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Creating Supply Chain Value W/ Cycle Time & Inventory Yield

Thomas Craig
Expert Author
Published: 2006-09-06

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A supply chain is not a series of links forged together for a common purpose. That is a nice image. However it minimizes the reality of the chain and how each link in that chain must design its own logistics process to function within the chain.

As a result, there are supply chains within each supply chain. With supply chains, the emphasis is on logistics because that is the vital driver of the supply chain.

The success of the chain depends on many things. How well and how clearly the key player in the chain, the large retailer/mass merchandiser or whoever, has defined what he is doing and why he is doing it that way. For suppliers located within the chain, this is important. There is no one standard universal chain. What you are dealing with are multiple, different supply chains and logistics processes and supply chains for each customer. That means developing agile, tailored logistics solutions to meet the requirements of each customer.

Supply chains work on a pull approach. This applies whether the product is made to stock or made to order. Each chain is really a series of buyers and sellers of products and services. That means that each link participant has his own objectives, and sometimes conflicting and objectives, which can work against supply chain effectiveness. The diversity of participants in the chain can create a complex and long process. Companies buy and sell and participate in the supply chain for their own reasons. This is an important and sometimes overlooked fundamental of developing a working logistics process, both for the entire chain and for each link in the chain. There must be collaboration between and among various buyers and sellers. Think of the supply chain as a relay race with good speed by each runner and a great handoff and exchange of the baton between runners.

The initial purpose of SCM was to reduce inefficiency in the supply chain. That inefficiency was defined with time and inventory. But that purpose was put on hold in the drive for cost reductions, often focusing on freight. Supply chain management is now transforming into its original purpose. Two key drivers for change are increased velocity for cycle time and inventory. These two are interconnected.

Cycle Time Velocity. Time is not on any financial statement; but its effect is. Inventory is not on the monthly P&L; it is on the balance sheet. The point being that gaining needed commitment to reduce cycle time may be difficult because it is not readily identified and measured. It also contributes to a customer service paradox. Accounting systems have their origins going back to the Ford Model A; that can add to the challenge in a globally competitive business world.

There are numerous financial and non-financial cycle time metrics, for example-on-time customer order delivery, manufacture to order complete, cash conversion cycle and days sales outstanding. A good one should be a measure of the length of time for a process, especially one that crosses the organization. The cycle time metric should be important to the company. It should recognize pain points or should add value and competitive advantage for the company.

A key process that crosses the organization is days in inventory that measures the number of days that inventory is held. Days-in- inventory is an important part of the cash conversion cycle. Reducing inventory levels and days of inventory improves profits, improves shareholder value and frees up needed capital. These please CEO, CFOs and shareholders.

This measure is often calculated as Inventory/(Cost of Goods Sold/365 Days). This method of calculation can be misleading and understate the total inventory in the supply chain. It excludes inventory that is on order and is being manufactured at suppliers and inventory that is in-transit. This is an omission that results in an understatement of the real days of inventory and the cash conversion cycle.

Retailers realize how critical the time from placement of purchase orders on suppliers until delivery is on inventories. With Section 404 of Sarbanes Oxley, adding this inbound portion to the calculation is valid for internal controls and risk assessment. Regardless of the technical issue of when title transfers, there is the company commitment and need for the material being ordered and shipped. Including the purchased order at supplier time and the in-transit time gives a better picture and understanding of what drives inventory levels, days and turns is useful for product lifecycle management (PLM).

This cycle time is total inventory days in the supply chain; and it is consistent with the length and definition of a supply chain. The supply chain cycle time runs from the purchase order placed on suppliers through to final placement on the store shelf or floor or to the customer's warehouse. Now we can measure the real, total time for inventory and by including the inbound side where the clock actually starts to tick on inventory.

Studies have shown that manufacturers and wholesalers have over 60 days of inventory and that retailers have over 90 days of inventory capital tied up. These times do not include the entire inbound inventory in the supply chain. Real supply chain inventory is likely 25% higher. This is a very significant amount of capital tied up in inventory.

Inventory Velocity and Yield Management. Inventory is directly affected by time. Increased time adds to uncertainty and requires incredible demand management. For retailers, this is also shown with yield management

Yield management is often associated with the airline and hotel industries where reservation-based companies attempt to maximize revenue from fixed supply or capacity, seats on a flight or rooms in a hotel. The analysis can involve operations research tools, such as linear programming and simulations, to determine a pricing model at the micro level. It recognizes that price or revenue creating ability of the item in supply decreases with time.

Yield management is applicable in supply chain management when inventory is viewed as the supply whose yield is to be maximized. Inventory is key to success for retailers, manufacturers, wholesalers and distributors. Having the right inventory is also difficult and challenging. Insufficient inventory means lost sales opportunities. Too much inventory means markdowns-and reduced profits--to sell it. Firms working on thin margins especially feel such pain.

Ocean carriers practice a form of yield management balancing the timing and value from the service contract signing period through peak season when space may be at a premium regardless of pricing and into slack season where price reductions are given to freight forwarders to fill ships.

Many items, as retailers know, enjoy a short shelf life relative to demand to the price customers are willing to pay. Sales promotions, discounts and markdowns are almost common practices to draw customers. Firms that are in dynamic, volatile businesses, such as fashion and related, know the impact of short product life cycles and pricing decisions on the bottom line.

The operations research approach determines the "optimal" markdown(s). But this is somewhat of an after-the-fact approach. It does not address the underlying problem of demand planning and uncertainty and how to mitigate it. The length of the inbound supply chains has increased significantly with global sourcing. Longer chains have also meant longer times to produce and deliver products from suppliers.

This yield management driver realizes inventory velocity with its focus on supplying product and not on placing it at customers or in stores. It puts the focus where it belongs, at the beginning of the supply chain where product originates. Firms can better turn inventory from purchase orders into cash. Inventory that is in a long transit, inventory that sits in warehouses and inventory that sits on store shelves and floors does not increase in value with age. Inventory goes stale and loses value. It loses the sales window of opportunity. The only solution then left is price reduction.

Traditional procurement approaches focus on product price as does traditional logistics approaches that focus on freight price. The result of these pricing efficiency approaches is to place prices before inventory requirements by treating the product supply as two discrete events. They create discord in the development of an effective supply chain that can minimize time, inventory and cost while maximizing service and profits. The dual-price approach hinders the development of inventory management at suppliers to create yield management as a benefit of supply chain management by focusing on having the right inventory at the right quantity at the right place and at the right time. And the place to implement that is at the supply origins with suppliers.

Product and freight pricing emphases do not recognize yield management. They do not take yield management from being an analytical tool to being part of the supply chain practice and process. The impact is to trade-off product and freight prices for markdowns and lower profits.

Incorporating yield maximization of inventory beginning at the supplier level converts an operations research tool into a supply chain operations paradigm to manage the product and its flow. It expands the supply chain focus supplier management. It creates substantial benefit and competitive advantage. Yield management success requires supplier management in order to bridge between supply chain planning and supply chain execution.

IMPROVING SUPPLY CHAIN CYCLE TIME AND INVENTORY YIELD. Reducing supply chain cycle time means decreasing the days of inventory held and reducing the cash conversion cycle. This can mean hundreds of thousands of dollars, even millions, reduction in inventory and in carrying charges. In turn this is capital available for other uses. All parties in the supply chain must understand their importance in gaining these benefits. Improving cycle time also positions the retailer for greater inventory yields and faster turns. These impact shareholder value and service.

Reducing supply chain cycle time takes analysis and effort. Points to consider are:
  • A supply chain is complex. The purpose of all this activity is to place product timely and correctly in stores or at customer facilities. It must be designed, directed and managed as a process, not as a series of order and shipping transactions. Pushing bad logistics processes and practices up or down the supply chain impedes time

  • Product and information should flow. Operational effectiveness depends on process, technology and people that cross internally within the company and externally with suppliers and customers.

  • The process should be assessed for gaps and redundancies. Measure the time required in each action and the reason for the action. Watch for organizational dysfunction that can creep in and add unnecessary time.

  • Inventory is created as a buffer for uncertainty. Uncertainty increases, almost exponentially, as the time required to position it correctly increases. So inventory increases as time increases.

  • Tradeoffs do exist between time (and inventory) and cost. Global sourcing adds to time and to the inventory that must be carried because of it.

  • External factors exist that impact time and may be beyond control to be reduced. Homeland security for importers is one such factor. It adds to how promptly suppliers located outside the U.S. can ship orders. Logistics infrastructure in sourcing countries is another factor that can add time and impede the flow of product from suppliers' facilities to ports and airports.

  • Besides the product supply chain, there is also a financial supply chain. This second chain can and does affect the timely flow of product.
With the extended supply chain, there are numerous places to extend, not reduce, supply chain cycle time and inventory. Likewise there are key points to concentrate on for reducing time.

Key ways to reduce time are:
  • Manage vendor performance. This is a critical requirement for reducing supply chain cycle time. Suppliers, at the supply chain source, have incredible impact on the supply chain as to time, inventory and costs, impact that goes far beyond pricing and placing purchase orders. Visibility of purchase orders, at suppliers, in-transit and at each step in the chain, from vendor's plant to delivery at the warehouse, store or customer is vital.

  • Integrate up and down the supply chain, both external and internal. This is mandatory. Non-integration adds to supply chain time and the lack of responsiveness and dead spots in the cycle time. Integrate demand forecasting or other inventory planning with suppliers for their build plans. Integrate purchase orders into transport load planning. Everyone should be working from the same data, information and system or platform. Manufacturers integrate through the production process.
Transferring data up and down the chain is not enough. Data is not information. To collect, analyze, and forward data takes time. Suppliers and service providers then reenter the data into their systems. In turn they do this to their suppliers. All this quietly adds to cycle time. Conversely, integration reduces time and increases accuracy.

Integration may not be readily and easily doable with all parties in the supply chain. Do it with key suppliers and service providers, key as to volume or critical products, parts or needs. Have key suppliers integrate with their key suppliers so the benefit ripples through the supply pipeline.
  • Collaborate with key suppliers and service providers. Work together as partners and be open to the mutual exchange. Sending procedures and demanding compliance with requirements is not collaboration. Work to align the process between both parties so that if flows smoothly and with minimal time.

  • Analyze how inventory moves and where inventory sits or is transferred for opportunities to move it more quickly and with fewer handlings. Improvements are possible with:

    · Warehouse / distribution network. Where warehouses are located as to time from stores or customers or suppliers impacts supply chain cycle time by becoming fixed repositories based on needs that may be outdated.

    · Multi-tier inbound logistics approach. What modes, carriers, service and ports are used can reduce transit time and increase inventory and cash conversion velocities. Inventory in transit is not inventory available for sell. Having a different approach for A inventory items (and some B items)--as compared to many B items and C items--puts time emphasis where needed.

    · Bypassing the distribution network where possible to reduce time. Three options to do this are:

    • Ship inbound containers direct to store or customer.

    • Use a transfer facility at or near a port(s) to quickly unload containers and transfer directly to needed destinations.

    • Allocate inventory in transit and then cross-dock containers at a transfer facility at or near the port or at a distribution center.

    • Implement technology. This is a necessity; it is a process enabler. However technology by itself will not result in needed improvements; it is not a silver bullet that solves a flawed process. Technology should be used across the supply chain enterprise, both internal and external. It is a key to gaining much needed supply chain visibility. Such visibility is needed for multi-tier inbound and bypass the distribution network programs.
For technology, remember:
    · Global suppliers and transport providers cannot be readily managed with emails. Technology is needed.

  • Supply chain complexity and scope may require more than one software be used for effective control.

  • Supplier management is directing and controlling supplier performance. It looks at the timing of product, the quantities, how and where delivered, product mix and more. The intent is to maximize yield.

  • Portals provide tracking useful tracking information and provide shipment visibility. But they are an after-the-fact tool and do not manage inventory or time.

  • Tracking purchase orders and contents of an inbound container has great value as compared to just tracking a container number. Visibility into the container sets the stage for significant abilities to reduce time and inventory.

  • Converting sales-point of sales (POS)-data into replenishment orders on warehouses and, in turn, into purchase orders on suppliers is critical.

  • Supply chain execution technology may be the most valuable of the technology applications. It is a vital to integration and collaboration.

  • Ease of connectivity-web enabled, interfaces and mobile access-is important.

  • Maximum supply chain process coverage-order management, transportation, distribution, warehousing, vendor, finance and more-is important to directing and managing the process and reducing time and inventory.

  • Event management and exception management capabilities should be part of the technology used; they empower control of the process.
CONCLUSION. Increasing cycle time velocity and improving inventory yield begins with supplier management. Effective supplier management is based on technology, process and people. Technology is how purchase orders are placed on supplier, via the Internet, EDI or other. It is supply chain execution. More importantly it is how purchase orders and suppliers and managed with event management and exception management. The technology enables revising orders, their priorities, their style and other mixes, their timing, quantities and more. Technology gives visibility to directing and controlling supplier performance and what is in the supply chain, including what is happening with transport and other logistics service providers.

Process takes purchase orders from being transactions to being part of a process that flows through the organization. That process enables the linking of all parts of the supply chain, the integration within the company and between trading partners. It gives the dynamics to controlling product flow and inventory positioning. That control is key to placing the right inventory, right as to quantity and timing and location, so as to achieve higher price yield.

People are logistics personnel positioned in China, India or wherever your suppliers are located. They speak the same language and are in the same time zone as suppliers. They are the day-to-day operational spears that make process and technology work. Global supply chains cannot be managed with emails. Managing suppliers also requires people.

Time and inventory yield improvements increase profits, shareholder value and customer service and retention.

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About the Author:
LTD provides logistics consulting for strategic and tactical needs. The scope of capabilities is broad--supply chain management, outsourcing, transportation, warehousing, inventory management, and more for both domestic and international needs. Clients include retailers, wholesalers/distributors, manufacturers, logistics service providers and 3PLs.

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