What would happen to your customers if they could not get the products they needed from your company for a month, six weeks or a year?
What would your customers do? Do you think they would still be ‘your’ customers after something like this happened?
Furthermore, what would a significant disruption like this do to the company’s revenue stream?
Supply Chain Risks
Supply disruption happens in more ways and more often than we typically know about.
The Supply Chain Visibility provider Resilinc reported 41 weather events in the first half of 2018 affecting suppliers.
There are other supply chain risks as well such as labor strikes (west coast ports in 2015), global, regional and industry wide raw material shortages (e.g., copper, nickel), and global or regional political issues that can affect supply, costs, and product availability (e.g., foreign country boycotts, tariffs, etc.).
The trade magazine Material Handling and Logistics (MH&L) reported, in their ‘State of the Global Supply Chain’ findings, that ‘40% of manufacturing companies in the last 12 months (as of February 2016) reported a significant supply chain event that disrupted their business.’
The challenge is proactively mitigating supply chain risk and that means to ensure that you can provide what your customers need when it is needed.
This means addressing and eliminating as much ‘risk’ in a company’s supply chain as possible.
Where does a company start if it wants to mitigate the risk in their supply chains?
The first step is a review and ranking of the company’s product sales according to revenue contribution.
The second step is an analysis of what raw materials and components are needed to manufacture the company’s products. These items too are ranked by importance.
The third step involves generating a ‘priority listing’ so that the most important risk issues are addressed first.
The fourth step is to develop a viable ‘risk mitigation strategy’ for each issue.
Finally, the overall plan to mitigate the supply chain risk(s) is developed and presented to senior management for approval. Executive management will either approve the strategy as is or ask the team to revisit the issues and look for other alternatives.
The Bottom Line. Supply Chain risks or disruptions can be paralyzing to a company’s customers and detrimental to its revenue stream. There are many kinds of supply chain risks to consider, e.g., extreme weather incidents, labor strikes, geopolitical issues, etc. The challenge for companies is to proactively mitigate their supply chain risks. To mitigate risk in supply, a company should review their products, analyze raw materials, rank all issues found, and develop a ‘risk mitigation’ strategy. The final step in the ‘risk mitigation process,’ prior to implementation, involves senior management approval of the selected strategy.
Do you really know what your operational costs are and the details of the products or services that you are purchasing?
Many manufacturing companies know what they’ve spent in direct material and direct labor.
But when it comes to indirect expenditures, the clarity is just not there.
Ironically, a company can grow substantially and be spending tens to hundreds of millions of dollars on indirect expenses and not have the right process or program in place to analyze or manage it.
To properly analyze this type of spend, it is necessary to,
- Define the company’s indirect categories of spend
- Answer questions about ‘agency’
- Create, publish and support a ‘company-wide’ Procurement program
Defining the Company’s Operational / Indirect Spend
The first step in understanding a company’s ‘operational spend’ requires categorizing, coding and documenting the spend, i.e., the company must have a way of grouping and associating multiple transactions.
This allows the firm to document, tally and analyze dollar amounts and transactions in each category.
The next step, creating an agency doctrine, is more complex but perhaps even more important and must be addressed for a company to manage the indirect spend.
The important questions senior executives must ask themselves about agency is,
- Where, for what categories and amounts, and whom should have the responsibility for the stewardship of purchases on behalf of the company?
- What are the reasons that the control has been specified in this manner?
Creating, Publishing and Supporting an Agency Doctrine and Procurement Policy
For a company to control spend, there needs to be an agency doctrine, i.e., a written policy that specifically authorizes individuals to act as ‘agents’ for the company when expending company assets.
Likewise, the company will need to create a procurement program so that all company personnel (and suppliers alike) know what needs to be done to obtain the necessary products and services needed to support the company operation.
Senior Management Support
Understandably, the agency doctrine and procurement program must be thorough, working as intended (and absolutely should be tested before release).
However, unless executive management supports all facets of this program, it will not be followed and in that case not provide the information required to properly manage this spend.
The Bottom Line. Knowing what the company’s operational costs are is the first step that is needed to manage these costs. To properly analyze spend, companies must categorize what is being purchased. Likewise, the company must develop and publish an agency doctrine and procurement policy. Finally, executive management must completely support these programs.
As businesses grow, entrepreneurs and the companies they’ve started must cope with changes in their business model and adapt their management style. In addition, they must confront the change in objectives, strategy, measurements and control.
Businesses at Stage One Growth
Stage One companies are typified by an entrepreneur who launched the company to promote an idea, product or service. The company’s main goal is survival and growth.
Likewise, the objectives are personal or subjective and strategy is implicit with exploitation of immediate opportunities. Measurement and control are accomplished by simple accounting and daily observation and communication.
Companies at Stage Two Growth
Companies have gotten larger and resources have expanded providing much needed help. One of the biggest changes, and challenges for stage two companies, is that the entrepreneur has hired functional managers. This transformation can be very difficult for some entrepreneurs, since they typically need to and should (with well-formed guidelines) relinquish decision making responsibilities (but many times do not).
At this stage objectives are focused on profits, meeting budgets and basic performance targets. The strategy typically is on one product or one service. Here, control grows beyond the solopreneur and structured control systems are developed.
Stage Three Companies
A Stage Three business has changed significantly from the early days. It is typically much larger in sales, personnel and products. The change in size also creates a challenge to increase profitability.
There is now a trusted management team as the company’s diversity and complexion has increased significantly. It is necessary to manage the overall business at the strategic and operational levels.
Growth has created the opportunity to be in more than one type of industry and geographical area. This means multiple divisions, product lines and product mixes.
Objectives have changed and take the form of Return on Investment, profits, and earnings per share. Control is performance measurement.
The strategy also changes as the company wants to increase sales of its product lines, both organic or non-organic in nature. This enables the company to exploit more business opportunities.
The Bottom Line. As companies are successful, their businesses grow and must adapt to changes in objectives, strategy, measurement and control. Early stage entrepreneurs make all the decisions and their objectives are personal and subjective. However, as companies grow changes take place. At the other end of the spectrum are larger stage three companies. Growth has taken off and products are diverse and complex. There is a need to have a management team overseeing a much larger organization that focuses on the Return on Investment, profits and earnings. The strategy is to grow the company’s sales, and this can take the form of organic growth or acquisitions.
Can a company, in the lower middle market, really save money using a digital procurement process?
Let’s take a closer look …
The First Step
The first step towards digitizing the procurement process can only begin if a company already has a procurement program in place, i.e., process, templates and a submission network.
This being the case, let’s stipulate that management has decided to examine which process is better for the company, a manual or digital purchasing requisition program.
To simplify this example, we will only look at the first part of the process and that is creating and submitting a purchasing requisition to the Purchasing department.
To begin, it is necessary to benchmark the company’s current manual process. The time for processing and submitting requests for operational supplies needs to be measured.
Below are the results, using a random sampling of purchasing requisitions, extrapolated to equal one year’s worth of requests.
The next step involved processing the same requisition(s), but this time the requests were processed and submitted electronically. Here are the results. Again, the same sampling of requisitions was used and extrapolated as in the first case.
When comparing these two studies, it is easy to see there is a significant reduction in costs when using the digital creation and submission process. In addition, requisition accuracy increases by eliminating repeated data entry that is an integral part of the manual process.
More Reduction in Costs When Digitizing Other Processes
The reduction in costs achieved by a company can be even greater, once the entire process is digitized. This can be seen when the entire purchasing and administrative processes of the company are digitized (i.e., purchase orders and Accounts Payable).
The Bottom Line. Once a procurement program is in place, a company can analyze the idea of migrating from a manual to a digital requisition process. The first step is a time study to benchmark manual processes. Likewise, the digitizing of the purchase requisition creation and submission process must be measured. The time saved by a requestor in processing and submission of a requisition was approximately 50%. More opportunity for cost reductions exists when considering digitizing the purchase order and Accounts Payable processes.
The Challenge. Many production systems today contain ‘bottlenecks’ or constraints costing a company money. Do you still have significant bottlenecks in production at your facility?
The APICS dictionary defines a bottleneck as “a facility, function, department or resource whose capacity is less than the demand placed upon it.”
In other words, a constraint is an element or process in a system that prevents the overall output from reaching higher levels.
Theory of Constraints. Dr. Eliyahu M. Goldratt developed a philosophy that ‘all’ systems at any one time have only a small number of variables or constraints (perhaps as few as one) that effectively limit the output of a system.
With this in mind, there are ways to optimize a manufacturing system’s output. Likewise, once constraints are removed, a company can reduce its overall costs since more product will be moving through the production process in a shorter amount of time.
It follows that the company’s challenge is to see (and understand) the current state of the production system and then envision the future state allowing for higher output of the system.
Removing Constraints. The APICS dictionary defines ‘five focusing steps’ to help identify and remove bottlenecks or constraints in a system. They include,
- Identify the constraint – determine the throughput rate and the demand rate
- Exploit the constraint – maximize use of the constraint
- Subordinate the constraint – make effective use of the constraint the top priority
- Elevate the constraint – increase capacity of the constraint
- Once resolved, identify the new constraint.
One of the most difficult steps, in more complex processes, is identifying the initial constraint in the system.
‘Product flow’ diagrams, that pictorially describe the product and flow rate, can be of help in finding the point or points of constraint in a system.
The Bottom Line. Many production systems exhibit ‘bottlenecks,’ i.e., those elements whose capacity is less than the demand placed upon them. Dr. Goldratt’s theory of constraints stipulates that a system can have only one or, at most, several constraints limiting the systems output. Identifying and removing constraints increases the output of a system and helps reduce costs. APICS defines five steps that assist in removing constraints. Product flow diagrams help identify constraints in a system.