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Warehouse, Green Logistics Co., Kotka, Finland

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Warehouse Management is a routine boring activity for some.  Same old, pick, pack and ship.  However, things are changing we are seeing lot of technology introduced in the Warehouse to make it more productive, efficient and happy place to work.

As we all know technology comes with a cost and also ushers in efficiency levels.  Warehouse Management is always fascinating subject for me; it provides lot of challenges and job satisfaction because of measurable performance.  Incidentally, I am responsible for 4 Distribution Centers managed by able professionals.  The common problem we face is known as miss-shipment (short, excess or wrong product dispatched).  We all know that only technology will help us to avoid such mishaps.  As you know miss-shipment results in disruption to operations, distribution costs go up and we end up with unhappy customers with inventory inconsistencies.

Initially, this problem was addressed by bar coding.  But what is bar coding?  Common, we all know about it.  However, here is the explanation.  “A barcode is an optical machine-readable representation of data, which shows data about the object to which it attaches.”   Beyond bar coding we are in era of RFID (Radio Frequency Identification). “RFID tags, a technology once limited to tracking cattle, are tracking consumer products worldwide. Many manufacturers use the tags to track the location of each product they make from the time it’s made until it’s pulled off the shelf and tossed in a shopping cart.”

We took one step forward and introduced something called ASRS (automatic storage and retrieval system) to eliminate miss-shipments.   An Automated Storage and Retrieval System (AS/RS) is a combination of equipment and controls that handle; store and retrieve materials as needed with precision, accuracy and speed under a defined degree of automation.

I bumped into a interesting video in the areas of warehouse automation, thanks to my colleague Shaun.  Watching these videos and hoping that I could implement a warehouse with such a precision is no more fantasy.  It is only matter of time.

I thought I should reach out to larger audience through my blog.  Automation at its best and making warehousing function highly technical and very attractive, gone are those days when warehouse was known as dark, dusty and rundown place.

Enjoy the video!

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Supply Chain superiority determines organizational competitiveness.  Some believe that supply chain superiority or excellence is achieved with the help of three elements; process, people and technology.  Another group would advocate continuous improvement, benchmarking and KPIs, and innovative thinking would lead to supply chain excellence.  Do you think these factors drive the excellence?  My answer would be, yes and no.  Yes because these are fundamental requirements of any supply chain but beyond these elements something else works behind the scene to improve your supply chain effectiveness.

In order to make all above mentioned factors to work effectively three factors are critical.  The first and foremost is Collaborative Relationships.  The other two factors are Trust and Commitment.  In my opinion supply chain is all about managing relationships, demonstrating trust in relationships and committing to the core objectives. Let me explain how my theory works.  The below given graphic would explain various supply chain relationships:

As you can see from the above graphic supply chain manages internal and external relationships with various agencies.  Supply Chain relationship with Sales and Marketing, Manufacturing, Logistics, and various Vendors will ensure that the right product is made available at the right time and place at the right cost.  Sales team relationships with agents, distributors, retailers and consumers will make organizations grow and become competitive.

People make things happen, technology give us the ability to establish supply chain visibility and the process drives the activities.  However, all these factors could function in a silo apporach and make supply chains fail.  What is required is an integrated approach and integration is possible by establishing trusting relationships.  Effective relationship management can provide a positive contribution to sustainable supply chain superiority and also help to satisfy stakeholder interests.

Many organizations end up with huge inventories and wrong product on shelf and mounting supply chain costs.  The main reason for this catastrophe is lack of trusting relationships among supply chain partners.  In my opinion all above are supply chain partners.  The partners could include internal members as well as external members.  What is evident is that supply chain fails if the partners working for individual benefits without a common goal.  Someone said, we all stumble, that’s why it’s a comfort to go hand in hand.

Mutual trust was defined as “a shared belief that you can depend on each other to achieve a common purpose”.  Trust plays a crucial role in strengthening relationships and organisational changes and it is a critical component in building a collaborative relationship among supply chain partners. Trust creates an increase in openness among partners involved and it is perceived as a result of effective collaborative relationships and leading to higher levels of partner/customer satisfaction.  Trust is not gained in a day or two; trust is built up over a series of interpersonal encounters, in which the parties establish reciprocal obligations.

“An ounce of performance is worth pounds of promises”. In order to turn your promises into performance you need commitment. The third ingredient for the supply chain success recipe is commitment; commitment means to show loyalty, duty or pledge to the core organizational values.  In a partnership commitment plays a vital role along with trust. Someone rightly said, “unless commitment is made, there are only promises and hopes; but no plans.” Unless the supply chain partners are committed to a common goal which could deliver mutual benefits, it would be a challenge to establish a trusting and successful relationship.

According to a recent report from Boston-based AMR Research Inc., “companies that excel in supply-chain operations perform better in almost every financial measure of success. Where supply chain excellence improves demand-forecast accuracy, companies have a 5% higher profit margin, 15% less inventory, up to 17% stronger “perfect order” ratings, and 35% shorter cash-to-cash cycle times than their peers. Companies with higher perfect-order performance have higher earnings per share, a better return on assets, and higher profit margins — roughly 1% higher for every three percentage-point improvement in perfect orders”.  In order to achieve these two key measures (i.e. demand forecast accuracy and perfect order performance), committed collaborative and trusting relationships are crucial.

Hachiko – A Dog’s Story motivated me to write this article. This story is based on a true incident from Japan. This story is about the relationships, trust and commitment shown by a dog and also explains how invincible bonds form instantaneously in the most unlikely situations. We do not realize the value of relationships until reality bites.

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Tom Peter once said, “Do what you do best and outsource the rest”. It is a common practice to outsource logistics and supply chain activities.  One would be surprised to know that some organizations strongly believe in insourcing logistics activities.  The recent study by CAPGEMINI (2010) revealed few interesting facts on insourcing.

  1. On an average of 24% of outsourcing companies indicated that they would be returning to insourcing some of their logistics activities, and 36% of 3PL respondents observe that some of their customers are insourcing certain logistics activities.
  2. “Transportation is most Outsourced”.
  3. The percentages of 3PL users outsourcing individual logistics activities (versus overall outsourcing) tend to be higher in Europe and Asia Pacific than in North America or Latin America.
  4. The gap between expectation and satisfaction with regard to 3PL IT capability is widening (54%).

The outsourcing survey conducted by CILTUK revealed that logistics service providers (3PLs) are seen as:

  • “A necessary evil“
  • “They are only in it to make money these days”
  • “Deliver poorer service for disputed financial advantage”.

Further, the same report revealed that 52% of the respondents indicated that the length of the contract reduced.  Outsourcing community is aggressive and they do not mince words in sending out a strong message to 3PLs, “don’t sell me what YOU want, show me what I NEED”.  In 2009 UK’s largest retailer, Tesco, has decided to take some of its distribution operations in-house. The move follows a company review of supply chain strategy.

What prompts them to Insource?

The CAPGEMINI 2010 outsourcing review listed 12 different reasons for insourcing.  And they include:

  1. Logistics is a core competency at our firm – 19%;
  2. Cost reductions would not be experienced – 15%;
  3. Control over the outsourced function(s) would diminish – 14%;
  4. Logistics too important to consider outsourcing – 13%;
  5. Service level commitments would not be realized – 11%;
  6. We have more logistics expertise than most 3PL providers – 10%
  7. Corporate philosophy excludes the use of outsourced logistics providers – 9%
  8. Too difficult to integrate our IT systems with the 3PL’s systems – 8%
  9. Global capabilities of 3PLs need improvement – 6%
  10. Issues relating to security of shipments – 5%
  11. We previously outsourced logistics, and chose not to continue – 5%
  12. Inability of 3PL providers to form meaningful and trusting relationships – 3%

Now let us review top 5 reasons individually and understand whether they are true or system failure is causing outsourcing to fail.

1.Logistics is a core competency at our firm:  What is core competency? Core competencies are the key skills, characteristics and assets that any organisation brings to the marketplace. These competencies, on an organisational level, are a synergistic blending of the core competencies that people in the organisation individually bring to work every day.

If we go by the above definition, Logistics is the core competency of any 3PL company because managing logistics activities is their core business. Interestingly, one of the main objectives of outsourcing is to focus on core competency.  Modern globalized companies are described as “intellectual holding companies” because they focus so strongly on their core technologies while they purchase other services from companies that excel at delivering them. Thus, their entire operations function at a high level, yet they do not have to maintain high cost infrastructure. They get world-class capabilities without the risks involved in developing them.  With rapid globalization, it would be next to impossible to compete in a global platform without strategic alliances.  In my opinion, this reason is a myth.

2. Cost reductions would not be experienced: This could be true to some extent.  In my opinion shippers equally share the responsibility for this blame.  During the initial phase of data collection, 3PL seek the existing costs, business processes, business volume etc., in order to understand the size of the business and develop a cost sheet.  Often it was reported that the shippers are hesitant to provide this information citing confidentiality as a reason. Outsourcing should be considered as a strategic solution and the service provider should be considered as a strategic partner.  Unless transparency is established, relationships do not flourish and this is one of the fallout.  If the shipper could provide all required information to the 3PL and insist on the 3PL to provide the costing using ABB (activity based budget), this may not happen. If necessary go for an open book method which would establish transparency. Many shippers believe that they have very limited role to play in the outsourcing process.  Outsourcing is a marriage; it may not work well for the organization unless both parties involved work for common objective with mutual interest.  CAPGEMINI 2010 report reveals that outsourcing companies have reported 15% cost savings, 25% reduction in capital deployment, and 11% reduction in inventory.  In my opinion if the outsourcing process is managed well one can avoid this problem.

3. Control over the outsourced function(s) would diminish: In my opinion it is a myth.  It is true that the shipper may not have transactional control but the overall control will not diminish.  Again the responsibility lies with the shipper.  If the shipper is able to develop KPIs for all the outsourced activities and monitor the KPIs regularly, one may not lose control over operations.  In my recently published article, I have identified 32 different KPIs for warehousing function only.  An effective set of interlocking performance indicators provides operational feedback to the enterprise and helps them in directing the 3PL operator effectively.  Instead of describing an operation as appalling, if one can explain that 75% of transactions failed to meet the expectations, it would deliver a better message.  Controls will never be outsourced, what are outsourced is transactional operations.

4. Logistics too important to consider outsourcing: There is no doubt Logistics is important function.  Seamless flow of material information keeps the business moving forward. However, some of the activities within logistics function are mundane in nature.  These activities can be outsourced and allow logistics/supply chain manager to focus on the value addition instead of managing day-to-day routine functions. Hence, it is necessary to develop a strategy on outsourcing and identify non-core activities and also develop a SWOT analysis to understand threats and weaknesses of outsourcing.  Routine functions such as transportation and warehousing are non-core functions in my opinion.  One can outsource them and save costs.  In current economic conditions it would be next to impossible to develop infrastructure globally, it would be advisable to farm partnerships and strategic alliances to save costs and expand globally.

5. Service level commitments would not be realized: It is true to some extent.  Again the shippers shares 50% responsibility for this blame.  As long as the shipper is able to define the measurable service levels and monitor the same periodically and works with the 3PL proactively, this could be avoided.  Operational efficiency should be measured on a daily basis.  Some of the Fortune 500 Companies recruit specialists or appoint lead logistics service providers to monitor their operations. Nicholas and Amrik of Monash University indicated that formulating and quantifying the requirements was an obstacle to outsourcing in Australia.  If you are not sure what to expect out of outsourcing, you have no right to complain about the service levels. Effective operational control will ensure high level of service levels.  CAPGEMINI 2010 review reveals that 29% improvement in average order cycle length, order fill rate improved by 11% and whereas order accuracy improved by 7% through outsourcing.

Other reasons include; organizational logistics expertise.  3PL service providers globally consolidated their positions and are able to provide cutting edge solutions which individual organizations cannot afford.  IT integration is very simple now days.  Without penetrating firewalls one can exchange information through EDI and integration may not be necessary.  3PL capability improvement is an on-going issue; shippers may have work with the 3PLs to get what they want.

However, in my opinion there are two genuine reasons and they are security risks and relationships failure.  I have discussed in length about the supply chain security risks in an outsourced environment earlier.  It is a genuine reason and 3PLs are expected improve their performance on this subject.  As mentioned earlier outsourcing is like a marriage.  As long as it is not a marriage of convenience and both the partners are willing to invest time and effort to make the relationships work, the pact should be successful.  The outsourcing goes through three phases before it firms up as a relationship.  The initial phase is known as courtship where everyone is happy.  The second phase would be hardship where the shipper notices inefficiencies and the 3PL struggles with resources and cost overruns.  The third phase is battleship, in this phase both the parties involved are in a mood to terminate the relationship because of mounting issues.  If both parties proactively work and sort out issues through well-defined escalation process, the outsourcing moves into a relationship mode.

Many organizations get caught up in the hype of the outsourcing craze and forget that it is a complex business strategy and lack of strategy, lack of top level management commitment and not dedicating best and brightest internal resources could lead to outsourcing disasters.  If organizations embark on outsourcing with one dimensional approach of saving costs, it would be a big business risk and will have long lasting implications on the business.  Ideally develop an organizational strategy, create an outsourcing frame work, and seek professional help (if necessary) to handle the process and select the right match (3PL) and this should work as mantra for outsourcing success.

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Significant staff members are deployed in supply chain area and the respective managers are responsible for Occupational safety and health related issues.  According to SAFEWORK Australia there were 131,110 workers compensations claims received during the financial year 2007-08.  Out of which 68% were from male workers and rest from female workers.  According to European Agency for Safety and Health at work, 5,720 people die in the European Union as a consequence of work-related accidents. Besides that, the International Labour Organisation estimates that an additional 159,500 workers in the EU die every year from occupational diseases. Taking both figures into consideration, it is estimated that every three-and-a-half minutes somebody in the EU dies from work-related causes.  The incidents are expected to be high in manufacturing, transportation and storage area.  Based on the compensation claims in Australia, 19% claims were received from manufacturing area and further 8% from transportation and storage area during 2007-08.  If we look at the frequency rate (is the number of cases expressed as a rate per million hours worked by employees) the manufacturing and transportation and storage recorded 12.4.

We are seeing steady improvements in the last five years, manufacturing area recorded 13% and Transportation and Storage industries have reported 22% improvement.  However, lot to be achieved in order to make workplace safe.  Someone said prevention is better than cure.  How appropriate in the present context.

Risk assessment is the first step to make your organization a safe place to work.  Managers should take whatever steps necessary to ensure the safety and health of employees. To prevent accidents, you should establish a health and safety management system that incorporates risk assessment, risk management and monitoring procedures. The risk assessment can be undertaken in five steps.

Step 1: Identify Hazards

Looking for those things at work that have the potential to cause harm, and identifying workers who may be exposed to the hazards.  Particularly in the warehouse area where fork lifts are moving at brisk pace carrying huge loads and also during loading and unloading areas.

Step 2: Evaluate and prioritize the risk

Based on the past incidents establish a list of existing risks, their severity and their probability.  Once this information is established prioritize the risks based on frequency and severity.  The objective of this exercise is to find ways to avoid the risks in future.  The risk need not be due to an accident, it could be due to health hazard also.

Step 3: Develop strategy for prevention

Understand the operational processes to identify areas of improvement and also identify appropriate measure to control and ultimately eliminate the risks.  Smoking is injurious to health, we all know.  However, we find designated space allocated in work place for smoking.  Instead of grouping all smokers in a small place where smoke inhalation would be much more than normal smoking, employees should be encouraged to adopt healthy life style by avoiding smoking.

Step 4: Taking action

Develop action plan for each risk and develop a prevention plan.  It is very much necessary to understand the roles of each player in this area. By specifying who does what and when, we are developing a collaborative approach involving everyone in the plan.  It is not plan that is important but it is the commitment to implement the plan is vital.  One more area that needs attention is education.  Continuously educate all concerned about the importance of safety at work place.  The best example is the safety drill conducted by the airhostesses prior to take-off.

Step 5: Measure and Monitor

“What You Measure Is What You Get”, the safety performance should be reviewed regularly in order to achieve sustainable and competitive advantage through continuous improvements.  This review should critically view “near miss” in order to avoid an accident in future.  Continuous reviews lead towards risk prevention.

What causes accidents and develops into a risk in Supply Chain Area?

The first and foremost factor that could lead to an incident is uneducated/untrained workforce and followed by Equipment, Workplace, Footwear, Material Handling, Transportation, Working at a height, Handling hazardous material, and last but not least is psychosocial factors.  Lack of information, instruction, training, supervision and education could lead to haphazard work flows and which could lead to accidents.

As we all know, the material handling equipment handlers in warehouse race against the time in order to keep their productivity levels high.  This is a welcome sign but not at the risk of safety.  The safety of the equipment handler and other staff working in the warehouse is paramount.  Poor housekeeping and poor visibility inside the warehouse could lead to accidents.  Generally people tend to ignore cleanliness in warehouses and that is not a good practice in making workplace a safe.  One should ensure that warehouse is illuminated well preferably by natural light if not by electricity. Workers and the warehouse visitors need suitable footwear. The footwear should take into account the type of job, floor surface, typical floor conditions and the slip-resistant properties of the soles. Movement of vehicles in the busy yard is always dangerous place unless managed well.  People being struck or run over by moving vehicles, falling from vehicles, being struck by objects falling from vehicles or vehicles overturning are some of the common incidents noticed in the yard.  In some of the modern warehouses people work at great heights and there is the risk of objects being dropped on people working below or people could fall from the height and injure themselves.  Some of the material handled in the warehouse could be dangerous in nature, it could be fatal when inhaled.

The last and the very important factor that could cause accidents in work place is psychosocial factor (“Psychosocial refers to one’s psychological development in and interaction with a social environment”), in simple stress.  The work related stress could have long lasting impact on the health and safety of the employee.  The supervisor should play a vital role by interacting with his/her staff on a regular basis in an informal atmosphere to address any issues that are could lead to work related stress.  Sometimes demanding work conditions also could lead to a risk.

Risk Prevention Guidelines:

  • Establish clarity with regard to procedures and responsibilities for health and safety and everyone know their own and others’ responsibilities?
  • If the manager is not competent on these issues, should not hesitate to seek outside help.  Avoiding the issue will not solve the problem, it would magnify the impact.
  • Identify and prioritize the risks and develop a strategy and plan to minimize and eventually eliminate.
  • Like people equipment will also fall sick and could cause the accidents.  Make sure that the equipment is regularly serviced.  This would also help to increase the life span of the equipment.
  • Organize periodical health check-ups, this is a preventive measure.
  • Continuous training is the key element.  The training need not be a class room based.  An informal discussions, charts, posters and incentives could help.
  • Supervisors should interact regularly with their staff and educate the ever changing regulations, safety procedures, and also discuss organizational changes in an informal way.
  • Develop the procedure to capture an incident.  As mentioned earlier, past records act as guide to avoid future incidents.
  • Incidents should be investigated promptly and outcomes should be recorded.
  • Celebrate the success and review the failure.
  • Workplace inspections play a big role in avoiding incidents.
  • Periodically review the Health and Safety policies and procedures and update the same in order to handle any eventuality.

Safety doesn’t happen by accident, at the end of the day, the responsibility to keep the work place safe rests with employer and employee both.  A collaborative approach would always produce the best possible results.  It is human tendency to hide the incident due to fear of defeat.  Unless we understand the incident and what caused the incident, we cannot avoid it in future.  “Prepare and prevent, don’t repair and repent”.  An unknown author said, “Your safety gears are between your ears”, it is true.  A vigilant and well trained workforce ensures safe work place and finally safety isn’t   just a slogan, the reality is that it is the way of life.

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on behalf of a third party

Image by Lєaтнєянєaят via Flickr

At the outset I would like to clarify that this article is not going to deal with outsourcing risks.  The focus is on Supply Chain risks in an outsourced environment.  Risk in managing supply chains is high due to several reasons such as Terrorism, Shrinkage, Quality, Natural disasters, IP Thefts, and Vandalism etc.  The risk magnifies if the some or total operations are outsourced. Twenty five percent CAPGEMINI 2010 outsourcing survey participants have indicated that loss of control as one of the reasons for not outsourcing.

In order to outsource and to mitigate the supply chain risks collaboration becomes very critical in an outsourced environment.  According to CAPGEMINI 2007 report practitioners reveal a gap between the desire to work collaboratively with 3PLs and how to go about it. Collaboration means equal participation whereas 35% of the CAPGEMINI 2005 survey participants have indicated that the time and effort spent on managing Logistics functions not reduced.  This could mean practitioners believe that outsourcing means total responsibility transfer to 3PLs and no participation or minimal participation from their side.  Outsourcing means handing over the control over operations to a third party but the ownership rests with the outsourcing companies and they cannot disown the responsibility. One should clearly understand that the outsourcing is confined to activity but not the function.  The functional responsibility rests with the outsourcing company and they may have to execute the activity in collaboration with the service provider.

Time and again shippers (outsourcing companies) repeatedly pointed out that 3PL (third party logistics) companies do not have the project management capabilities and they fail during the transition due to lack of industry specific knowledge and also due to lack of process integration capability across supply chain. These teething issues if not addressed properly could lead to relationship failures.  Hence, the problem is not supply chain risks but the lack of collaboration in tackling the issues.  In order to highlight the seriousness of the issue, I reviewed the last five CAPGEMINI outsourcing surveys and the trend indicates consistency.

In my opinion, top three reasons that could lead to supply chain risks in an outsourced environment would be lack of project management skills, unsatisfactory transition and lack of knowledge based skills.  Surprisingly the feedback over the last five years was consistent and we see 20% improvement in case of knowledge based skills.  This could be due to more skilled force joining 3PL companies and we have seen recently 3PL companies recruiting practitioners as subject matter experts and to manage the projects.  What is disturbing is that on an average 15% survey respondents have indicated that 3PLs are unable to form meaningful and trusting relationships.  In my opinion this is a cause of concern.  The recent survey conducted by CAPGEMINI (2009) indicated that only 25% of the shippers felt that the outsourcing is “extremely successful” and further 64% participants felt that outsourcing is “somewhat successful”.   If the outsourcing community is not totally happy with the outsourcing outcomes or performance, managing risks through collaboration could become a serious issue.

How secure are the shippers about the security provided by 3PL companies?

The 2008 CAPGEMINI survey did indicate that majority of the respondents are comfortable with the security arrangements.  Around 22% have indicated somewhat secure and 2% indicated that not secure.  Supply Chain security is paramount and even if 2% were unhappy, it needs immediate attention.  These risks could lead to major customer satisfaction issues.  That could be the reason why 25% non-outsourcing respondents (2009 survey) indicated that they do not outsource due to loss of control over operations.  Some of the serious security breaches indicated in the 2008 survey included the following:

  1. In one case, 2GB branded USB sticks were replaced with 1GB but appeared as 2GB to users.
  2. Another case involved falsified Italian airplane parts that were later rumoured to have contributed to accidents.

Supply Chain security is critical to all industries but it is vital for some specific industries where any security breach could be life and death question and the example could be food contamination.  58% Food and beverages industry respondents in 2008 survey indicated that spoilage of food products creating a health risk as the biggest risk. The above mentioned survey did indicate that 3% Food and Beverage industry respondents were not secure about the arrangement, which is really a cause of concern.  Tampering was reported as the second biggest threat (45%) for life sciences and pharmaceutical companies.  This is also a life threatening risk.

Type of Supply Chain Risks:

One can divide the risks into two categories, the first one dealing with 3PL operational efficiency related risks and the second one dealing with generic supply chain risks. The trends reveal some interesting facts.

The top three risks, theft of material, material tampering and theft intellectual capital were predominant in Asia compared to global trends.  The risk of terrorist attacks and the disruptions due to natural disasters are the two top risks in North America.  Whereas Latin America faces serious supply chain risks from, smuggling of other material with the shipments, Vandalism and Spoilage of food products leading to health risks.  Europe is a mixed bag, it also faces all risks but the thefts and thefts of Intellectual capital are over and above the average global percentage.

The first three supply chain risks identified as 3PL operational efficiency related risks are quite common even in insourced operations.  As warehousing and distribution function is a non-core activity for many organizations, organizations should work in collaboration with the service provider to minimize the risks and operational disruptions.

Enhance Supply Chain Security:

Risks are inevitable and outsourcing is unavoidable (encouraged due to various benefits of outsourcing).  Hence, it is necessary to enhance the supply chain security with the help of service providers.  CAPGEMINI 2008 survey identified 12 enhancements and the participants have identified gaps in enhancing the security.  The below given chart is developed based on the data published in the above mentioned survey:

If we review top three gaps, any one would understand that it is not a challenging task to improve security.  What is lacking is proactive approach from both the shipper and the service provider.  Lack of proactive reporting with regard to thefts or any other risks is the biggest complaint by the outsourcing community and this continues to haunt the 3PL industry even today.  In most of the cases, the customer (shipper) gets to know first about the incident.  This is really frustrating for the practitioners.

RFID tags are virtually impossible to copy, making them suitable to security applications. According to “The pros and cons of RFID in supply chain management” article the cost of goods lost within supply chains among the European companies was 50 Million euros a day and the same report indicated that up to US$30 billion worth of goods are being lost each year within supply chain.  However, recent development are encouraging, one of the biggest retailer (Wal-Mart) introduced mandates for RFID adoption.

Providing alternative routing for shipments is a possibility.  However, in the peak seasons such as Christmas and Chinese New Year time it would be next to impossible for rerouting keeping in view of very limited options.

Collaboration:

Collaboration is all about working together.  The CAPGEMINI 2008 survey published how the shipper and service provider are collaborating by industry.  What is heartening to note is that 48% shippers are willing to collaborate with the service provider to enhance the supply chain security to a limited extent.  Retail dominates this segment (57%), followed by Life Science (51%) and Chemical (50%).  Thefts are very high in retail whether the operations are outsourced or insourced and life science and chemical industries face more risks if they fail to collaborate with the service providers to achieve selected security improvements.  The 2008 CAPGEMINI report indicates that the higher the company’s revenue, the more likely they are collaborating beef up security measures.

Supply chain efficiency is the back bone of organizational excellence.  According to one estimate supply chain disruptions could result in 40 percent decline in share price.  Prof. Vinod Singhal of DuPree College of Management, Georgia Institute of Technology indicated that material shortages could contribute 7.5% reduction in share value on a given day.

Today’s business success to great extent depends on logistics and supply chain performance and the role of Supply chain has never been as critical as it is today. Supply Chain speed and flexibility have become two key levers for competitive differentiation and increased profitability. In order to compete effectively in the market place Supply Chain managers drive cost improvements and that could lead to some supply chain risks.

“Many of the key risk factors have developed from a pressure to enhance productivity, eliminate waste, remove supply chain duplication, and drive for cost improvement,” says William L. Michels, CEO of consulting firm ADR North America, Ann Arbor, Mich.

Today’s supply chain professionals recognize the risk as part and parcel of supply chain management and at the same time outsourcing is also inevitable.  Hence, the trick lies in identifying the risk and mitigating the same with the help of supply chain partner.  Proactive approach and collaboration minimizes the risk element in Supply Chain.

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Some time ago, we have reviewed the Warehouse KPIs and it time now to review the best-of-breed performance in order to bench mark the warehouse performance.  The data source is from DC Measure 2010, by Karl B. Manrodt, PhD and Kate L. Vitasek, published by WERC 2010.

The respondents were drawn from large corporations, medium size organizations and small industries.  The classification was based on company’s turnover.  The first group (31.9%) turnover is over 1 Billion US $, the second group (30%) consists of companies with turnover between 100 Million and 1 Billion US $ and the third group (38.15%) consists of companies below 100 Million US $.  In my opinion the grouping is balanced.

Some of the vital Key Measures:

If we review the top 10 metrics used by the companies (listed below) one can clearly understand how the focus has shifted to warehouse activities in order to improve overall supply chain efficiency.  All the below mentioned top 10 supply chain measures used by the survey participants are pointing towards operational efficiency.  It is a foregone conclusion that if we improve the efficiency/ productivity / cycle time, the overall operations cost would become efficient.

I have been monitoring the key measures for the last five years and I will highlight the improvement or decline in the performance level.  For the purpose of this article, I would be focussing on best-in-class performance, median performance, and the worst performance.  The logic is to understand the best performance and facilitate benchmarking.  The median performance will act as guidance for companies who cannot perform at the best-in-class rate and would continue to focus on improvement using median performance as a guide.  The worst performance is again used as an indicator for recognizing unacceptable performance.

I have divided the measures into five categories based on the nature and characteristics of the activity, the first one focuses on operations management, the second one deals with Inventory Management, the third one concentrates on Order Management, the forth one aims at Cost Management efficiencies, and the fifth one highlights Resources Management efficiency.

Operations Management:

I have included receiving, put-away, pick-n-pack and shipping activities.  In my opinion, Damage free receipts, Order pick accuracy, Cases and Pallets picking rate, complete order shipment and Damage free shipments indicate the operations management efficiency.

Please click the above graphic to magnify the image.

When we compare with 2009 best-in-class performance; dock-to-stock cycle time (23.33%) and cases picked and shipped per hour (12.11%) registered improvement in performance.  We have seen negligible efficiency improvement in handling material without damages.  We have seen decreased productivity levels in orders and pallets picked in an hour.

Inventory Management:

Inventory efficiency is the key indicator for Supply Chain efficiency, Inventory Shrinkage, Inventory in days of supply and Raw material and finished goods inventory on hand in days are considered as critical measures.  It is necessary to understand the difference between Inventory in days of supply and raw material and finished goods inventory on hand in days. Inventory in days of supply is calculated as shown below:

= Current (at the end of year/period) inventory value/ Total value of cost of goods sold.

Inventory in days of supply (13.64%) and Raw material in days (12.5%) shown improvement in 2010 compared 2009 results and this could be considered as tight inventory management as focus is to reduce inventory in the supply pipe.  We have seen 12.86% additional finished a goods carrying which is not in line with above two inventory performance indicators, this could also indicate lacklustre demand patterns noticed in the retail industry which could have caused additional inventory carrying.  Considerable (60%) improvement was noticed in case of product damages in the median group.

Order and Cost Management:

Order fill rate, Lost Sales, Distribution cost to sales are the key performance indicators in this segment.

Lost sales % and back order % has shown tremendous improvement in the best-in-class group.  This is an indication of supply efficiency.  As we all know both these performance indicators are interlinked.  The distribution cost has gone up by 20%, which could be due to low sales volume in $ and fixed warehouse costs.  Whereas the distribution cost per unit shipped has improved by up 94%, this is an indication of increase in number of units shipped but the sales value decreased; this could mean increased product discounts.  There was no increase in distribution cost in median group.  However, in-line with best-in-class results, we could notice improvement in cost of units shipped indicating increase in volume of units shipped.

Resources Management:

This is my favorite segment.  I strongly believe that time related positioning of resources is logistics management and logistics is part of supply chain.  Any improvement in this segment, I believe will have a direct impact on supply chain efficiency.  Warehouse Capacity utilization is an indication of business efficiency.  Equipment utilization and Human Resources turnover indicates how well warehouse operations are managed.  Last but not least workforce productivity is the proof of happy workforce.  In my opinion, happy workforce will contribute high productivity.  In order to achieve this both workers and management are equally responsible.  I am sure by this time you would have understood why this segment is my favourite.

Honey Comb %: Actual cube utilization/Total warehouse cube positions available.

All in all we have seen improvement in all performance measures.  There is a slight (3.16%) dip in the workforce productivity.  However, HR turnover has shown some great improvement. These two measures analysed together reflect the impact of financial recession.  We have seen salary cuts and uncertain job market.  I believe these two factors could have influenced these performance indicators.  However, we could see improvement in case of productivity levels in median group to an extent of 2.35%.  Any improvement in productivity irrespective of the quantum is always welcome and it is a good sign.

I would like to emphasize once again that warehouse operation is the key to the success of any supply chain.  Unless product moves seamlessly within supply chain, no supply chain would be successful.  This is a great job by the authors; I look forward to reviewing 2011 performance.

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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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