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Sliding scale

Sliding scale

31/07/2006 | Channel: Business

Balancing risk boils down to three overall values:
visibility, balance and good operational systems.
By Mark Croxton

During the last 18 months, retailers have continued to experience high levels of risk in their supply chains. The earthquakes in Japan, floods in Pakistan and associated crop harvest problems across the globe have all contributed towards making supply chains increasingly fragile. When taking into account the price of inventory, labour, transportation, planning, co-ordination and storage, as well as the cost of offsetting risk through safety stock, it is unsurprising that the supply chain can be one of the highest costs in the organisation and a soft target when things get tough, driving supply chain professionals to constantly adjust the balance between cost and customer service, thereby increasing overall risk.

Essentially, these risks boil down to two variables: the hard cost of the supply chain (including building resiliency into it) versus the soft cost of absent products and aggravating customers. Many organisations allocate significant budget to these elements, making supply chains robust and building in redundancy and alternative suppliers and supply routes to ensure high availability levels in stores, but this can also result in over-stocking and inflated supply chain costs.

This balance is always a sliding scale, and some organisations will react to trading pressure by completely stripping down their supply chains, ordering the bare minimum of items from manufacturers to satisfy customer demand. The risk of this approach is that any disruption to supply chains will result in unsatisfied customers and lost profits. This is something that no company can afford today, but equally, it can be prohibitively expensive to ensure an organisation will avoid any risk.

A question of visibility
In any successful supply chain, visibility is absolutely key to avoiding and understanding risk. This includes a number of components:

Primarily, companies need to ensure that they have control over operational costs, in particular, labour and transport costs. One example is US retailer Smart and Final which reduced inventory carrying costs at the warehouse by 18 per cent through concentrating on labour and transport efficiency. As the cost of labour and transport rises with minimum wage increases, fuel prices and vehicle maintenance costs, many companies are looking at labour management and fleet management systems which can track fuel consumption, mileage, wear and tear – and in some cases, using advanced geofencing systems to ensure, for example, that delivery drivers do not go outside of their designated delivery zone, which could be better served by another driver.

Good supplier and deals management is a second such essential, as is good invoice management. Paying the right people at the right time, the right amount and getting the best deal for your money, is a hard act to juggle – especially when balanced with encouraging the right supplier performance. A supplier kept on the minimum of margins, after all, will rarely operate at peak efficiency. Musgrave Group, a major European retailer, is one organisation that is using management software to control trading functions within the Group and for store back-office functions.

A good flow of financial information is also important within the supply chain to maintain visibility on key aspects of trading. Without visibility, organisations cannot hope to maintain control. Midlands Co-operative, the UK’s largest independent co-operative, is using an integrated central data management, order management, store inventory management, automated replenishment and point of sale
and payment solution to gain a full dashboard of control over
this operational intelligence, without completely integrating
financial systems into the supply chain.

Three values

Without going into a complete breakdown of the elements of a successful supply chain, balancing risk – or at least, having the information to understand the risks you are taking within the supply chain boils down to three overall values: visibility, balance and good operational systems. Without these, retailers are ‘driving in the dark’ and exposing themselves to unnecessary risks – and potentially risks they do not know about.

As we’ve said, visibility is absolutely essential for a well-functioning supply chain: if you do not understand the financial details of what is going on in your supply chain and where you are spending money, you cannot hope to optimise it from a financial standpoint. Similarly, this visibility is essential for providing updates to C-level staff and for understanding the ROI of new initiatives.

Balance is the perpetual fight for supply chain staff. Traders need to carry enough stock to meet service levels without the risk of expensive overstocking. Logistics staff need to get the stock to stores in time in the right quantities. You’ll need to balance in-store replenishment with good warehouse management. Getting all of these things right all the time can be extremely costly, and the trick for a successful supply chain professional is to get the goods there on time vs spending too much.

Once you have visibility, you can model the various factors against each other and achieve a balance that you are happy with.

Finally, companies need great operational systems that can be flexed to achieve the chosen level of risk. Modelling a balanced supply chain with the required visibility requires a solid, trustworthy system. There are still a lot of retailers using thousands of Excel spreadsheets, each one with different equations. Whilst many of these equations may be correct, it will not give you the advanced analytics, which you often need; nor will it help you a tremendous amount with modelling different scenarios, especially when things go wrong. It is also helpful to be able to communicate with other departments: having one common view across different item categories and stores can support good communication between staff.

Common understanding
So whilst retailers may choose the degree of acceptable risk within their supply chains, supply chain professionals need to strive for visibility, balance and have solid, trustworthy systems in place in order to succeed. This does not always mean ripping out and replacing existing systems with brand new systems, which in itself introduces risk into the supply chain operation. Rather, any updating should be done in a modular fashion to reduce risk and upgrade rather than risking any errors with wholly new systems.

There may already be a significant amount of knowledge and value in place, and staff should always look to utilise this information where possible. After all, systems modelling can only show a retailer a sliding scale of risks; it is the staff that must choose the acceptable balance of costs vs. possible customer dissatisfaction.

Mark Croxton

Mark Croxton is vice president of customer support for Aldata. His current global responsibilities centre on ensuring that Aldata’s customers in over 50 countries receive world class support across their business operations. He joined Aldata in 2004 as MD of the UK and Ireland business, and established the business with several key strategic wins including Thorntons, Lloydspharmacy, Hendersons, Midlands Co-operative and Waitrose

Aldata is a global leader in supplier to consumer business optimisation. It helps reduce costs, time, and waste, for retailers, distributors, and manufacturers, while improving availability, service, and customer retention. Founded in 1988, Aldata has an unparalleled track record of delivering successful projects for the world’s largest retail and consumer brands, wholesale and distribution organisations, and specialist store chains.

For further information, visit: www.aldata-solution.com