The Infosys global supply chain management blog enables leaner supply chains through process and IT related interventions. Discuss the latest trends and solutions across the supply chain management landscape.

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November 26, 2008

Capturing Warehouse Costs and Margins

This is my third blog which is an extension of my previous one, "Channels to Leverage Warehouse Revenue". In this blog, I will explain what a WMS software needs to scale up to in order to capture revenue related information.

First, it must be able to capture costs for warehousing tasks carried out or space utilised. Having said this, tasks carried out will be treated under activity based costing, wherein each activity carried out within a WMS transaction will have an certain cost associated to it.

Let us understand this with an example. Take the case of Kitting that needs to be carried our for a certain product before it needs to be packed into a shipping carton. The cost associated with the kitting task would be labour cost, equipment cost, consumables used,and so on. This would all pile up to the cost that incurs to kit a finished product.

The WMS needs to provide capabilities to define such costs. Next, there needs to be a margin applied to each of these cost and also a overal margin over and above the total cost. This will define the profit that the warehouse will make when product comes out from this kitting process. The cost plus margin is then charged as customer who utilizes the kitting services of the warehouse.

There may be many such activities that can be defined within various warehousing transaction for which a customer can be charged for. Cost of other expenses can also be factored in like Pulley cost, Batteries, Labor unloading from Truck, Security Cost, Salaries of Labor, Cleaning Expenses and so on. These costs need to be associated with relevant warehousing transactions and need to be tracked as and when these transaction are being executed. These costs are accumulated over a period, say a week or month and billed to the customer, of course, with the margins added to each of them.

Next, we will delve into the other side of costs that can be defined and charged to the customer utilizing the space. This is known as storage based costing.
This can be defined as Storage Unit of Measure (UOM) based costing, Package UOM based and Fixed rental based costing. These are the three types of costing that can be defined, tracked, captured and billed to the customer.

In my next blog, we will delve much deeper on each of these storage based costing on how they need to be setup, with real situational examples. 

November 22, 2008

The Other Side of Supply Chain

Supply chains have been traditionally linear in nature. Let me explain what I mean by a linear chain.

Raw materials are procured from sources such as vendors, transformed into a sub-assembly and/or into a finished good again at  factory and transported to a distribution center or a warehouse. The number of echelons in the chain vary based on industry structure and resulting dynamics. Each echelon adds a finite value by either transforming the product into something more worthy of consumption or moving it closer to a consumer. This chain quickly became a network when organizations felt strongly about leveraging core-competencies of other organizations and developing one of their own.


The network quickly became complex as the nodes were either geographically dispersed or did not talk the same language as the other.  They used different tools for communication, were bound by a local legal structure and sometimes had divergent/adversarial/competitive positioning compared with other entities in the network. What came out of the mass fragmentation and dispersion was a complex supply chain structure dropping under its own weight no longer nimble as before.

Then came a phase of consolidation and tool revolution where the partners in the network started or seemed to start working towards a global objective of serving the customer - the only objective agreed upon or could have been agreed upon by all the entities in the network. Good sense prevailed and the common objective gave a common ground for innovation and service to the customers. So far so good.

However one aspect of supply chain that was not able to get due attention and focus was the service side of supply chain - the after-sales service. This is pertinent towards Hi-Tech supply chains in particular. As the customers become more demanding, the after-sales service model became increasingly complex requiring tracking and management at multiple service points. Supply chains  of today have become increasingly  more complicated on this reverse side of supply chain. 

Some of the broad challenges that Hi-Tech supply chains in particular are facing in the service side include
- Increasingly complex service models towards customers requiring guarantee schemes that are very difficult to price
- Due to miniaturization and complex designs, full part replacement has become popular but very expensive for supply chains
- Product Portfolio proliferation has led to maintenance of increasing pipeline inventory in terms of service parts
- Shortening Life-Cycles add even more complexity to service side business. Though laws require 7 years of service, as an example, the composition of the installed base of finished products is a dynamic target for planners to chase for planning service parts
- Aggressive selling in forward supply chains burdens the service supply chain, since this leads to consequent "freak" sales-returns
- Fragmentation in the forward supply chain leads to a huge complexity in the service supply chain, since the failure component needs to be replaced/repaired by coordination with a diverse set of component suppliers
- Forward supply chains have to absorb, adapt and adjust to the "regurgitation" levels in the supply chain to come up with a better evolved forward business models

This has made the supply chains of today non-linear in nature and very different from what we understood conventionally. There are entities in supply chain that are becoming core-competent in service side playing sometimes equal role as the forward side entities. All of the above has created a market opportunity for software product vendors to come up with appropriate tools to address this service side of supply chain. The marketplace of today have forced businesses to evolve from a point offering positioning to a an end-to-end offering positioning.

Times of today and future will be very interesting for service side supply chains.

Well, on a philosophical note, selling an offering to a customer is a lot like being accepted for a marriage proposal.  As one wise old man said - all marriages are happy. It's the living together afterward that causes all the trouble !

November 18, 2008

Where do I start Supply Chain Risk Management in my supply chain?

Implementing Supply Chain Risk Management (SCRM) is as much about changing the mindset of people, as much it is state-of-the-art tools and processes. I firmly believe that if every person operating within the supply chain is made aware of the risk associated with each decision, half the distance to success is traversed. Ability to foresee and assess the impact of the risk is probably the toughest thing to instill across supply chain, rightly so, for multiple reasons.

1.       Operations managers across supply chain typically operate in silos. Although they are extremely well versed with their functional area, their understanding of how their function will impact the entire supply chain is often missing. They are not to be blamed for this, as they were never required to develop that view. This is the first major obstacle in implementing SCRM program. Developing a holistic view of multiple supply chains within the organization and how each function knits, is the first and foremost requirement.

2.       My first reason could be wrong as I have come across Operations Managers, who are in effect, are supply chain managers in all aspects but the designation. The holistic understanding of supply chains is a hygiene factor, but that’s not enough. Ability to assess and quantify risk scenarios is of vital importance. Quantification uses anything from gut feeling to experienced speculation – and not always scientific tools and techniques. Organization needs to invest into researching and designing methodology to assess risk across all supply chain functions and processes.

3.       Supply Chain Risk Management is in a nascent stage. Early adopters have developed in-house solutions to enable few processes. However, enterprise-wide SCRM solution remains a white space. Such a solution can contain simulation capabilities to aid business users in making informed decisions in context of Supply Chain Risk. It could also contain integrated view of supply chain processes and how, mitigation strategy employed in one area could benefit the entire supply chain. It should provide dash-board capabilities where the Supply Chain Owner could monitor on day-to-day basis, how much risk he/she is posed with.

While such tools are under evolution, one need not sit idle. Supply Chain Risk Management starts from - bringing the change in mind-set which by itself is a herculean task. Enabling “risk-conscious decision making” approach is the next step and that can aided by a plethora of research done by academicians. Supply Chain Operators can be equipped with simple excel tools to assess and report Value at Risk (VaR) on periodic basis – starting on a monthly basis and reducing the frequency as the process reaches the desired maturity level. The assumptions for the assessment should be well documented and reviewed monthly by monitoring council within each function. The same exercise needs to be repeated at organizational level with key stakeholders such as marketing/sales, finance and operations/supply chain functions being involved. Early adopters should leverage this opportunity for creating awareness to shareholders about the best practice for gaining their confidence.

November 13, 2008

Five 'I's' of Supply Chain Visibility

While reading a thought provoking blog on a speech by David Allen, famous author of “Getting Things Done”, I could not help but find a corollary between capabilities, what he calls as five “I’s” , of  personal productivity software and an ideal supply chain visibility solution. A day in life of an executive is a quite interesting corollary for Supply Chain. There are constraints, demanding customers, reluctant suppliers and unforeseen meetings/happenings that continuously disturb the meticulously planned schedules. Executives pay a lot of attention to their personal planning gadgets and hire great assistants who help them maximize their day’s worth. Just goes to explain how much would be the worth of a supply chain visibility solution that allows the supply chain managers similar control over their processes.

Summed up eloquently by David as the Five “I’s” the five capabilities that would make for a great personal productivity software also can be extended to become the critical capabilities of an ideal supply chain visibility and control solution:

Interception: The solution must be configurable for line managers to place process sensing “listeners” that actively seek process deviation. For example a fulfillment manager might place a “listener” to intercept any delays in picking an express parcel due to labor shortage in the warehouse. An elegant solution would have an easy to navigate visual modeler that can be quickly configured by business managers and process owners.

Interpretation: A signal becomes a message only when it is correctly interpreted. The visual representation capability of the solution must allow the managers to quickly deduce the impact of the event intercepted by the “listener”. For example the alert from delayed express shipment should not only trigger alert to the fulfillment manager but also display if any linked shipments to the customer need to be rescheduled or expedited. This can be specifically useful if the express shipment was a part of customer’s scheduled plan for a critical project and it needs appropriate communication and resolution.

Investigation: A supply chain event cockpit would provide the manager a single control dashboard to not only monitor and interpret the critical events across the supply chain but also to quickly access other required information to take the corrective action. This goes beyond the plain vanilla BI offerings and should have “what-if” scenario generation capabilities to help manager quickly decide the best solution to get out of the soup.

Integration: Once the manager is through with the interpretation and investigation, the application must go beyond being the visual dashboard and analytical tool. Capability to trigger changes in other applications or start workflow do seem surreal like a Star Trek pilot control board, but with companies on their way towards SOA enablement and  a robust portal strategy, this capability would certainly deliver the maximum bang for the buck.

Implementation:  There are many products in the market that promise the proverbial manna of complete supply chain visibility but not many are easy to implement and integrate with existing applications. An ideal solution should cause minimal disruption to existing processes and infrastructure and act as an “ether” layer on top of other applications.

Now where do I start looking for such solutions?

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