The Case for Competing Supply Chains
Addressing uncertainty in sales plans with supply chain techniques can become a key differentiator and a competitive weapon.
Our chief weapons are time and flexibility.
I love manufacturing. The idea of making something that people want to buy fills me with a sense of pride. It’s almost a patriotic passion, and it’s for this reason I lament manufacturing’s demise, especially here in Northeast Ohio, my home. I’ve wrestled with the reasons and realize they are many and complicated. I just can’t shake the feeling that we’ve lost our competitive spirit and a desire to win. For my part, I’ve tried to do what I can to promote a higher level of competitiveness with the companies where I consult.
Offshore manufacturing is a reality, but the willy-nilly movement of production off our shores over the past two decades has seen a small turnaround in recent years. In my mind, this turnaround has been too slow and the opportunity to bring some of this manufacturing back to the U.S. has not been pursued as aggressively as it should.
One area that continues to astound me is our inability to mount a compelling business case that compares the onshore versus offshore costs of manufacturing, materials, logistics and labor as well as the components of time, return on inventory investment and the risk of the lost sale because inventory is moving in longer supply chains.
The idea of the lost sale is not a new or complicated one, but it is difficult to measure. The most effective means of measurement I’ve seen revolve around assessing sales velocity and understanding the likelihood of a sale. There is also the need to consider stockout situations and assess the likelihood of sales that would have happened.
Although this is a pretty straightforward explanation, it is still difficult to assess and isolate meaningful data. These measurements are still flawed because there is not an effective way to test stockout timing or the purchase of a substitutable item. It is absolutely necessary, however, that lost sales are measured and it is absolutely necessary that steps are taken to prevent lost sales and by extension, stockout situations.
Generally, manufacturers want to sell as much of their wares as possible since they generate profit from each sale. This reveals the nature of the problem: being able to anticipate how much will be sold and how much profit will be made requires knowledge of future events. There is no crystal ball to see into the future, and the farther we look, the more uncertain we become. We are left with making educated guesses about the future, and the only thing we know for sure is that more information results in better guesses. Therefore, addressing uncertainty in our sales plans with supply chain techniques can become a key differentiator and a competitive weapon. Our chief weapons are time and flexibility.
As a manufacturer and supplier, selling the benefits of additional planning and reaction time to a retailer is critical. What can be done with this additional time? Ideally, it can be used to increase sales by focusing on activities related to adjusting and refining actions to meet future demand. Where does the time come from? When viewed within the context of an offshore import there are multiple time buckets including:
- In the host country
- At the port of embarkation (incl. customs clearance)
- At the port of debarkation (incl. customs clearance)
- In destination country en route to the destination
This can easily take three to four weeks, a significant portion of a selling season. The example below may better illustrate the benefits of additional time:
A national retailer gets its house brand of snow shovels from an offshore supplier. The process they follow includes reviewing historical data to forecast a sales quantity, placing an order in March for delivery in September and distributing to retail locations throughout October for sale throughout the winter season.
Last year a sales executive at a Northeast Ohio (NEO) [PU1] manufacturing company noticed that the shovels had been OOS (out-of-stock) at her local store. She inquired why the shovels had been OOS so long and discovered that because the shovels had all been distributed in October, it was difficult, if not impossible; to move products back through the network for redistribution.
As part of the executive team at her company, the sales executive is very interested in finding ways to consume her company’s winter production capacity as well as making inroads with a large national retailer. She puts together some numbers to determine if there is a compelling business case.
She estimates that a winter storm gives a one-week warning and this becomes the order lead time for new shovels. The shovels need to be the same and sold at the same price. She estimates that the imported cost is $12, her company’s cost is $15 and the sales price is $24. She also believes there is a 20 percent sales lift by having the shovels at the right place at the right time, a service her company can offer because of the additional time and their flexibility.
Here is the deal she proposes:
Instead of purchasing all 5,000 shovels offshore, purchase 80 percent (4,000) offshore and 2,000 from the NEO company, deferring distribution to the time of need.
The result is a better in-stock position as products are distributed just before the time of need (a weather forecast) and a 10 percent increase in gross margin dollars. Other intangible benefits include happier customers and an increase in associated sales such as ice-melt.
There is a way to leverage time and supply chain flexibility to bring manufacturing opportunities back to the U.S. Since this was a very simple example many costs were not included, making the actual opportunity potentially much larger.
By taking the time to measure lost sales and allowing for additional planning and reaction time, it IS possible for medium and small manufacturers to compete effectively with the offshore behemoths.