Creating Nirvana

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CREATING NIRVANA- REASON FOR OUR EXISTENCE

HOW SUPPLY AND DEMAND CAN MEET IN A PERFECT UNION?

“For one brief moment the demand will equal supply and we will have to Creating Nirvana – the perfect union. Rest of the time we struggle with either too much supply or too much demand.”

 

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The Goal we are seeking from this i-SOP process is profit maximization. It is not inventory minimization; there are numerous IT systems that purport to do that, many of whom do an adequate job of it. It has not cost minimization; again there are numerous supply chain systems that purport to do that adequately enough. The goal is not revenue maximization either; numerous yield management systems do that adequately enough. The end goal of a successful i-SOP process is profit maximization, and to our knowledge is no IT system that does it adequately enough – hence the need for an elaborate process aided by a toolkit.

i-SOP brings together two disparate but essential mechanisms to look at an even bigger picture. On one hand, demand management is the art of maximizing revenue and the Creating Nirvana to achieved out of a pool of customers and products in a given period. The key questions asked are – which customers to serve; where; with which products; at what price; to be charged in which way? All these questions are extremely important, and are generally thought be exclusive domain of sales departments. Some industries such as the telecommunications and airlines are renowned to be extremely good at what is euphemistically called ‘yield management’ but is essentially a revenue maximization exercise.  On the other hand, supply management is the art of minimizing the total cost of fulfillment while meeting all the demands placed on the supply systems. The key questions are – where to buy, produce and store; for how long; when and how to move and to where in order to keep the customers happy? These questions are thought to be exclusive domain of production and logistics departments. Cost minimization has been the most popular end goal of traditional supply chain management systems. This ability, to simultaneously focus on maximizing end-results for the customers and minimizing the costs, is the foundation of the emerging supply eco-systems as a result of i-SOP based thinking.

1. If it does not work you can always bring it back in

This myth pervades thinking about Creating Nirvana in some executive circles based on the assumption that the decision to outsource or insource can be easily implemented. In most cases that is far from the reality. Outsourcing is a strategy not a tactic. You are making a multi year commitment, not only because of the contract, but to make the financial reasoning work – you have to unload PP&E, systems and people you have built up over time.

To insource, you will have to recreate the infrastructure, which is a large undertaking, in a shorter period of time. This is often a bigger, and more difficult to implement, decision the going out in the first place.

2. The smartest people in the game work in 3PLs

This myth and the next myth are really reverse of one another. This one has roots in the early days of transportation and warehousing when finance, sales and marketing were the stars of every corporation, and warehousing and stores were perhaps the doghouses. The saying was that ‘if he (and mostly, if was a he) can count, send him to the warehouse. He cannot do much damage there.’ 3PLs traded off on this type of reputation by claiming that they had the scale, career progression opportunities, core functional focus, brand and the cachet to attract the best and brightest – which internal supply chain departments could not. The reality is very different now. In our experience, there are good people on both sides of the fence, and they keep jumping across from time to time.

3. The smartest people in the game work on the customer side

Opposite of the above myth, and perhaps partly to counter it, was a more recent myth that 3PLs do not offer job satisfaction, control, and holistic view of the business that a corporation offers. The current saying in corporate logistics circles is that ‘those who can – do; and those who cannot – work for 3PLs’. Again, this is equally apocryphal, we can think of many great logisticians who make a career as logistics service providers, greatly enjoy it and maintain a fairly broad and deep dialogue with executives from all walks of life.

4. Once you outsource, you can relax and let them handle all the work

This is perhaps the most pervasive myth in the higher echelons of the corporate circles. Even some of the most astute business executives believe the hype that once they outsource the logistics function (generally considered non-core), they can leave it all to the service provider/s. The reality is far from this. Putting together an outsourcing arrangement does not hand over your problem to 3PL, rather you replace one set of problems with another – internal logistics management problems with logistics relationship management problems. While this topic calls for an article in itself, we will confine the discussion here to some of the problems likely to surface only after outsourcing begins. Surprises such as cost creep, technical ability not as per expectations, inflexibility to incorporate changing business needs, additional (potentially very high) charge out for minor (and low cost) activities that might have been assumed to be included but in fact were not included in the contract, loss of real visibility, control and direction are some of the problems often cited in this context.

5. It’s an equal win-win partnership

This is another pervasive myth – often perpetuated by 3PL organizations. A real partnership, by its very nature, is defined by co-dependence where the relationship means a lot to both parties. The test here could be how much each party would hurt if the relationship falls apart. The truth, in most case of outsourcing, is not much.

Most 3PLs have a multitude of customers and keep bidding for every 3-5 years for work with those customers. Moreover, most 3PLs have learnt not to rely on just a few customers for their business, for obvious reasons. Even if a few customers pulled out, 3PLs would normally have contingency plans to optimize their asset utilization.

6. Your logistics service provider is responsible for their own mistakes

Most directors and officers are clear about their responsibility and obligations for the acts of their managers, servants and contractors. However, for some reason the a vague belief still persists that if the 3PL makes a mistake related to performance,

security, environment, health or even commercial decision making they will be responsible, and the customer will not suffer as a result. Not only the law, but also the custom and practice, point to a different reality.

Your customers will blame you first if they don’t get the product in time. The authorities will trace back the owner of the product in case of spillage of dangerous products. Compliance with regulatory and security measures is your responsibility, no matter who you delegate it to. In most cases, the damage to brand, relationships, reputation with authorities, and even bottom line will be borne by the customer – much more than by the contractor. And this applies no matter how big is the contracting firm, and how much insurance they carry.

7. Lock it in a contract and squeeze the last penny out of your 3PL

The final, and the most persistent, myth is that you can have an ideal logistics contract stitched up, trying to squeeze the last penny out of your logistics service provider. While it is essential that contracts are specific and explicit in terms of the tasks and terms, there is a rare business whose logistics task does not change from year to year, month to month and day to day. All these variations can neither be foreseen, not incorporated in a contract. 

While, the usual answer to the problem – partnership is also a myth (as discussed above), a spirit of service in a flexible manner goes a long way to create and sustain such relationships because essentially a 3PL outsourcing arrangement is a service contract within a highly dynamic business environment. The contract is very important, the integration process is also important, the relationship management tool kit is also important, but the most important thing is selection of the 3PL with right attitude across the company (not just in the key salespeople, or account managers).

About the Authors

Global Supply Chain Group - vivek BWVivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com 

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Creating Nirvana, model 1 sop pyramid

Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com 

Vivek is the Managing Director of Global Supply Chain Group, a boutique strategy consulting firm specialising in Supply Chain Strategies, and headquartered in Sydney, Australia . He has over 24 years of experience in strategic transformations and operational excellence within global supply chains. Prior to co-founding Global Supply Chain Group in January 2000, Vivek was a management consultant with top-tier strategy consulting firm Booz Allen & Hamilton.

Vivek provides strategic operations and supply chain advice to boards and senior management of global corporations, private equity groups and other stakeholders in a range of industries including FMCG, food, shipping, logistics, manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities.

Vivek has served world-wide corporations in nearly 500 small and large projects on all continents with a variety of clients in many different industries. Most of projects have involved diagnostic, conceptualisation and transformation of supply chains – releasing significant amount of value for the business. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, supply chain systems, negotiations and all other aspects of global supply chains.

Vivek has written a number of path breaking articles and commentaries that are published in several respected journals and magazines. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. He received his MBA with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner.

More information on Vivek is available on www.linkedin.com/in/vivek  and more information on Global Supply Chain Group is available on www.globalscgroup.com

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