Upgrading Your Supply Chain without Breaking the Bank

Stephen DeAngelis

October 20, 2011

In a post entitled Supply Chain Transformation, I cited an interview that Dustin Mattison had with Jeffrey Boudreau, a Partner at XCD Performance Consulting. In that interview, Boudreau claims that right now the is right time for companies to improve their supply chains. He notes that the era of supersizing seems to have ended and cites the fact that many companies are breaking into smaller companies that are focusing more tightly on a specific product lines. As a result, Boudreau insists, “This is really a year to pause, breathe and catch up. Now they can optimize their supply chain rather than supersize their supply chain.”[“Improving Supply Chain Without Capital,” Dustin Mattison’s Blog, 25 August 2011] Before discussing how companies can improve their supply chains with little or no capital, Boudreau takes us on a tour d’horizon of the corporate landscape. He writes:

“I think that traditionally executives look for strategy, process and technology to improve their supply chain. … What we have seen this year and what we have heard pretty much across many industries is that there are no capital budgets left for this year. … We are finding executives have operating budgets, but they have no Cap X budget to spend or invest in new upgrades for their supply chain. … Without this capital budget, we are seeing a couple things. We are seeing that initiatives are getting elevated to get approval. In the past a vice president could approve a project. Now it is getting elevated to a senior vice president, an executive vice president or perhaps even the CFO. We are certainly seeing a lot more active CFO involvement even in modest initiatives.”

Boudreau makes an interesting observation about increased CFO involvement in supply chain decisions. In several past posts, I’ve noted that CFOs are getting more and more involved in areas from risk management to sustainability — all of which affect the supply chain. Frankly, some of these areas of expertise are beyond the ken of money men so they need all the help they can get. Most of that help, I believe, will come from supply chain professionals. Boudreau continues:

“The second thing we are seeing is that there is almost no spending on new technology. During the past few years of rapid growth on the other hand, there had been so much spending on new technology and there was tight timeframes to get it in and working. There has been a massive overlook in getting these technologies and processes optimized. As a result, we are seeing that it is now time to optimize and not supersize.”

I agree with Boudreau that companies are looking to optimize their legacy systems rather than invest in replacement technologies.

“The third thing that we are seeing is that CFOs are being very receptive to schedule an initiative or a new supply chain improvement to become funded directly from existing operating budgets.”

This just makes sense. An improvement that “costs nothing” or quickly pays for itself is a win-win.

“A fourth thing is inventory. Actually, I think the U.S. has done almost too good of a job here, where they have done massive productions and inventory positions, freeing up all kinds of capital, really creating an instant line of credit. However, it is almost at a risk of destroying their supply base.”

In other words, Boudreau believes that some supply chains have become so lean that they have become brittle. In an age that requires supply chain agility and flexibility, brittleness can be fatal.

“A fifth thing we are seeing is a technique which has been used in the past, but I think it’s more important now. The technique is to actually bundle several initiatives together so that the savings from one part of the initiative can actually fund another. An example might be a labor of management program that kicks off a lot of labor savings; then use that to pay for a new supply chain execution or warehouse management software installation. Or we are seeing executives go back and negotiate just about every contract they have, from telecom and support services to rent, and then use those savings to pay for upgrades or new technology.”

This sounds like Congress’ pay-as-you-go scheme. In theory it sounds great. Seldom, however, can you find tit for tat savings that match exactly the amount you need to implement some new improvement. If you can pull it off, however, it’s a good strategy. The final activity that Boudreau is seeing is more outsourcing. He writes:

“The sixth thing we are seeing is that there has been a big increase in outsourcing day-to-day activities. Transportation has been outsourced for decades; you’ve seen 3PLs do a lot of outsourcing of inventory, warehousing, Pick, Pack & Ship. However, I think it is even more important now to maintain day-to-day activities and outsource special projects or one-off initiatives that require a lot of distraction and outside expertise. With the explosion of available experts out there—just look at LinkedIn—we are seeing more and more people engaging experts on one-off initiatives. More people are actually taking short-term gigs to help a company with a project. And we are seeing a big shift away from the big consulting firms and more toward the network of experienced, specialized professionals to help out with pretty big projects at big companies.”

I wish Boudreau would have explained why he believes that it is “important now to maintain day-to-day activities” rather than outsource them. With unemployment remaining high, his recommendation to hire subject matter experts to do one-off projects makes a lot of sense. There are a lot of talented people looking for work, even if it’s temporary. Even though some companies are flush with cash, Boudreau says that many of them have “a ‘use what we’ve got’ mentality.” He indicates that this is not a bad thing since many companies have never really “realized the full functionality of their technology, their software and their systems.” As a result, he writes, “There is now an opportunity to really build expertise with folks learning how to better use the business systems and technologies to optimize and run their business. I think this is a unique opportunity that hasn’t been around for quite a long time.”

 

Improving how a company uses its legacy systems is certainly one way to improve supply chain performance without spending much money. Boudreau, however, believes that the best way to free up funds to make supply chain improvements is to make changes in labor management. He writes:

“Labor is still a big untapped opportunity. Labor management has really started to get some traction in the past 6 to 7 years. Although the concept is well over a hundred years old, and has been a mainstay in manufacturing for decades, it has only been getting traction in supply chain in the last 10 to 15 years. There is a big untapped opportunity for companies to understand how to transform their labor-intense operations to a performance-focused culture. If I look at all the supply chain initiatives or strategies companies can take, labor typically floats to the top in terms of highest ROI.”

Boudreau claims that labor management reform is most applicable to “labor intense businesses, such as retail and consumer products distribution, high-tech refurbishing and kitting, field service operations and customer care operations.” He explains:

“There are new technologies that can help companies report on performance versus expectation. We can compare their actual performance versus the performance goal. We can then report that to management in terms of a score, and use that to evaluate, motivate and even incent people to take charge of their own performance. Traditionally, this has been somewhat difficult to do in jobs that are not direct labor. However, there are new techniques now to look at what we call white-collar and support operations, where there might be some thought intensity or there might be time in task, there might be customer interaction. It is not a directly measurable amount of work, and those have always classically been a challenge for engineers to figure out what is good performance for that person over some period of time. We can use new techniques out there that have become a more prevalent, more widely used, and use them as a part of a comprehensive performance-management program; what we like to call workforce motivation.”

Such reforms obviously aren’t easy to make. Employees, who are not used to having big brother watch their every move, are likely to chafe under the scrutiny. However, if they see that customer satisfaction goes up or they are rewarded for better performance, the reforms may go down easier. Economists have repeatedly noted that even though productivity has risen over the past few decades, employees haven’t been the beneficiary of those improvements. Boudreau indicates that there ways “to engage people and let them take part in a true taste of capitalism, where they can actually, in a small way, be in business for themselves when they are actually at work as an employee for a company.” Such schemes are good for both the company and its employees. He continues:

“Look at where are the big operating budgets, and those are most likely your biggest opportunities from which to fund an initiative. It is likely going to be your labor and transportation budgets. … Go where the money is—that would be the first place to look. If it’s related to labor, workers may misunderstand and think you are changing the way that the value they add to their workday is perceived. It is all about the people, and it is all about creating the right culture and the right workforce strategy. Unfortunately, we are seeing this pushed or promoted as a software initiative or as an engineering project. Those are two important and necessary components of a labor and management project. However, they are certainly not the overarching emphasis or the underlying theme for what these programs need to be to be successful.”

Clearly, if you are going to make a successful transformation of the way you do business, you have to get everybody on board. That’s a very difficult task — especially when it comes to labor relations. Boudreau continues:

“[Implementing] a labor-management program or paid-for performance, [is] clearly optional. It is like going to the gym; it’s not something you have to do, but if you do it, you get great results. Since it is optional, therein lies its greatest risk. The risk is that once the economy turns around, or there is a merger or divestiture, or something else that takes management’s attention. Management will think that they have got the management program licked and they take all their attention away from it. These programs can easily wither on the vine and die. It is a big opportunity for companies to improve their supply chain without any capital, but they need to understand the commitment they’re going to make once they head down that road.”

Boudreau claims that, when labor management initiatives are implemented correctly, the payoff is significant. He indicates that interviews with “dozens of executives who had done this program” indicated that the improved productivity from “those programs was about 45%.” When he and his colleagues “looked at what the top ten—the top-tier programs, the ones who had done just about everything right,” the improvements were even more spectacular. “Those top performing companies that use these programs averaged a 62% productivity improvement.” Improved productivity was not the only improvements that Boudreau and his team found. There were other positive side effects as well. He explains:

“We are also seeing a lot of qualitative improvement to the supply chain in terms of strengthened and bolstered management skills. We’re seeing lower turnover. We are seeing a shift over time to a higher mix of people in the workforce. So think of it going from a rec soccer team to the travel club soccer team. The mix of players on the team has been elevated over time; so the folks who are drawn to that type of environment tend to stick around. We are also seeing [another] interesting side effect. We found that all the prior investments in software technology automation became improved. … They get much more return on assets or much more utilization out of their existing infrastructure.”

When incremental improvement programs positively affect the way employers and employees see their relationship, they move from a “use what we’ve got mentality,” which excites no one, to a “let’s get the most out of what we’ve got mentality,” which makes every individual a valuable stakeholder in the process. You can only get there by bringing everyone willingly along with you. People who feel that they have been coerced and/or exploited are going to undermine change management. Done right, change management provides long-term vision along with short-term wins to demonstrate the value of change.