Before going to Europe on business, a supply chain executive drove his new Rolls Royce to a downtown New York City bank and went in to ask for an immediate loan of $10,000.
The loan officer was quite taken a back, and requested collateral.
“Well, then, here are the keys to my Rolls,” the man said.
The loan officer promptly had the car driven into the bank’s underground parking for safekeeping, and gave him $10,000.
Two weeks later, the man walked through the bank’s doors, and asked to settle up his loan and get his car back.
The loan officer checked the records and told him, “That will be $10,000 in principal, and $30.80 in interest.”
The man wrote out a check, thanked the loan officer, and started to walk away.
“Wait sir,” the loan officer said, “while you were gone, I found out you are a very wealthy man indeed. Why in the world would you need to borrow?”
The man smiled. “Where else could I securely park my Rolls-Royce in Manhattan for two weeks and pay only $30.80?”
Paying as little as you can in holding costs may make sense in some arenas, but investing in an effective supply chain strategy can mean dominance in an industry. In the age before “Big Data,” logistics decisions were made locally and big picture impacts were difficult to see, or even be aware of. But now information is available in spades and those who harness it rule the day.
In Steve Sashihara’s book, The Optimization Edge, he recalls some of the reasons for the astounding staying power of the United Parcel Service (UPS). One factor of its success formula can be traced to a laser-like focus on the “pennies and inches” of the game, translated as fuel costs and miles. With a fleet of 88,000 trucks in 2003, even a small savings in fuel efficiency leveraged across the network would mean huge economies for the operation. When they used routing software to minimize the trucks idling time waiting on left hand turns, the impact added up quickly. In one metro area alone, they eliminated 464,000 miles and saved 51,000 gallons of fuel for the year.
Should cost savings really be the benchmark of all benchmarks when analyzing success in the supply chain? Walmart would beg to differ. What keeps them at the top of Fortune 100 the past 10 years is their command of procurement. Questions that are re-asked quarterly include:
- Where and how much to buy?
- What will we pay?
- How should we reorder and when?
- Where is the best location to route the goods?
Walmart even goes as far as to track the weather when forecasting SKU max points. Because of its obsession with the supply chain, my kids have never heard of Kmart.
So what then does it mean to achieve success? Bottom line thinking still tends to marry this concept with cost savings. But conventional wisdom may be changing. As a VP of Operations told me a few years ago: “Don’t save me so much that you run me out of business.”
If you are an executive exploring where opportunity may lie in your company’s supply chain, begin by asking a few questions, such as:
- What are my underutilized assets? Are there significant gaps between actual and theoretical?
- Do I have the same kind of tactical decisions being made over and over throughout the network?
- How accurate are our forecasts and what impact is that having on our ability to service customers?
- Do we spend more time debating about what we think we should do vs. having the ability to make quick decisions based on analytics?
The answers to these questions may point to enterprise value well beyond working capital cost reduction. Other factors that should be considered are higher levels of customer retention, overall network profitability, speed of issue resolution, and higher asset utilization. And at a strategic level, having the ability to quantify opportunity costs is a game changer. If we choose to do “a” instead of “b”, what overall impact will it have on our competitors and customers?
Companies that can effectively answer the questions above rely heavily on data to make systematic decisions that are transparent, with high degrees of accountability. Companies with dynamic operations can ill afford to lean on the traditional judgment levers of conventional wisdom, hunches and headcount reduction to stay competitive. The Fortune 100 companies that have stayed in the Fortune 100 have paved the road for fact-based decision making that favors rigorous analysis occurring not once a year but hundreds of times. Per day.
Whichever it may be, strategic or tactical decisions involving critical assets should never be made in a ‘black box’, where the thinking that went into choice is unclear. The best decisions are made with the support of a visible, systematic process in which the decision criteria are understood, the range of alternatives to be considered are agreed upon, and the performance of each alternative is assessed before a recommendation is proposed. For complex, interconnected business environments this is even more true. In industries that are particularly sensitive to asset utilization and opportunity costs, having the right operational strategy means speed, reliability, scalability and efficiency.
In our era of computing power, digitized data and an ever mounting pressure to use assets in environmentally effective ways, we can’t keep the Rolls chained in the basement any longer.