The role of supply chain management

MIM SPEAKS
By NICK WREDEN AND MARCUS OSBORNE

IT is probably safe to assume that the supply chain does not figure strongly at most Malaysian retail firms. After all, in the last month how many times have you heard the classic line (normally delivered with an uninterested shrug of the shoulders) “No stock lah!”?

But there’s more to supply chain management than ensuring sales staff have something to do. SCM is shorthand for the interconnected coordination of the flow of materials, information and finances (credit terms, payment schedules, etc.) as they move in a process from supplier to manufacturer to wholesaler to retailer to customer.

Without effective SCM, companies cannot deliver on the promises made to customers.

Just as importantly, ineffective SCM raises costs across the board. According to the consulting firm A T Kearney, supply chain inefficiencies can eat up to 25% of a firm’s operating costs.



SUCCESS STORY: Zara has successfully adopted the lean manufacturing system which responds to actual demand, rather than try to predict it. --STARpic by SIA HONG KIAU

Poor SCM is the cause of many branding mistakes. Offerings are advertised without adequate inventory, leading to that all too familiar refrain “No stock lah, can come back next week?” which results in unhappy or, more likely, lost customers.

Excess inventory leads to obsolescence or sales at a loss. Late deliveries disrupt customer schedules. This in turn reduces profitability, diluting the brand.

Despite the poor performance of global brands such as Sony, GM, Ford and others that use advertising to build their brands, it is really sad to hear advertising agencies and brand consultants still talking about branding in terms of logos, slogans, positioning, advertising campaigns, static websites and even new business cards while ignoring the role of operations and supply chain management (SCM).

Such supply chain failings are common, but not easily fixed due to enormous complexity – which is often why Malaysian firms ignore it. However, the problem of sales at a loss will not go away.

The supply chain is often visualised as serial linkages, like an assembly line, but actually it is a choreographed network of interconnected activities, each dealing with uncertainty, conflicting objectives and resource constraints.

Steve David, CIO of Procter & Gamble, lays out the vision of the supply chain as a branding tool: “To realise the vision of a fully integrated and efficient supply chain, we need to have data visibility across all of the supply chain.

So, when a consumer buys a roll of paper towels, the forest products company knows immediately they need to cut another tree to send to the pulp maker who supplies Procter & Gamble so that we can make another roll of towels to send to the retailer.”

Achieving this vision requires progress in three interrelated areas. The first, of course, is greater use of the Internet to encourage collaboration and automate transactions within the supply chain.

Remember that the phenomenal branding ability of the Internet does not rest on advertising but rather on its capacity to make supply chain activities transparent.

Second, data integration standards are required. Sometimes, a powerful industry giant like Wal-Mart can enforce such standards; other industries may see protocols like XML as a solution.

Finally, organisational imperatives have to evolve. Companies with price driven strategies will not work.

Other areas to address include:

“Lean” or agile manufacturing: Most manufacturing today represents a holdover from the mass economy. By contrast, lean manufacturing seeks a system so responsive that production can respond to actual demand, rather than try to predict it.

Lean manufacturing enables short, profitable production runs with quick changeovers, or machine conversions to manufacture different products.

Lean manufacturing requires redesigning manufacturing processes, increased supplier involvement and improved resource planning. This is a model adopted by Zara, the fastest growing fashion brand.

Zara has grown at 20% per annum since 1990 and their double-digit net profit margins are the envy of the industry.

Logistics: Late deliveries are a prime source of customer unhappiness. Yet, according to an Economist survey of 70 global companies, only 22% of the companies were consistently able to deliver on time.

Companies must incorporate transportation management systems for routing and scheduling, or rely on advanced Fedex and other carrier capabilities to improve delivery experiences.

Forecasting: Accurate demand forecasting is one of the biggest supply chain challenges. Poor forecasts lead to lost sales or profits through excessive inventories. New demand planning systems can help.

These systems combine sales history, promotional plans and other information with sophisticated algorithms to predict demand for each product, reducing the possibility of over- or underproduction.

The best forecasts are achieved with close supplier and customer collaboration.

The payoffs from these initiatives can be substantial, especially since it is estimated that supply chain costs form 50% to 75% of a product’s final price.

According to the consultancy FinListics Solutions, reducing SCM costs at a typical US$5bil company would increase annual profits by US$20mil.

Additionally, supply chain improvements also contribute to accountability, still being ignored in most branding discussions.

Measurement can encompass three areas: performance, including order fill rates and return rates; cost savings, including inventory turns; and capital efficiency, including percentage of work-in-progress inventory to total inventory.

In the mass economy, marketing departments could build brands through “positioning,” advertising and other tactics.

In today’s New Economy, it requires an organisational effort to build a brand based on relationships. In the emerging economy, branding will require the coordinated efforts of the whole organisation.

Nick Wreden and Marcus Osborne are joint managing directors of Fusion Brand, a brand consultancy headquartered in Kuala Lumpur. Nick's latest book, ProfitBrand: Building the Profitability, Accountability & Sustainability of Brands, will be available mid-August 2005. For more information, please contact +6 03 7954 2075. Alternatively, e-mail marcus@fusionbrand.com or nick@fusionbrand.com. Or visit www.fusionbrand.com

Source: The Star Malaysia