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Do supply chain disruptions cause financial instability?

Do supply chain disruptions threaten shareholder value and can they affect the financial performance of the company and lead to long-lasting damages.

A recent report ("From Vulnerable to Valuable: How Integrity Can Transform a Supply Chain,") from PricewaterhouseCoopers (PwC) suggests that the average stock return of companies suffering from supply chain disruptions was almost 19 percentage points lower over a two-year period relative to the benchmark group. An earlier report (couple of years earlier) from The Aberdeen Group revealed that recovery costs from disruptions can average to seven figures.

But, what factors drive supply chain disruptions? - things like lack of alternate suppliers, over-reliance on outsourcing, having very lean operations, poor collaboration, demand-supply variations, etc. Besides, supply chain disruptions can also be caused due to natural calamities, part shortages, manufacturing delays, shipping and cargo delays, rollout problems, order changes by some customers etc.

Effects of Supply chain disruptions: Profit and sales dips, increased manufacturing costs, inventory accumulations and drop in level of customer service to name a few.

Examples of supply chain disruptions in the past:

  • Year 2000 - Fire at a supplier of microchips created havoc in companies like Ericsson and Nokia. Nokia tied up with other suppliers quickly to fare better.

Innovative Supply Chain Practices at H&M

Hennes & Mauritz (H&M) AB, a pioneering apparel retailer based in Sweden is known for its cheap but chic fashion. While other retailers are struggling, H&M sees the economic slowdown as an opportunity to expand, enter new markets and to add new brands. In September 2008, H&M is all set to enter into Japan, known as one of the world's most competitive fashion markets. It will open a second store in Japan in November and a third one expected to be launched soon. In Japan, H&M is also entering into a design collaboration with designer Rei Kawakubo. The Japanese designer is the founder of well-established fashion brand Comme des Garçons. Last year, H&M entered in China. It now has presence in 30 countries and more than 1,600 stores.

Download Management Case Study on H&M in Japan (PDF File)

H&M's Business Model Advantage

H&M's core business strategy - to provide the fashion concept and quality at the best price - is paying off largely due to its innovative supply chain practices. H&M's average sale prices are lower than those of its competitors. This it achieves with its in-house designers (around 100) who work with buyers and centrally design the garments at Stockholm, Sweden. The production is outsourced mainly to independent suppliers (around 700 who in turn use subcontractors) in Asia and Europe. For high-demand products, manufacturing is carried out in Europe and in Asia in case of garments with longer lead time. In all, there are around 20 production units and more than 700,000 people involved in product manufacturing.

Central Warehouse and Distribution with constant replenishment

A central warehouse in Hamburg in Germany collects all apparel from various locations and distributes locally to various distribution centres across various countries wherever H&M has a presence. Based on the demand, the apparel are replenished constantly. The constant replenishment helps maintain novelty and attract repeat customers. To be continued...

Wal-Mart - Monitoring supply chain risk

In January 2008, the world's largest retailer Wal-Mart introduced Supply Risk Monitoring (SRM) service as a requirement to Wal-Mart's supplier community. This after Wal-Mart made an agreement with Strategic Forecasting, Inc. (Stratfor) to assess and rank security risk for countries in its global supply chain.

Stratfor is a leading private intelligence company and its services will enable Wal-Mart to identify risks with supply chain infrastructure in countries (ranked as high, medium or low) within its supply chain using a unique analytical methodology. The countries will be assessed on risks associated with terrorism, insurrection, crime, the political and regulatory environment, natural disasters, including various other factors related to supply chain infrastructure. This will help Wal-Mart to produce a quantifiable measure of the actual risk to a nation's supply chain and thereby determine appropriate supply chain security counter-measures. It can thus quickly warn of emerging threats and prevent disruption of deliveries of goods to major markets around the world.

Why Wal-Mart's supply chain is so successful?

The key to Wal-Mart's supply chain

Wal-Mart is committed to improving operations, lowering costs and improving customer service. But the key to retailer Wal-Mart's success is its ability to drive costs out of its supply chain and manage it efficiently. Many supply chain experts refer to Wal-Mart as a supply chain-driven company that also has retail stores. Wal-Mart's company philosophy ('The Wal-Mart Way') is to be at the leading edge of logistics, distribution, transportation, and technology. The Wal-Mart business model would fail instantly without its advanced technology (Wal-Mart has the largest IT systems of any private company in the world) and supply chain (Wal-Mart has made significant investments in supply chain management).

Wal-Mart's business model and competition

Wal-Mart's business model is based on a low price strategy and low transportation costs allow it to sell its products at the lowest possible prices. In return for its strategy (Everyday Low Price Strategy), Wal-Mart's suppliers - both large and small - either break even or make profit supplying at Wal-Mart's stores. But the real winners are Wal-Mart's customers (approximately 175 million every week) who save thousands of dollars buying at low prices. Since Wal-Mart stores began selling groceries almost three dozen regional grocery suppliers have struggled to match or simply run out of business. Last year, Wal-Mart's annual sales were $350 billion and it had more than 7,000 stores, 120 distribution centres and operations spanning 15 countries. Nearly two million employees at Wal-Mart focus on cost, customers and continuous improvement on a daily basis. Other major retailers like Target and Home Depot have emulated Wal-Mart's logistics strategies and actics.

Wal-Mart's one-store-at-a-time, RFID and just-in-time distribution approach

Every Wal-Mart store operates like a small company. Store managers are trained to manage one store at a time, one department at a time, and one customer at a time. Decisions are made by store teams to make the individual stores operate at its best with superior in-store execution. With established vendor partnerships with top manufacturers, Wal-Mart has implemented advanced logistics solutions like RFID (radio frequency identification). RFID solutions help maintain lower costs, identify out-of-stocks and increase sales. Distribution centres instead of warehouses, automated replenishment and cross-docking technology also reduce inventory carrying costs.

Related Reading

Vendor Managed Inventory - Basics and Advantages

What is Vendor Managed Inventory?

Vendor Managed Inventory (VMI) is a supply chain practice. The stock or inventory is monitored, planned and managed by a vendor on behalf of a consuming organization. The vendor does this based on expected demand and previously agreed upon minimum/maximum stock levels.

VMI had its beginnings in the retail business in line with Efficient Consumer Response (ECR). In ECR, the consumer expectation of stock availability gives an advantage. Wal-Mart pioneered this strategy in the retail sector and today it is being used by several companies even in other sectors.

Advantages of Vendor Managed Inventory

The advantages of VMI can be broadly classified into cost, delivery, and quality. The advantages of VMI can be overlooked if supply chain managers keep a narrow focus on the benefits as they relate to their own companies. Supply chain experts are of the opinion that the real benefits of VMI come with driving a lean supply chain centered on creating an end-to-end pull system, which is based on end user demand cascading through the chain.

Cost Advantages of Vendor Managed Inventory

The vendor holds stock on site or near the customer. This gives the customer almost-instant access and the ability to pull stock as needed and only pay for that which is consumed, thereby reducing stock investment and increasing stock turnover.

The vendor is responsible for replenishing stock in most VMI partnerships. This includes ordering the stock, managing the logistics and freight to ship the material, as well as stocking and counting the stock. By passing on these expenses to the vendor, the customer can reduce overall costs.

Another advantage of VMI is that it separates demand variations and forecasting errors between upstream and downstream supply chain partners. Such decoupling eliminates the practice for every supply chain node to buffer its stock position. This helps reduce the stock levels and the linked costs of maintaining the stock.

With VMI the customer can pull stock in the quantities necessary to meet consumer demand. Therefore there is no need for minimum order quantities. The vendor can restock based on pre-specified minimum-order quantities internal to its company. Moreover, because the vendor is responsible for stock liability it becomes more of an incentive to eliminate requirements that push excess stock and cost into the supply chain…

RFID and Supply Chain - Reverse consumer effect

RFID, Supply Chain and the Reverse Consumer Effect

During the last several years, Radio frequency ID or RFID technology was seen as the catalyst to supply chain revolution. But many feel that the most important technology trend is moving into the reverse direction i.e. from business use to consumer use. RFID technology in the supply chain has not progressed as well as the RFID industry had hoped for. This is creating the 'reverse consumer effect'. The consumer effect is when technologies popularized by consumers find their way into business use. A great example is the Apple iPod or social networking sites like Orkut. But RFID, which has been a corporate technology since its introduction is finding its way into the consumer market. Businesses in various sectors and industries are adopting RFID, but not necessarily for the supply chain.

Examples can be derived from At&T's move to provide radio-frequency identification and GPS-based products and services for schools. Schools can use RFID to track their staff and students. Even insurance companies, and hospitals are using RFID tags to track important assets, files and equipment. On the reverse, corporate side, Wal-Mart (RFID's most aggressive user -- e.g. Wal-Mart's suppliers tag pallets and cases with RFID tags), has said that its RFID plans have fallen short of the company's goals.

Dell Supply Chain Management Case Study

Case Study: Supply Chain Management at Dell, Dell's Direct Model

Dell Inc. pioneered the Direct Model of selling PCs directly to the consumers. How it enabled Dell to manage its supply chain efficiently is discussed in this case study.

Dell Computer Corporation a leading direct computer systems company was founded in 1984. Dell sells its computer systems directly to end customers, bypassing distributors and retailers (resellers). Dell's supply chain consists of only three stages— the suppliers, the manufacturer (Dell), and end users.

Dell’s direct contact with customers allows it to:
  • properly identify market segments,
  • analyze the requirements and profitability of each segment, and
  • develop more accurate demand forecasts.
Dell matches supply and demand because its customers order computer configurations over the phone or online (Internet). These computer configurations are built up from components that are available. Dell’s strategy is to provide customised, low cost, and quality computers that are delivered on time. Dell successfully implemented this strategy through its efficient manufacturing operations, better supply chain management and direct sales model. Dell takes orders directly from its customers; either on phone or online. Thus, Dell reduces the cost of intermediaries that would otherwise add up to the total cost of PC for the customer. Dell also saves time on processing orders that other companies normally incur in their sales and distribution system. Moreover, by directly dealing with the customer Dell gets a clearer indication of market trends. This helps Dell to plan for future besides better managing its supply chain.

Another advantage Dell gets by directly dealing with the customer is that it is able to get the customers requirements regarding software to be loaded. Dell loads the ordered software in its plant itself before dispatching it. By eliminating the need of a PC support engineer to load software, the customers gain both in time and cost. They can use the PC’s the moment they arrive. More soon....

Case Study Keywords
: Supply Chain Management, SCM, Supply Chain Case Study, Direct Model, PC Retailing, Dell Computer Corporation, Michael Dell, Founder and CEO

Click to download full text of this Case Study in PDF format: Dell's Supply Chain Management Strategy

Walmart Case Study on Supply Chain Management (SCM)

Case Study : Walmart's Supply Chain Management (SCM) Practices

Supply chain management (SCM) is important for companies that deliver goods or services. Transitioning from a single company to the whole supply chain implies the need for reorganization and reengineering, strategic management or organizational theories have not yet been incorporated in supply chain management. A competitive business environment has made Walmart focus on innovative processes and systems to overhaul its supply chains and make them more efficient. Increasingly, Walmart is integrating its supply chains with major customers. Wal-Mart is an innovator in SCM, which has helped it to provide low-cost merchandise to its customers and undercut its competitors.

Stalk et al. (1992) reported:
In 1979 Kmart was one of the leading companies in the retail industry… At that time, Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half those of Kmart stores… Today Wal-Mart is the largest and highest profit retailer in the world. How did Wal-Mart do it? The starting point was a relentless focus on satisfying customer needs; Wal-Mart’s goal was simply to provide customers with access to goods when and where they want them and to develop cost structures that enable competitive pricing. The key to achieving this goal was to make the way the company replenishes inventory the centerpiece of its strategy. This was done by using a logistics technique known as cross-docking. In this strategy, goods are continuously delivered to Wal-Mart’s warehouses from where they are dispatched to stores without ever sitting in inventory. This strategy reduced Wal-Mart’s cost of sales significantly and made it possible to offer everyday low prices to their customers."

Stalk, G., Evans, P., and Shulman, L.E. (1992). Competing on Capabilities: The New Rule of Corporate Strategy. Harvard Business Review, March-April, 1992, 57-69.

More soon.....

Keywords: Case Study, Walmart, Wal-mart, Supply Chain Management (SCM) Practices, SCM, Supply Chain, Strategy and Organization in Supply Chains

Download Case Study: Walmart in Japan (pdf format)

Will Wal-Mart be able to sustain its supply chain advantage : Download Case Study on Wal-Mart's Supply Chain Practices in PDF format.

Company Supply Chain - Weakest Link?

The Supply Chain is a competitive differentiator for organizations and managers. Chief executive officers (CEOs) who neglect it put their organizations in jeopardy.

Identification of key areas where supply chain managers can influence their supply chains is critical in assessing the influence they currently exert. Outsourcing of core business functions like distribution or manufacturing could lead to serious problems for a company. Good Supply Chain Management (SCM) begins with finding the right people to lead a company's supply chain operation, right from the most senior on down the ranks. Managers must participate in recruiting a top-notch supply chain team that will use customer-focused metrics and best-practice benchmarking to bring about cross-functional alignment and achieve efficiencies, which the top management should personally review.

Two serious threats to the supply chain are product complexity and obsolete inventory. It is important to eliminate such cross-functional disconnects. A long term approach should also include business planning, promotional programs, and customer-contract negotiations, with inherent supply chain ramifications.

Keyword: Supply chain optimization; Supply chains; Supply Chain Management, Outsourcing, Lead time

Innovation and Supply Chain

Innovative Supply Chain

A successful supply chain requires an organization to be clear about its business objectives. A successful supply chain also requires innovation and adaptability.

An innovative supply chain is largely driven through sharp business focus and synergy generated from an integrated functional approach. Some key factors that are essential to build an innovative supply chain are:
  1. Culture and Leadership: Organizations must encourage employees to be creative and innovative. IBM encourages an organizational culture with innovation emphasized in every employee's job description and evaluation. Top management support for an innovative supply chain creates a positive environment for change. An innovative organization should also foster a culture open to ideas. An innovative organization must recognize poor decisions and failures as part of a normal business process.

  2. Reward Innovation: IBM's ISC team in Scotland has developed 200 innovation projects in two years. IBM awards the best innovations.

  3. Motivation to change: A successful implementation of innovation necessitates organizations to constantly motivate for innovation. The approach may be out of sheer necessity or the will to excel constantly. With integrated functions, it is necessary for supply chain managers to become innovators.

  4. Innovative employees: It is essential to have the right employees at the right place for successful innovation. Innovative employees are creative, enterprising, desire change for the better constantly and can visualize differently. Employees may be initiated into innovation through training, benchmarking, professional development, job rotation or even recruitment of fresh talent.

  5. Break traditional barriers to innovation: A supply chain is traditionally considered as an operational function. Hence, innovation takes a backseat. However, operational workforce led by line managers should explore opportunities to innovate, improve existing processes and restructure operations with other functions.
    Innovation is not a new discipline in most organizations. However, the usual strategies in innovation and approaches adopted and succeeded in the '80s and '90s, are no longer sufficient. Organizations must involve in exciting experiments and innovation to reinvent the way they create the future, for "business as usual" does not always produce the desired results.

  6. Evaluate the organization’s present state of innovation: Supply chain managers must benchmark the existing supply chain against the competition and keep track of business trends. It is also important to adopt constantly techniques that enable better performance from service providers so as to adapt the supply chain in accordance with the nature of product.

  7. Prioritize Innovation: Companies acknowledge that innovation is the only sustainable source for growth, competitive advantage, and new profits. However, only about 25 percent of the companies consider innovation as the key strategy to be successful in today’s competitive environment. Organization must consider innovation in the supply chain as top priority and a responsibility of all employees, even the lower level employees. Organizations need to understand and evaluate the impact of innovation. This will allow organizations to put supply chain innovations on the same level as product innovations.
In a dynamic environment, organizations are forced to adopt an innovative supply chain management strategy to ensure success and long term survival. For best results, innovation should be backed by the management and elicit the participation of all the employees. Innovation has always led organisations to stand out

Essential principles for managing innovation:

• Comprehensive approach to innovation.
• Innovation must include an organised, systematic, and continual search for new opportunities
• Involve everyone in the innovation process.
• Work constantly to improve the environment for innovation.

Case Study Quotes

"Pretty much, Apple and Dell are the only ones in this industry making money. They make it by being Wal-Mart. We make it by innovation". - Steve Jobs, Apple