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Accelerating out of recession

Accelerating out of recession

03/10/2009 | Channel: Business

The five steps to create supply chain innovation in a down economy as revealed by Andrew Kirkwood of RedPrairie

Whether you label it a recession or an economic downturn, the simple fact is the world’s economies are in the worst slump in years.

According to the European Union, industrial production will shrink by 2.3 per cent in Germany, 1.9 per cent in Belgium and 1.8 per cent in France. Car manufacturer, General Motors announced it will be laying off 8000 more workers. The banking and insurance group ING said it would cut 7000 jobs; the electronics company Philips, 6000; and IBM said it would shed 2800 employees.

Research by Transport & Logistics Netherlands indicated that about 47 per cent of all large logistics service providers carry too many staff and resources. The New York Times reported more than 45,000 trucks, about three per cent of the US tractor fleet, have disappeared from America’s highways since early last year. In retail, RIS News estimated there were approximately 6000 stores closings in 2008 compared to 4600 in 2007.

We are in tough economic times that will sooner or later impact your business. The question is, what can you do about it?

The Green Visor vs the Thinking Cap
In tough economic times, the reaction by many companies is to cut cost, often without consideration of its long-term impact on their business.

While there is nothing wrong with thoughtfully cutting costs, the companies who emerge from economic downturns quickest and gain the most market share accelerating out are those who use innovation during the downturn.

For example, when times were tough in the 1970s and small-town America was hurting, Wal*Mart was the first big-box retailer to put satellite dishes on the roofs of its rural stores so they could get daily sales results and restock shelves faster and cheaper than other retailers.

After the Dot.com bubble burst and internet companies were struggling, Apple figured out how to deliver music easily, legally and cheaply over the internet in the popular MP3 format. iPods and iTunes now dominate their respective markets.

While these may not address traditional supply chain issues, they point out the advantages of using innovative means to get products people want to buy to customers faster and cheaper. In short, the focus is on adding value to the customer more than cutting costs.

Supply chain innovators are those who are the first to pull various practices together to offer new value to their customers while improving profits. These need not be revolutionary approaches or ‘first-ever’ techniques. Rather, companies that can adopt the five steps discussed below will create greater value for their customers and themselves, gaining competitive advantage in the marketplace, especially as the economy improves.

1. Know your customers intimately
Most companies will tell you they know their customers. But do they know what their customers’ problems and challenges are, the detailed cost to serve each customer, or what mix and quantity of products they are buying today? To answer these questions takes a mixture of human interaction and technology.

Many suppliers to the big-box retailers, for example, have special account teams dedicated to knowing the customer’s objectives, needs and promotional plans. But what about the rest of their customers? How do you know what is selling today in each store? How does this apply to companies that don’t sell to retailers?

The answer to all these questions is technology-assisted collaboration. It starts with demand signals – knowing what quantities and mix of products are selling in each store or region for you, your customer, or your customer’s customer. This requires linking point of sale and in-store inventory information to demand replenishment networks.
2. Cut the Fat, Not the Lean
Companies gain weight as they mature, just like humans. Occasionally shedding a few pounds is a good idea. Economic downturns are as good an excuse for this as an upcoming school reunion.

But you have to make sure you are cutting out the fat, not the lean. Cost reduction programmes that mandate cost cutting percentages across all departments only reward those who ran too fat in the first place. More importantly, they are not geared to adding value to the customer.

The right way to cut the fat is to start with customer demand signals. Follow the demand signal up through the demand chain to manufacturing and suppliers, then down through distribution to the customer or the store shelf. Examine each point along this journey to see what adds value and what doesn’t. Cut everything that does not add value. That is the principle of lean supply chains.

But don’t stop there – this only streamlines existing flows. To innovate requires improving processes by leveraging best practices and technology to create better flows of product, people and information. Look at order management, manufacturing and procurement, distribution and transportation. There are significant new developments in technology supporting these areas. For example, using a single system to track raw materials and purchased components, sequence them into and through production, and then tracking the combined output through distribution improves manufacturing and distribution efficiency, and has huge traceability benefits in case of recall.

Other examples include: distributed order management systems that source order fulfilment from the most economical distribution node or drop-ship supplier; task interleaving and wave picking functions that reduce the amount of ‘empty-travel’; or dynamic slotting applications that reduce travel distances and picking times.

If you can’t afford the up-front costs, there are many pay-as-you-go models such as hosting and SaaS to get around that problem. More importantly, if you wait until the economy is booming again to implement these technologies, you will lose market share to competitors who already have them.

3. It’s about Productivity, Not Costs

A favourite tactic for CEOs faced with sagging profit lines is to lop off a few heads. After years of downsizing, right sizing and lean, most companies are already running full out. Cutting heads may cut costs, but it also cuts customer service while raising overtime expense.

Go from survival mode to competitive advantage by empowering your employees through a performance-focused culture. This means training your employees (better called associates) the most safe and efficient way to do their jobs and giving them the tools to monitor their own performance. Also give supervisors real-time mobile tools to monitor associate results so they coach associates who are struggling to meet goals. Productivity will go up ten to 35 per cent, creating much more value than cutting headcount.

A final productivity kicker once everyone is meeting goals is to add incentives. However, incentives won’t be effective unless you have the underlying fair and accurate labour standards in place and the means to monitor detailed individual or team performance. The incremental improvement is typically five to15 per cent.

4. Beam me up, Scotty
Until we get our Star Trek transporters in place, transportation costs are going to be a major portion of distribution expense. With supply chains lengthening and fuel costs on a roller coaster ride, transportation costs and risks are areas you may want to address.

While network design is a hot topic for long-term improvement in transportation costs and service improvements through areas such as near-shoring and localised production and distribution, there are many short-terms gains to be had.

It’s amazing how many large and medium-sized companies have still not implemented modern transportation management systems, especially when there are so many good pay-as-you-go service options available. These systems can routinely deliver ten to 25 per cent savings on transportation spend by consolidating shipments, rate shopping and intelligent mode selection, carrier management, and automated freight payment.

They can also take savings a step further by eliminating empty miles through arranging back-hauls and continuous moves, automating yard movements and appointment scheduling, and providing portals for carrier and customer communication.

If you have your own or a dedicated fleet for local pick-up and delivery, a fleet management system is a must to improve driver and equip-ment utilisation while further reducing costs.

5. Driving with the Rear-View Mirror
Try driving home tonight by only looking in the rear-view mirror. Not a very good idea, right? But that’s exactly what many companies are doing when they make business decisions based on reports that are old and incomplete. To make good decisions, management needs real-time access to accurate, meaningful information – a single version of the truth.

That was supposed to be the promise of ERP. But the batch nature of ERP and its lack of supply chain detail have shown the reality to be less than optimal. Business intelligence tools are required that link, sort and analyse data from all the supply chain systems and trading partners to present meaningful, personalised information to executives in real-time.

The good news is these business intelligence systems are available today. They give supply chain management the tools they need to respond with agility to the ever-increasing variability of demand and take advantage of new market opportunities before the competition.
There is a line from an old movie called Grand Prix about international open-wheel road racing. The lead character, in explaining why he is so successful, says when there is an accident on the track, he tromps on the accelerator because he knows everyone else will be letting up on theirs.

That’s a good analogy to what happens in tough economic times. Most companies let up on the gas by focusing on cutting costs. The winners are the ones who tromp down by taking advantage of the slight lull in the action to implement innovative new processes and technology geared toward creating customer value. They are the ones best in position when the economic race resumes to accelerate out of the recession, gaining customers and market share.

RedPrairie delivers productivity solutions to help companies around the world in three categories – inventory, transportation and workforce. RedPrairie provides these solutions to manufacturers, distributors and retailers looking to reduce cost, increase sales and create competitive advantage.

With over 20 global offices providing services to over 40,000 sites in 50 countries, companies trust RedPrairie inventory, workforce and transportation solutions to deliver an immediate increase in productivity – with the flexibility to adapt as business needs change.

At RedPrairie, we understand today’s operational demands and we’re committed to delivering solutions that work. We’re committed to delivering solutions for the real world.

Andrew Kirkwood

Andrew Kirkwood is senior vice president and executive director for sales across EMEA and his responsibilities include marketing, new business development and account management.

Andrew has worked in the logistics and IT fields for 17 years. He has experience and knowledge in a range of retail and supply chain disciplines including warehouse and labour management as well as customer service improvement.