culture, Training, and organizational support will create a successful manager if that individual has the right attitude.

Cartoon Source: http://www.funnyjunksite.com/wp-content/uploads/2008/09/funny-prayer-before-office1.jpg

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Supply Chain is all about integrated approach, a team work and about collaboration.  We hear motivational speeches about team spirit.  Teams, Teamwork, Team spirit, are these just a bunch of fancy words or do they mean anything to Supply Chain Success? They do mean a lot. Let us pause for a moment and understand what “team spirit” is.  In simple, “the  spirit  of  a  group  that  makes  the  members  want  the  group  to  succeed”.  In summary this definition is about three words, a group and their passion and third and important word is success.  So in simple, team spirit is about motivated team working towards success with a common goal.  Now it makes sense to know how critical team spirit to supply chain is.  As mentioned earlier, success of any Supply Chain largely depends upon collaboration and team work; because supply chain has many facets which are integrated and an independent approach would defeat the very objective of supply chain.

Harland felt that supply chain is about management of network of activities involved in delivering a product or service, “Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers” (Harland, 1996).

Supply Chain is a process/system that manages customer order from receipt to delivery through its network of related activities that have primary focus to manage seamless flow of information, product and also cash flows.  Apart from managing product, information, and cash flows supply chain would target maximization of return on investment to the shareholders.  In order to maximize profitability of the organization, all functions/activities within supply chain should have common goal and work as a team collaborating with other functions within the business.  Let us understand how all activities within supply chain can be integrated.

In any supply chain the following activities will handle or participate in a team effort to transform the order into a product/service that matches with customer expectations and delivers profitability to the organization.

  1. Planning;
  2. Procurement;
  3. Logistics;
  4. Manufacturing;
  5. Customer Service.

In order to understand why a fragmented approach will not deliver targeted efficiencies of supply chain, let us understand the activities of each function and examine how they are aligned to the common goal.  From the below given graphic one can understand all functions within supply chain are connected and work in tandem.

However, the crisscrossing lines may confuse some.  In simple the arrows indicate functional integration within supply chain collaborating and exchanging critical supply chain related information and working unitedly towards common goal.

Let us examine each functional activities and how they work in tandem with other function to achieve the common goal.

Planning: Planning’s main objective is to ensure right product is made available to sales team at the right time and at the right place.  In simple, planning team is responsible for product availability planning. It works with other functions as explained below:

Procurement: Component Planning, Life Cycle Management, Demand Planning etc.

Logistics: Inbound Logistics, VMI Planning, Milk Runs, Outbound Logistics, Distribution etc.

Manufacturing: Production Planning, Product Life Cycle Management, etc.

Customer Service: POS information, Product Availability, Order Execution etc.

Procurement: Procurement team aggressively work towards achieving low per-unit Costs for raw materials and supplies. It coordinates following activities with other functions within supply chain in order to achieve their objectives.

Planning: Component Planning, Life Cycle Management, Demand Planning etc.

Logistics: Inbound Logistics, VMI Planning, Milk Runs, JIT Delivery etc.

Manufacturing: Component Requirement, Product Life Cycle Management, etc.

Customer Service: Customer feedback, Product Availability in case of CBU etc.

Logistics: Logistics team’s main function is transforming planning into action and in the process managing time related positioning of resource economically.  It works collaboratively with other functions in the following areas:

Planning: Inventory Carrying Levels, Finished Goods Distribution, Inbound Logistics etc.

Procurement: Milk runs, VMI Management, JIT deliveries, Inbound Logistics etc.

Manufacturing: Component delivery, finished goods Warehousing & Distribution etc.

Customer Service: Product Availability, Order Delivery Status etc.

Customer Service: The main objective of the Customer Service Function is to coordinate effectively with customer with regard to their order and make sure that the customer is well informed about the delivery of product or service. In simple exchange of information is the key function.  In order to deliver the right information to the customer, they work closely with the following functions.

Planning: Share point of sales (POS) information, Customer Order Fulfilment, Customer feedback etc.

Procurement: Customer Orders, Procurement cycle time in case of CBU etc.

Logistics: Order status, Product Availability, Customer Expectations and Product Delivery status.

Manufacturing: Customer Order flow; Product availability, Product supply constraints, Technical Problems etc.

Above are only few examples of coordination.  Depending upon the product and organization, supply chain coordination complexities varies.  Just for a moment, imagine functions within supply chain working in silo. There is no need to explain the disastrous end results!  Supply Chain is a team work like CRICKET.  Every one in the cricket team has a defined role with a common goal to win the match.  Same way supply chain with many functions, and variety of individual goals work together for achieving the common goal.  A fragmented Supply Chain team is like chariot pulled by several horses in different directions and going nowhere.  Some examples of a fragmented supply chain:

  • Crisscross movement of material resulting in additional transportation costs;
  • Manufacturing producing what is not relevant in the market place, creating non moving inventory;
  • Planning team forecasting without understanding market pulse;
  • Procurement team pursuing vendors not acceptable to manufacturing team;
  • Customer service team not in a position to share Order delivery schedule with the customers due to lack of information.

Martin Hoegl and Hans Georg Gemuenden (July-Aug 2001) have defined team work as, “teamwork is work performed by a team. The quality of teamwork may be measured by analyzing the effectiveness of the collaboration in the following ways:

1. Communication

2. Coordination

3. Balance of contributions

4. Mutual support

5. Effort

6. Cohesion”

A sustainable team work is achievable through efficient communication, collaborative coordination, and effective contributions by all with mutual support matched by individual effort.  Before concluding let me summarize team work/team spirit. It is all about working together towards common goal and helping each other to achieve their individual objectives at the same time attaining common goal.

“Coming together is a beginning. Keeping together is progress. Working together is success.” Henry Ford.

Cartoon Source: thisissurya.wordpress.com/…/team-spirit/.

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It is extremely easy to convert cash into Inventory, but it is immensely hard to convert inventory into cash.  The success of Inventory management lies in balancing the cost of carrying inventory with benefits of carrying inventory.  Under these circumstances, if someone can suggest a solution that could help the company to differ the ownership temporarily, it would be an ideal solution for any business.  Is it feasible?  The answer to the question is yes and no.  Yes, because it is possible using a concept called Vendor Managed Inventory (VMI) and no because, in order to implement the concept, we need to make sure that some factors within the supply chain are optimized.  This concept is hugely common under Pull supply chain and heavily used in IT-High Tech industry and also in automotive and retail industry.  In order to make this concept work for business, the supply should be abundant and multiple suppliers and also supplier willingness to participate in the VMI program.

Let us understand how using VMI, one can differ Inventory Ownership for any organization.  This concept is also known as “Supplier Owned Inventory” but popular term is VMI.  The VMI was first introduced by Kurt Solomon Associates in 1992 (http://www.kurtsalmon.com). VMI perhaps is the most widely known Inventory minimization solution which allows buyers to authorize the supplier to manage the level of inventory at the buyer’s site or in a 3PL site close to the buyer’s location under agreed upon parameters.

VMI can be used for components management as well as Finished Goods.  In a normal practice, in any manufacturing environment, organizations carry inventory in anticipation of orders and the title rests with manufacturing organization. In this conventional setup, the chances of carrying appropriate inventory hinges on demand forecast accuracy.  As current markets are defined as hyper markets and conditions are dynamic, the forecasting accuracy is anywhere between 70% to 85% at the finished goods level and at the component level the forecast accuracy could be much lower if the product has many variations.

Based on the survey data collected during Institute of Business Forecasting conference held in 2004, the forecasting errors at SKU levels by Industry are given below:

Source: “Benchmarking Forecasting Practices”(2006) by Chaman L Jain and Jack Malehorn.

A Practical Model:

Parties Involved:

  1. Buyer;
  2. Suppliers;
  3. 3rd Party Service Provider.


Step 1: The buyer places the blanket purchase order based on annual or quarterly demand for an SKU.

Step 2: Buyer appoints a common 3PL service provider who will handle products from all suppliers.  The cost of warehousing will be negotiated by the Buyer and advices all suppliers accordingly.  The suppliers are responsible for the 3PL cost.

Step 3: Based on the recent demand trends and actual consumption pattern, the buyer and seller collectively work out three inventory levels to be managed in a 3PL Warehouse.  They are, Maximum Inventory Level, Replenishment Level and Minimum Inventory Level.  The same information will be shared with 3PL also.

Step 4: Based on the defined inventory levels, the supplier will supply the material to the warehouse managed by the 3rd Party.  The inventory title at this point of time will remain with the supplier.

Step 5: Based on daily demand in the trading environment or based on daily manufacturing plan, the buyer would pull the inventory into the production line or the warehouse.

Step 6: 3PL will arrange to deliver the pulled material to the buyer.  At this point of time, the inventory ownership is transferred to the buyer from supplier.  The SKU that was pulled that particular day could be sitting in the 3PL warehouse for any amount of time.  However, the ownership will be transferred to the buyer only when the SKU was pulled into buyer’s premises and the payment terms kick-in from that time onwards.

Step 7: Daily use (pulls information) will be shared by the 3PL with all respective suppliers either by EDI or as an email attachment.  At the same time, the suppliers should be in a position to monitor their inventory levels periodically using 3PL web based Warehouse Management System (WMS).

Step 8: Based on the inventory levels, the supplier may use EOQ or any other technique to determine the economic lot to be despatched and will replenish the inventory at the third-party warehouse.

Step 9: Based on the agreed payment terms, the buyer will organize the payment for the SKUs consumed/pulled.

In simple VMI helps organizations to manage uncertain demand with reliable product supply and also allow the buyers to differ the inventory ownership till the actual point of consumption.

Benefits of VMI: According to Fernando del Cid, Roger Gordon Brian Kearns, Paul Lennick, and Andreas Sattleberger, the following companies are wonderful case studies for VMI success.

  • At K-mart: Inventory turns on seasonal items have gone up from 3 to between 10 and 11; and for the non-seasonal items form 12-15 to 17-20. (Retail)
  • ACE Hardware, Fill rates rise 4% to 96% in the past few years.(IT/High Tech)
  • Fred Meyer, Inventory carrying reduced up to 40%. (Retail)
  • Grand Union, Inventory Turns up by 80%. (Grocery Retailer)
  • Oshawa Foods, Inventory turns improving from 3 to 9 times, while achieving customer service levels of 99%.  (FMCG)
  • Panduit, Able to reduce replenishment costs which were squeezing profitability out of the entire supply chain using VMI model. (Electronics)

Source: vmi.doc. (n.d.). Retrieved from http://www.prenhall.com/divisions/bp/app/chopra/word/vmi.doc

There is no doubt that VMI would eliminate inventory carrying to a large extent.  However, in an integrated supply chain world, if the supplier is carrying inventory on behalf of the buyer, the cost of carrying inventory is always passed on to the ultimate customer.  Having said that, the overall inventory management efficiencies could improve because of the supply chain transparency and the collaborative approach adopted by the buyers which allows the suppliers to access the real-time data + forecast in advance in order to manage the supplies to VMI hub.  There is also a hidden danger because of the transparency.  The suppliers could modify the forecast based on past performance without considering the market dynamics, which could lead to material shortage.  As mentioned earlier trust is the foundation for the relationship.  As long as there is trust and mutual cooperation between the buyer and supplier, a healthy supply chain is a certainty!

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Warehouse Sizing

I am writing this article based on personal experience and self development process adopted subsequently.  I was part of a team which attended a RFQ briefing carried out by a large IT Hardware vendor in Singapore.  Surprisingly, all competing vendors were assembled in one room to debrief about the RFQ process and objective of the RFQ.  All of a sudden the official who was explaining the RFQ process and deliverables paused for a moment and asked us the size of the warehouse required for a particular volume of operations.  There was a pin drop silence in the room.  If not all of us, some of us were so called subject matter experts and no one was able to come up a with a rough estimate.  I was ashamed and took up the challenge to figure it out how one can do a quick calculation of warehouse sizing.

Subsequently, I have taken up a teaching job and decided that I will learn the technique and also make sure that all my students are trained in this area.  And that is the reason for writing this small article on calculating warehousing size.

Is it possible to calculate the warehouse size if we are given the number of pallets to be stored?  The simple answer is no.  Warehouse size calculation depends upon various dynamics.  I will list some of them hereunder:

  1. Short side handling vs. Long side handling;
  2. Pallet size;
  3. Material handling equipment used;
  4. Aisle space;
  5. Warehouse dimensions (if known);
  6. Block stacking vs. Racking;
  7. Load bearing capacity per sq. metre;
  8. Product shape and size;
  9. Load on the pallet etc.

The most important element is the type of pallet used in the warehouse.  Let us spend some time understanding different types of pallets used.

  1. The Australian Standard Pallet 1165 x 1165mm
  2. European Pallet: EUR 800 x 1200mm
  3. American Pallet: 1000 x 1200mm.

As type of pallet plays a vital role in determining the size of the warehouse.  Here are some specifications about the pallet.

  • Platform with enough clearance beneath its top surface (or face) to enable the insertion of forks for subsequent lifting purposes.
  • Materials: Wood (most common), paper, plastic, rubber, and metal.
  • Size of pallet is specified by its depth (i.e., length of its stringers or stringer boards) and its width (i.e., length its deck-boards)—pallet height (typically 0.127 m.) is usually not specified; orientation of stringers relative to deck-boards of pallet is specified by always listing its depth first and width last: Depth (stringer length) x Width (deck-board length).

Having understood about the pallet and dimensions, it is time to explain how to build a racking module and using a pallet module to calculate the size of the warehouse.  Before we get down to designing the racking module, we may have to assume few things, such as type of pallet to be used, no. of pallets, material handling equipment to be used etc.

  • Type of Pallet – 1.2 x 1m;
  • No. of Pallets – 10,000 nos.;
  • Material handling equipment to be used: Reach Truck with a lift height of 10m;
  • Aisle space: 2.7m;
  • No. of levels -7 (storage);
  • Short side handling.

With the above information let us build a pallet module.

Now we know how much space is required to store two pallets using a reach truck.  Now let us do the mathematical calculation to find out the warehouse size to store 10,000 pallets.  Let me clarify that the calculation is purely for pallets storage purposes only.  And we need space to undertake activities such as receiving, inspection, despatching, office work etc. and we are not dealing with that in this article.

  1. Pallet dimension – 1.0mm x 1.2 mm
  2. Pallet module width – 5.2m
  3. Pallet module length – 1.2m
  4. Storage levels – 7;
  5. No. of pallets to be stored – 10,000;
  6. Pallets to be stored at the ground level= 10,000/14=714 (rounded off)

Storage Size Calculation:

=Pallets stored at the ground level (714) x Pallet module size (5.2m x 1.2m=6.24m) = 4,455sqm.

This means we need 4,455sqm. space to accommodate 10,000 pallets.  This is a rough estimate and if you are looking for a ready made scientific calculator to calculate the ware house space for given number of pallets or no. of pallets to be stored in a given space, please visit online tool at:


As the aisle width is decided by the material handling equipment used in the warehouse, here is the space requirement for different material handling equipment using the above calculator:

From the above data, one would conclude that CBT is the most inefficient truck with regard to ware house space requirement is concerned.  In reality, it may not be true.  With the significant space saving available with NA and VNA options, certainly everyone should be converting to this type of storage, right? Not necessarily. Warehouses are no more a donjon where goods are stored.  It is a cost centre and every effort is made to make it more efficient in order to keep supply chain costs low.

The counterbalanced lift truck design that’s been used for more than 50 years still remains a very viable option. The flexibility to pick a load out of pallet rack and load it immediately onto a trailer combined with fast travel speeds, a short learning curve, low cost, higher weight capacities, and a great variety of options and attachments will keep the standard forklift and wide aisles around for while. One should not forget that wide aisles also provide more flexibility with diverse load sizes and weights.  However, this truck could become a disadvantageous in locations were space is a constraint.

There are advantages and disadvantages of using narrow aisle trucks.  These trucks will certainly help us in optimizing warehouse size.  But it needs additional investment in other related equipment, slow in travel speed as well put-away and extraction rates.  The learning curve is longer in operating these trucks and inability to load trailers directly. People working on these trucks often complain about neck and eye strain.  Further, safety also very important factor in any warehouse and if storing a heavily loaded pallet at a 30’ height, one should be extra careful in order to avoid accidents and product damages.

Again many factors influence what material handling equipment should be used in a warehouse.  As that is a specialized topic, I would like to end here. Before I conclude, I should thank Mr. Nick Walker my guru who taught me the intricacies of calculating warehouse size.  Thanks Nick!

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