I don’t recall when it started but sometime in the past 20 years the food and drug business folks decided that the best way to address the coming onslaught of the most efficient supply chain operator in the world, WalMart, was to separate the buying process into two distinct entities, Merchandising and Supply Chain. They existed before but in that context Supply Chain was called Logistics and was entirely focused on warehouse and transportation.
Actually it was more like a coup de taut than a collaborative business decision. The old W&T guys got a bit tired of what amounts to a complete lack of regard for their issues and metrics, put together a business case for kidnapping the replenishment process and convinced upper leadership that they would be much better at delivering inventory management than the merchants. The premise being that because they were logistics guys (and gals) they would care more about inventory. They’d be better at dealing with all the complexities of having the right amount of inventory at the right time in the right place because they had to deal with the problems that poor inventory management techniques bring. One company after another in the 90’s and early 2000’s took a look at the metrics that the folks in Bentonville were putting up and rushed to create the industries answer, Supply Chain with a capitol SC.
The merchants weren’t too happy about the change, after all the real power they held over their suppliers was the ability to buy stuff. To create the one thing that every supplier really wants, Purchase Orders. I remember an old sales guy that used to come in with a placard around his neck that looked like he had swiped it from a homeless guy on the side of the road and it said “I work for PO’s”. He got it, that document, the PO, contained the thing that we are all chasing, MONEY. By switching to this new “demand” driven process the merchants were no longer able to cut PO’s and in some cases even influence them. Forward buy became a dirty word and days of supply became the “real” measure of success, at least for the supply chain.
Fast forward 15 years and how are we doing? Did the move, organizationally, meet the needs of the business. Did the change from a merchandising process to a supply chain process reap the benefits that it was projected to reap (at least by those that were proponents of the change)?
That depends on who you ask. The amount of inventory that is in the supply chain at the retailer has been reduced. My personal experience was that we were able to take 2 full days of supply out of the dry goods inventory and maintain it at that level. That alone had several million dollars in benefit from capitol expense to warehouse expense, living with less inventory is very profitable. However at what price?
The secret to lowering inventory is really based on moving from a buying process that takes all variables into account, cost, forecasts, inbound expense, warehouse expense, money, etc…to a demand driven replenishment process that is concerned completely and totally with the forecast. Bridge buys, forward buys and all sorts of cost based decisions are eliminated and the only reason for purchasing inventory is because there is demand / need for it. Just writing those words makes sense to me. They sound good, great concept, if you don’t need it or have a demand for it, don’t buy it! It’s simple, straightforward and logical, right? Well maybe not quite as right as was thought. One retailer that I know of recently switched to a demand driven process and has calculated that they’ve several million dollars in missed deals and bridge buys that would have drastically decreased the cost of goods sold. Millions that would have been straight to the bottom line and in a much quicker and more profitable way than waiting to see if the W&T number came back good. Sure there would have been a bit more inventory on hand as the process does ignore the “normal” demand signals and puts inventory in place for financial reasons versus demand. But the cost savings are far greater than any expense that may or may not be incurred in the warehouse. I have always wondered about that “internal” cost of storage number, don’t I have to pay the rent regardless of whether I’ve got stuff in the building or not?
So the “truth” is really buried somewhere below the surface. The real issue in Food and Drug is not sub process ownership; it’s a lack of end to end accountability and ownership. Left to their own devices each of these sub processes, merchandising and supply chain, will always defer to their four walls. They’ll sub optimize upstream and downstream to make their metrics. There is a very distinct lack of total process ownership. Visibility across the business is blocked every step of the way by walls (or silos if you will) constructed internally to ensure the success of the ORGANIZATIONAL UNIT BUILT AROUND THE SUBPROCESS. I have been in meetings when a very profitable supplier related forward buy was rejected because the current days of supply was over budget. While the additional profit for the company would have been incredible, cost of goods was a merchant issue and the supply chain was not going to risk it’s metric for a few extra profit dollars that they weren’t going to get credit for. “Are you kidding me!” crossed my mind on several occasions after sessions like that.
From a technology perspective these myopic sub process owners are famous for wrapping their process up in a technology stack that, while very effective at managing the sub process, completes the wall. It ensures that what happens inside the sub process is not visible nor up for any kind of scrutiny from outside sources. It also ensures that the end to end visibility necessary for this whole thing to work optimally has no chance of working unless the sub process owner allows it. Permission to see into the sub process is given only when it can cast a good light and never when it may show issues. Issues that really need outside help to resolve but help is never asked for because it would show weakness. Weakness that is the kiss of death for the leader that has aspirations of the next level up.
So how do you solve it? First and foremost, it’s all about the process. Yeah I know, that has been said over and over, but at the end of the day it truly is. Let me restate it a bit differently. It’s all about the end to end process. I actually think the replenishment process should reside with the supply chain org., as I said earlier, it makes sense. But not with the walls built around it. Replenishment must consider ALL factors and be responsible for the cost ofgoods as well as the traditional supply chain metrics. While the merchants should not have to deal with the latest late truck they should have ownership in the supply chain expense numbers as well as what they are primarily tasked with, sales and profits. An efficient supply chain will have a very positive effect on both of those numbers.
SAP, with its end to end ERP solutions, is poised to help companies get this right. Sub process optimization still has its place and while we have solutions that address those specific needs, we’ve also got the world class platform that ensures that even when you’ve got sub process focused solutions you can still see across them and into them. Lastly the closer is Business Objects. Our BI solution has a myriad of ways to drive the scorecard, dashboards, ad hoc reports, and canned reports that allow the “truth” about end to end success to be drug upwards and made visible. I’ve been on several transformation projects and each and every time we said out load “it’s all about the scorecard” and with SAP Solutions you not only can ensure the data that makes up the scorecard is clear and accurate but you’ll have an amazing ability to bring that information forth.
At the end of the day with SAP Solutions driving behind your processes it doesn’t matter how you choose to organize, you will have a clear concise view into your processes and the ability to see and improve your bottom line.