Many small-to-midsized business enterprises struggle with various symptoms—the undesirable effects (UDEs) of supply chain troubles. Too frequently, however, the executives and managers do not have a clear picture of the cause-and-effect in their own business or the industry in which they participate.
As a result, they find it difficult to know which levers to “push” and which levers to “pull” in order to get what they are really after: increased profits.
Print out this checklist and check off the appropriate columns as an exercise in honesty with yourself and the condition of your enterprise:
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Not Applicable |
| 1 |
We experience frequent out-of-stocks, particularly on fast-moving items | ||||
| 2 |
We have considerable overstocks, especially on slow-moving items | ||||
| 3 |
We have too much inventory almost everywhere | ||||
| 4 |
Too frequently, customers are dissatisfied with product availability | ||||
| 5 |
We spend too much time, energy and money on expediting, excess freight costs and “emergency” orders | ||||
| 6 |
We too often find ourselves scrambling in cross-docking operations instead of in an orderly shipping and receiving mode | ||||
| 7 |
Items arrive from our vendors later than expected many times | ||||
| 8 |
Our supply lead-times are, in general, too long | ||||
| 9 |
We know that we lose sales and sales opportunities due to our inability to supply products at the time they are wanted or needed by our customers | ||||
| 10 |
Our warehouses and display spaces are packed and we are running out of room | ||||
| 11 |
It can be a real burden on our systems to increase product variety or even take on new products | ||||
| 12 |
We end up discounting or liquidating too much stock (or holding on to what we know is pretty much worthless inventory because we “can’t afford” to write the values off our balance sheet) | ||||
| 13 |
Expiring product or products becoming obsolete while sitting in our inventory reduces our profitability | ||||
| 14 |
Discounted sales of old products just before the release of new products cannibalizes sales of new product releases, so we never make the profits on new releases that we really should | ||||
| 15 |
We have way too much cash tied up in inventories and it is hurting our cash-flows that could otherwise be used to build our business in more profitable ways |
If you answered honestly and the great majority of your columns are marked “No,” then you and your firm are in pretty good shape. Congratulations!
If your honest answers led to a lot of “Sometimes” checkmarks and that “Sometimes” really means “We don’t know for sure,” then you have a checklist for discovery. Get to it! Find out what’s really going on in your business and industry.
If you checked a majority of boxes in the “Not applicable” column—and it’s true—then you can stop reading this article right now and go on to something more important to your business success.
If the majority of your honest assessments ended up as checkmarks in the “Yes” or “Sometimes” columns (and “sometimes” really means “sometimes”—not “we don’t know”), then there is considerable room for improvement in your supply chain and there are steps you can take to start changing things now.
The First Thing
First of all, you and your management team are likely going to have to gather some data. In particular, you need to begin to understand three key metrics:
- Throughput, which we define as REVENUE less TRULY VARIABLE COSTS (TVCs). TVCs are limited, as the name implies, to only those costs that are truly variable based on the incremental change in revenue. This eliminates all allocations of labor and overhead done based on complex formulas. Included in TVCs are typically costs like raw materials, unit-based duties or taxes, subcontract or outsourcing costs paid for on a per-unit basis, and most sales commissions. Be careful what you include here. Wrong decisions in this category can lead to wrong choices being made in management of your supply chain.
- Inventory (Investment), which we define as all the money your system—read: your business—has tied up in assets of any kind in support of turning inventory into Throughput.
- Operating Expenses are pretty easy to define once you understand TVCs. They are all the monies your company pays out month after month in support of the activities undertaken in turning inventory into Throughput. Simply stated: look at your profit-and-loss statement and then subtract out all of the TVCs. What you have left is Operating Expenses.
Next Steps
- Calculate your Throughput for a given period (e.g., last year, last quarter, last month, year-to-date).
- Calculate the average value of your inventory on-hand over the period selected in step 1 above.
- Calculate your Operating Expenses for the same period
- Calculate the size of the problem you face today in real terms. We will call the metric Throughput-Dollar-Days-Delayed (TDDD) and we calculate it as the Throughput value of delayed shipments times the number of days the shipment has been delayed. This gives us a single figure—one metric—that tells us the size of the problem both in terms of profit (Throughput) and the days that profit has been delayed from being turned into actual revenue. Use a table like the one below to get you started.
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| Order No. |
SKU/Item |
Delayed Qty |
Delayed T-value |
Days Delayed |
D * E = TDDD |
| Total TDDD >> |
Now you are getting somewhere. In step 4 you have a single metric by which to measure improvement profitability, due-date performance, customer service levels and cash flow. This should be a helpful beginning today.
We will go forward with more steps in our next article.
In the meantime, we would be delighted to hear from you. Please feel free to leave your comments here or contact us directly.
