Rivers of money emanating from supply chains - FAQs (Frequently Asked Questions) On Five Flows of supply chain
Following are some of the frequently asked questions (FAQs) on five flows of supply chain that we have encountered in our speeches, workshops, seminars, and other forums. Feel free to ask more questions if your particular question is not answered below.
Why we are qualified to write this list of FAQs on Five Flows of supply chain Management?
VERY FEW PEOPLE KNOW SUPPLY CHAINS LIKE WE DO - retail, beverages, food, milk, dairy, meat, livestock, explosives, chemicals, cotton, rice, graphite, solar power, natural gas, crude oil, fertilizers, electronics, packaging, glass manufacturing, machine parts, automobiles, industrial goods, mining, etc are just some of the industries where boards and executives have benefited from our proprietary knowledge of the supply chain analytics.
Click on our project methodology above to see how visualisation of the five flows of supply chain is an integral step in each and every project that we have undertaken in the last three decades.
Since when no one had heard of supply chain, our co-founder Vivek Sood has been considered one of the most authoritative professionals in the field when it comes to the subject of supply chain flows in Australia, Asia, North America, South America and Europe.
He has written four seminal books about restructuring supply chain flows to gain massive advantage in business. He also regularly delivers keynote speeches at business schools and conferences such as University of Technology Sydney, Supply Chain Asia, Asian Bankers Forum, APEC Business Advisory Council.
He has been quoted in the authoritative business press and over 100 academic papers written by supply chain researchers around the world. Vivek and his team have examined hundreds of supply chain flows during their projects over the last three decades and helped hundreds of executives build safe, cost effective and sustainable supply chains and careers.
Five Flows of supply chain - FAQs
What are the significant flows in the supply chain - What Else Exists Besides The Product Flow In The Supply Chain?
There are five significant flows in any supply chain:
- product flow,
- financial/cash flow,
- information flow,
- value flow &
- risk flow.
Fully explain the significance of the Product flow in the supply chain?
In the supply chain, the commodity and services generally flow downstream from the origin to customer point of consumption. There is also a backward flow of materials, mainly related to product returns.
For some people, product flow is the only flow, or at least the primary flow that gives rise to all other flows in the supply chain. If this was true then in the strict sense of the word - none of the services companies would have any supply chain.
The fact that many services companies believe this to be the case is the reason why their supply chain management skills - both on the demand management side, as well as the supply management side are significantly deficient.
Many people, mainly logisticians, focus primarily on the product flow as the sole flow in supply chain management. There are many reasons why they are mistaken.
We disagree with the people who claim that product flow is the most important flow of the supply chain. We believe that distinction belongs to the cash flow.
Product flow is just the most visible flow in the supply chain management. That is the reason why naïve and new comers think of it as the most important or the only flow.
Everybody knows, and can roughly visualise, the product flow. That is why it is easy to call product flow the most influential flow of the supply chain. It can be justifiably claimed that both - the cash flow, and the information flow - are more, if not equally, influential in supply chains.
Does all the preceding discussion mean that product flow is insignificant, or uninfluential?
No, that could not be true. It is just as significant and influential as all the other flows of a good supply chain management protocol.
RULE OF THUMB
We have seen a lot of companies lose a lot of money by getting their product flow wrong. But, getting the product flow right is not going to make you a lot of money on its own.
The companies that make money in supply chains, generally get product flow right AND two of the other five flows better than anyone else. This is just a rule of thumb from operating in supply chain field for ages.
What is an Outstanding Example of Financial flow OR Cash flow in the supply chain management?
Arguably the most significant of the five supply chain flows, and the reason for orchestrating the entire supply chain is the finance or cash flow.
Even today most CFOs would be very proud if they managed to squeeze their suppliers to extract a few extra days of accounts payables out of them, or if they got creative Accounts Receivable factoring arrangements from their bankers.
That was certainly the case in when Dell came up with its new business and supply chain strategy to re-create the financial flow in its supply chain.
We have written an entire section on the Cash-to-Cash cycle management in our book The 5-STAR Business Network. We used Dell as the chosen case study because even decades from when they did it, there is not a better case study in turnaround of cash to cash cycle management. Look at the impressive numbers below:
case study - DELL
When Michael Dell started the company in 1984, the cash-to-cash cycle time in the industry was 56 days on average, and as much as three times of that was well accepted in the industry.
In the book Direct from Dell: Strategies that Revolutionized an Industry, the authors Michael Dell and Catherine Fredman describe the journey of phenomenal growth of Dell.
Michael Dell started the company convinced that by selling PCs directly to the end customers, he could better understand customers' needs and provide the more customized solutions.
Revolutionizing an industry was not on his agenda - though it ended up happening once Michael Dell fully understood and applied the power of the business network he created over a period of time.
In the PC industry, when Dell started his business C2C of 50-150 days was the norm. Within 4 years of starting his business, he had reduced it to -4 days, an unheard of achievement. In fact Dell was being paid before he bought parts for his product. In the next 5 years he brought it down to nearly -40 days - a figure where it has consistently hovered ever since.
If you have not already calculated the bottom-line impact of C2C reduction for your business, divide your annual turn-over by 365 days and then multiply that by the cost of capital, obsolescence, and collection. You will be surprised by how high the number is. In Dell's case the number worked out to several hundred of millions of dollars, a figure that easily allowed Dell to consistently take market share away from his high cost, fixed infrastructure competitors.
While in the last 15 years the basis of competition in the PC industry has moved to innovation and transaction profitability, Dell still continues to set the standard for $eed-to-$tore efficiency.
How has information flow in the supply chain evolved over the past decades?
Supply chain management takes a great deal of diverse information–bills of materials, product data, pricing, inventory levels, client and order information, planning, supplier and distributor data, delivery status, the title of goods, prevailing cash flow and finance data format.
It can require a lot of communication and cooperation with suppliers, transportation merchants, subcontractors and different parties.
It all started very humbly with the introduction of cash registers that could process basic cash transaction and keep track of the daily sales.
In the 1970s the introduction of functional transactional system enabled automation of the low-value repetitive works within individual functions such as purchasing, invoicing, inventory tracking etc.
In the 1980s the new enterprise transactional systems with best in the class tool were introduced. These systems were generally owned by the users and supported by MIS.
They provided an accurate, consistent view of data across the company even though these were generally closed systems.
By 1990s and early 2000’s the best in class tools, and software reduced the role of the transactional approach, it introduced new synchronisation tools and analytical software into the system.
During the 2000s and 2010’s the term Object-oriented “plug and play” was introduced into the field which emerged the use of fully open software and established the standards of “plug and play” by the way ability to combine the software components was achieved.
By the start of 2010, New internet-based supply chain tools were already in vogue. These contained service-oriented architecture (SaaS) which ensured better GUI also with interactive and integrated software.
Thus the supply chain visibility was improved by the real-time tracking of information and also the extreme transaction processing ability was enabled to scale up the supply chain.
The entire history and evolution is explained in a great deal of details in our report titled SINK OR SWIM REPORT: HOW INFORMATION TECHNOLOGY CAN SAVE OR RUIN SUPPLY CHAINS. A newer edition of the same report is also available at https://globalscgroup.com/product/sink-or-swim-report/.
Information flow case study - amazon
The strategy of Amazon has been unique, and it has shaped Amazon's Management Information Systems - MIS.
The operations of the company have undergone a transition from a single level sales strategy to that of multilevel e-commerce strategy.
The initial growth of the company was favoured by business to consumer B2C models of selling and business to business mode of operations.
The recent boom in move towards E-commerce amongst the general population has enhanced the interactions between the consumer and the company, thus forcing Amazon to give upscaled priority and customisation to its IT to value and give respect to the reviews of the customers as a part of their business operations. The exclusion of the retailers and wholesalers has been the signal of growth in Amazon as it allows the consumers to sell and buy the products using Amazon as a platform.
The buyer can retrieve their delivery address that has been saved at the time of registration in amazon. The option for retrieving the address helps the users to reduce the time involved in re-entering the address again. In case if the consumers wish to add a different address, they can save it by offering a new name.
The technology under use by Amazon comprises web service, middleware, groupware and most importantly, networking.
These lay the foundation and pillars of management information systems.
The ERP systems that are embedded with the Internet are the logistics, accounting and human resources.
The tech and the enterprise systems at Amazon are mutually connected with dynamic relational database management systems which are interdependent.
The payment gateway of Amazon always takes in the account the debit card or credit card information of the end-user who ordered the product.
Netscape Secure Commerce is a vibrant tool that is used by Amazon with the help of the secure socket layer to store the banking information.
These data are not made accessible over the Internet, thus paving the way for high confidentiality and protection of customer data.
The company also provide the customer with an option of making a part amount of the payment online and rest of the actions through the telecommunications post order.
Legal and policies are communicated to the users at this stage, thus ensuring that the trust component of customers is increased.
Yet another essential part of Amazon CRM is the collaboration of logistics systems with that of the customer contact information.
Consumers could track the progress of the shipping through logging in to the Amazon website and entering a unique ID such as order number; this enhances the confidence among the customers by offering tangibility in the services. At any point in time, the customers can find out the status of the product.
It is our recommendation to use the AI systems as a tool for improving the bonding with the consumers. Use of virtual agents would set the future for Amazon and its IT systems.
More changes need to take place in terms of the way the systems interact with humans. Amazon needs to ensure that growth in management is a norm as the E strategy of Amazon has to be flexible to meet the changing demands of consumers.
The alignment of AI-powered virtual agents with the whole MIS systems needs to be passed to all the stakeholders.
Amazon must ensure that the technology and the platform used must out beat the existing features of its rivals. Use of avatars and branding that avatar as an exclusive agent for Amazon business would bring about a massive change in the use of MIS.
The virtual agents through whom the data collection took place and interpreted by the marketing as well as the logistics team, will aid in strengthening the operations of the respective departments.
The Intelligent virtual agents will pave the way for offering human-like personalised interaction with the customers of Amazon. Undoubtedly the existing consumer base and the marketing channels will take the success of intelligent virtual agents within a short period.
Amazon can use smart virtual agents as an interface to understand the issues associated with logistics and operations.
A 24-hour chat service could be initiated, and the response and interaction could be saved as information for future use. Supply chain management, operations management, customer relationship management and the human resource management of Amazon has to be driven with the help of intelligent virtual agents.
As far as the effectiveness of MIS in responding to the queries of the customers has been low, customers have filed continuously a set of complaints due to the delay they perceive with responses.
Use of AI-powered virtual agents would help the organisation in relying less on the customer service centre and could cut a high number of costs involved with human resource.
What do you mean by Value flow in the supply chain?
A supply chain would not exist if it did not create value, and, had a mechanism to cut that value-pie and distribute it among all the value creating entities.
A typical value flow curve looks like this:
Value flow is perhaps the most advanced and complex topic in reality, and is of particular interest to tax authorities and national accounting bodies to determine the Value Added Taxation and national accounts.
In business strategy and supply chain strategy, every company needs to determine where it would like to concentrate its forces. A company can only win if it focuses on its strength, its competitors weaknesses and gaps in the marketplace.
An outstanding example of the value flow driven supply chain strategy is the success of ACER computers as an outstanding brand after its emergence from the shell of contract manufacturing for DELL and other known brands.
Rather than get too deep into this topic and write a treatise on value chain management - I want to clarify one useful distinction in the mind of the reader here. That is the difference between value chain, and supply chain.
- Value is in the eye of beholder - objective measures of value are only partly relevant. For example a thirsty man in desert will value a glass of water a lot more than a man sitting near a cold water fountain.
- Exchange of value is essential for a valid contract to be executed.
- Value chain is one of the five flows of supply chain. The other flows are - cash flow chain, physical flow chain, risk flow chain and physical flow chain.
- Mainly relevant for record keeping and strategy development.
- Supply chain is an umbrella term that encompasses value flow chain, and four other flows.
- Supply chain is the engine running the modern commerce and economy. It is essential for smooth operation of commerce.
- Supply chain flows are precise, objective and measurable. They can be used for management of operations and taking executional decisions.
- Relevant for both - strategy formulation, and strategy execution.
Value Flow case study - ACER
Acer company was founded in 1976 by Stan Shih with his wife Carolyn Yeh, and five others as a company in Hsinchu, Taiwan.
The organisation began with eleven employees and US$25,000 in the capital. Initially, ACER was primarily a distributor of electronic components and a consultant in microprocessor technologies.
As of July 2020, Acer is the fifth-largest personal computer vendor in the world. Currently, along with core IT products business, Acer also has a new business entity that focuses on the collaboration of cloud services and platforms, and the development of smartphones and wearable devices with value-added IoT applications.
Acer’s strategic moves had paid off, and in the year 1988, it had earned $25 million in profits only.
By 1990 Acer's revenue had reached $1 billion, but it had only profits of $4 million. This was due to the instant fall in the prices of computer hardware across the world and the strengthening of the Taiwanese currency.
But Acer moved ahead by investing in new technology and acquiring various companies. Acer had come up with a strategy to improve its profitability and keep the sales growing.
They did this by shipping the electronic components to 32 locations around the world for assembly. This strategy helped in reducing the costs of production and keeping the quality of the product at optimum levels.
By 1995, Acer has become the top-selling computer brand in countries like the Philippines, Chile, Mexico, Thailand, Uruguay and Taiwan. In 1993 Acer got hit the record profits of $75 million. Its fairy tale journey has continued, and it went on to become the fourth-largest PC manufacturer of the world in 2012.
In the year 2011, Acer has $16 billion in revenue with more than 7,500 employees.
Stan Shih – introduced the "Smiling Curve". A smiling curve is a diagram of value-adding different potentials of different components of the value chain in the manufacturing industry. According to founders observation, in the personal computer industry, both ends of the value chain command increased amount of values added to the product than the middle part of the value chain.
If this gets represented in a graph with a Y-axis for value-added and an X-axis for the value chain, the resulting curve appears like a "smile".
What makes this insight particularly ironic is that Acer is the epitomical company at the bottom part of the curve. They do make PCs, but it was the critical electronic component makers like Intel and Windows that acquired most of the value on the left, and systems integrators and value-added resellers like IBM or Accenture that caught the rest of the weight on the right.
Acer and its merry band of 8 OEMs competed themselves to single-digit margins and ultimately stagnant growth; there isn't any money in the undifferentiated middle.
Acer's substitute in the market would be HP and Dell and Lenovo because they do manufacturer laptop and desktop.
But Acer has introduced with a unique line of product that is the Acer Timeline Series. These series offer the screen size from 13.3 inches to 15.6 inches.
The threat of the entry of the new competitors means the LOWER barriers of entering into the unchartered industry.
The all-new Acer Timeline Series does not only have 8-hours of battery life but it also ultra-thin, that makes convenient for people to bring along anywhere, it also has a multi-gesture touchpad which replaces the mouse and also has an HD which is as high as 16:9. The Acer Timeline Series will be the cheaper alternative to Macbook Air.
The power of competitive rivalry is the primary determinant of the competitiveness of the company. For sustaining the market, a manufacturer has to make improvisations or come out with new products and ideas out of the box.
Acer has been doing this by making the Acer Timeline Series that allows a long battery life up to 8 hours which is unique in the market.
The bargaining power of suppliers is market inputs. Supplier bargaining power will peak when the market is dominated or monopoly by one or a few suppliers. Thus when the supplier refuses to supply goods to the manufacturer, the whole production process will stop.
For Acer, the leading processor supplier will be AMD and Intel. If both of these suppliers had increased their price, then Acer has no choice either to continue with them.
This will cause the product of Acer to hike the price due to more expensive on the processor if this happens consumer will tend to buy another brand of laptop or desktop thus Acer has lost part of its market share.
So to mitigate the power of supplier is to maintain win-win relationships with suppliers. By making a win-win relation, we can pay advance payment or pay the debt on time.
The forces that in the value chain are the bargaining power of consumers, the risk introduced by new competitors, the threat of substitutes in the market, the intensity of competitive rivalry and the bargaining power of suppliers.
Acer has used these five forces to gain a competitive advantage, meanwhile gaining the market share and also to provide a win-win relationship with the supplier.
What do you mean by Risk flow in the supply chain?
Read our frequently asked questions of supply chain risks for more details.
Every movement in every flow is fraught with risks. Risk of non-performance, risk of losing control of performance, risks of partial or incomplete performance, and risks of faulty performance.
Whether it is information flow, or physical flow, or value flow or cash flow - there is always risk involved at every step. And, the risk changes every moment, and every place as the other flows continue unabated.
It is an art to recognise the risk, to measure the risk, to mitigate the risk, to manage the risk and to place the risk in the insurance and re-insurance markets.
Unfortunately most companies are singularly bad at management of risk flow in their supply chains. That is one of the reasons they are unable to take full advantage of opportunities from value flow optimisation and finance flow re-creation that you saw in the cases of ACER and Dell in the examples given above.
Finance Flow case study - Alibaba, Alipay and ANT Group
Alibaba Group Holding Limited, also known as Alibaba Group and as Alibaba.com, is a Chinese MNC specialising in e-commerce, retail, Internet, and technology. ANT Group, formerly known as Ant Financial and Alipay, is an affiliate company of the Chinese Alibaba Group. Ant Group changed the name in June 2020 from Ant Financial Services Group. Ant Group is the world's highest-valued FinTech company and most valuable unicorn company.
In ANT Group as well as Alibaba merchants are one user group and consumers are the other group. With a network effect between them. And also these businesses enable mobile payments, so we can also send costs to other consumers. So that is another network effect between customers. And payment platforms have virality. So payment platforms can multiply and bring in lots of users naturally by usage. Ant group refers to payments as the "infrastructure" of finance. So this platform business model is the foundation and is what is generating their network. And it attracts users and produces the highest volume of activity.
These businesses serve as a marketplace platform for financial services (insurance, credit, investments). It enables users to do transactions with banks, insurance companies and asset management companies. This gets very little activity because people don't buy investment products very often. And they have complicated services that require risk management.
It is very tough to build a stand-alone marketplace platform for digital finance. Also, it is a challenging task to get users and activity levels. But financial services is also where big money is. It is where rising Chinese customers are putting their accumulating wealth. So Alibaba is constructing this on top of the other platforms with higher activity and more users.
These businesses will also act as a marketplace platform for financial services. This is another market that enables costumers to do transactions with banks, insurance companies and asset management companies. This gets very little activity because people don't buy investment products very often.
Finance Flow case study - Klarna
If the ANT group has done the magical transformation of the supply chain risk flows in the Chinese markets, then on the international front we have a Swedish winner - Klarna Bank.
Already working with more than 200,000 sellers in 17 markets (as per The Economist), Klarna understands the risk flow in global supply chains better than banks much bigger than its size.
While others try to milk the system by providing minimal value for a very high price, Klarna has decided to actively understand the risk, manage the risk, and trade on it.
A rudimentary understanding of global supply chain and contract law is sufficient to discern where the risks lie and how it flows in global trade. Both - the buyer, and the seller - are exposed to risks they are unwilling, or unable to bear.
If you read our Quick Notes on Supply chain Finance, to mitigate this risk, you will find that traditional banks charge too much and provide a service which is rooted in the 17th century international trade, and takes far too long for the realities of today's commercial world.
So, what did Klarna do? And, is it a surprise that the solution emerged from the icy waters of a traditional shipping centres of the world in Copenhagen.
Klarna not only understands the risks, but also understands the risk profiles of a typical buyer, and a typical seller. in 2010, in bought out an Israeli firm called Analyzd, and can analyse the risks that they will be amenable to bearing at various points of time in the supply chain movement.
Our Quick Notes of Supply Chain Analytics and Supply Chain Risks might be useful as a primer for better understanding of those topics.
More than anybody else, even ANT Group, whose pricing is rooted in market forces - Klarna can analytically price and manage the risk for the two parties simultaneously. No wonder Klarna commands the kind of margins that banks can only dream about.
So what exactly does Klarna do to help the buyers and sellers. As per a recent article in THE ECONOMIST - here is a pararaph that succintly summarises the activity:
"Klarna is one of several “buy now, pay later” (bnpl) services that have grown rapidly in recent years. Its attraction, for both online retailers and their customers, is simplicity. Instead of entering their card details at checkout, shoppers sign up to Klarna’s app with their email and delivery address, and leave payment to be made in 14 or 30 days. Klarna pays the retailer in the meantime, bearing the risk that shoppers do not pay—something few other fintechs do—while charging the merchant a fee."
How can we Better integrate the flows in the supply chain?
One of the pre-requisites of supply chain is INTEGRATION.
By their very nature the five flows of supply chain management are integrated. For example every node of the physical flow will generate an information record which will be transmitted and recorded in the information flow.
Almost every financial node will also create an information record of similar nature. It is very easy to see how every node of every flow acts as a cross-over point for every other flow in the supply chain.
So, by their very nature the flows are fully integrated.
What accounts of lack of apparent integration in that case?
Generally, companies lack the facility to record and manage the flows in an integrative manner. In many cases the transmission of value and risk is not even recognised till the case goes to the court, and the judge unravels the facts to find the responsible parties for bearing the risk or value loss.
Getting back to the point, better integration needs effort to collect data, analyse data, plan supply chain, and control supply chains. We have frequently asked questions on each of these topics - these will help you achieve better integration of five flows of supply chains.
Please see the following links for more information:
- FAQs (Frequently Asked Questions) On Production Planning and Optimisation
- FAQs on Sales and Operation Planning
- FAQs (Frequently Asked Questions) On Supply Chain Systems
- FAQs (Frequently Asked Questions) On Supply Chain Dashboards
- FAQs (Frequently Asked Questions) On Supply Chain Analytics
- FAQs (Frequently Asked Questions) On Supply Chain Management (SCM)
How can IoT help in the integration of flows in the supply chain?
Internet of things (IoT) deploys devices with built in sensors and controllers to manage supply chain processes. Better data - more accurate, and more comprehensive - is available due to the automated sensors all along the flows of goods. The handover points and nodes of supply chain can be easily identified and better plans and better controls can be achieved as a result. To read more on use of IoT devices in supply chain - read FAQs (Frequently Asked Questions) On Internet of Things (IoT) in Supply Chain Management.
How advanced analytics help in the flow integration of supply chain?
Even within your production chain, operational data can be leveraged into reinforced predictive and prescriptive insights with the use of advanced analytics; this can be a crucial value-added proposition for supply chains that struggle with matching their production to real demand levels or those who simply operate at such a high level of complexity that optimisation is daunting for human planners. Transport logistics, procurement, demand-capacity planning: in integrated environs, all of them stand to benefit from the creation of advanced analytics workflows.
How can we set goals and KPIs for enabling flow integration?
Once you’ve got a firm groundwork of visibility within your operation and you've begun to integrate other data streams into your workflows, the next big question you need to ask yourself is: what specific goal am I trying to achieve with my supply chain integration? On some level, the answer is always going to be reduced cost and higher profit. Still, it’s worth ransacking a little deeper into the specifics to create the optimal IT environment for your particular goals. By making sure to choose an appropriate KPI or set of KPIs and track them over time. This way, you’ll be able to get a real feel of what’s working and what’s not, meaning that you can polish your integration over time.
Sink of swim Report: how information technology can save or ruin supply chains
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Notes on FAQs
Clearly, any such list of frequently asked questions (FAQs) about supply chain can never be fully exhaustive. Neither is anyone, including us, the final authority and arbitrator on this or any other topic.
You will have your own opinions on many of these topics, and will have many other questions.
We throw open the comments section to you for your opinions and questions. We will try to address all of these, and the best ones will attract a reward in the form of one of our books, or publications.