Supply chain management is the ultimate back office function. It doesn’t receive as much attention as websites, marketing technology and app development. Yet improving the supply chain yields major bottom line benefits.
Walmart and Amazon are household names in retail, noted for their global presence and steady emphasis on delivering low prices. Outstanding supply chain and operations systems are a key reason for their success. What if other companies were able to achieve Walmart-style supply chain efficiencies? That’s the promise of a new generation of supply chain innovators.
What’s driving today’s smart supply chain?
Improving the supply chain and internal operations wasn’t always a top concern. Think back to the 1990s: Low fuel prices and high economic growth meant minimal returns from optimizing the supply chain. That has all changed. Anti-terrorism measures have added red tape and procedural delays to shipping. Fuel surcharges have become a normal item on vendor invoices, even when commodity prices decline. These trends have created an increased sense of urgency to cut costs.
At the same time in order to retain customers, and compete with the likes of Amazon, companies must offer both ever-faster delivery and greater customization.
“Our view is that customers are expecting product delivery in a few days,” says Eric Lamphier, senior director of Product Management at supply chain software company Manhattan Associates. “The days of taking seven to 10 days to deliver an order are on the way out. Better data and KPIs are key to meeting that customer demands for fast delivery. Many companies are still struggling with the accuracy of their inventory data,” he adds.
Consumer demand for mass customization is also driving the need for more flexible supply chains. “We worked with Adidas to support their customized sneaker offering. It was a complex process because there are many different factories to coordinate,” says Kurt Cavano, president of supply chain software company GT Nexus. “Supply chain innovation requires close coordination across several groups: accounts payable, transportation, warehousing, customer service and other groups,” he adds.
A combination of new technologies and process improvement methodologies provide the tools to improve the supply chain. RFID (Radio-frequency identification) tracking for products, and analytics software give improved insights. In terms of methodology, the Lean Six Sigma movement, popularized by books such as “The Lean Six Sigma Pocket Toolbook” and “The Six Sigma Handbook,” has equipped businesses to formulate better questions. Supply chain consulting has become a popular offering at brand name firms such as Bain, Capgemini and Deloitte.
Keeping bottles safe at the LCBO
Established in 1927, the Liquor Control Board of Ontario (LCBO) sells spirits, wine and beer, in addition to other products, to Ontario residents. The LCBO’s supply chain makes regular deliveries to more than six hundred retail stores and manages shipments from around the world.
The costs of outdated supply chain management practices and technology prompted the LCBO to search for a better way. “Our employees suffered dozens of injuries due to the manual processes we used to prepare and ship products. In addition, we also suffered financial losses when products were broken during shipment — an estimated loss of $500,000 annually,” says George Soleas, president and CEO of the LCBO.
At the core of LCBO’s supply chain innovation is an algorithm with over 900,000 lines of code that optimizes the process of packing products into pallets. It’s like an industrial scale version of the Tetris video game. “The auto-palletization process developed at our Durham service centre involved a combination of new hardware and a proprietary algorithm to pack items of different sizes into pallets,” says Soleas. At the Durham Centre, case dimensions for different products can vary significantly with case length ranging from 7.8-21 inches, width from 6.2-15.7 inches and height from 4.3-20 inches.
The organization has estimated annual labor savings per year at $1.9 million Canadian ($1.46 million U.S.) from implementing this project. And it has reduced the number of days lost due to workplace injuries and related problems from 200 days in 2012 to near-zero today. “We delivered this innovation with the engagement of our unionized workforce, in-house experts and outside consultants,” Soleas adds.
The LCBO is currently seeking to patent their innovation and explore ways to license the technology.
The high cost of supply chain failure
Poor inventory data quality has potentially disastrous consequences. Target’s failure to expand to Canada has been attributed partly to low quality inventory information. As Canadian Business reported: “At the very start, an untold number of mistakes were made, and the company spent months trying to recover from them…. A team assigned to investigate the problem discovered an astounding number of errors…. The investigative team estimated information in the system was accurate about 30% of the time. In the U.S., it’s between 98 percent and 99 percent.” As a result, many of Target’s Canadian stores ran out of critical inventory and the company’s strategy to appeal to customers by offering common household items — the “mom’s shopping list” strategy — could not succeed.
Target’s failure in Canada is a cautionary tale for IT professionals and supply chain experts alike. In the United States, the company has developed an effective supply chain process. However, this success did not easily translate to the company’s Canadian division. Target’s example shows that innovation and expansion into new markets cannot be achieved without deep understanding of the value of data integrity and processes to ensure data is well maintained.