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In the January-March 2018 issue of APICS magazine, APICS CEO Abe Eshkenazi contends that if supply chain leaders bring business success then that makes them business leaders. Mr. Eshkenazi goes on to state “organizations that consider their supply chains as strategic and competitive assets outperform the market”.

 

Indeed, superior supply chain performance does drive business success in very measurable ways.  How can supply chain justify and measure process improvement initiatives using a metric that finance can relate to?  As cash management is a top priority for finance, sharing the Cash Conversion Cycle (CCC) metric allows supply chain and finance to speak a common language when measuring business success.

The Metric That Finance and Supply Chain Can Agree On

Per Investopia, the CCC metric “measures how fast a company can convert cash on hand into inventory and accounts payable, through sales and accounts receivable, and then back into cash.”  Actually, the CCC is combined of three separate financial metrics:

  1. Days Inventory Outstanding (DIO); how long it takes to turn inventory into sales.
  2. Days Payable Outstanding (DPO); how long it takes to pay invoices from creditors, such as suppliers.
  3. Days Sales Outstanding (DSO); how long it takes to collect payment after a sale has been made.

All three metrics indicate how long an organization will be deprived of its cash – the lower the number of days, the better. So how can supply chain improve DIO, DPO and DSO?

Days Inventory Outstanding & Just-In-Time (JIT) Replenishment

JIT replenishment has the potential of releasing a ton of capital previously tied up in inventory because goods are received only when needed. With JIT, lead-time demand does not figure into your safety stock calculation (i.e. goods sold/consumed from the time the order is issued until the goods are received) because the system can project the rate of depletion, determine when safety thresholds would be impacted and then back date the replenishment order accordingly.

 

For example, a SKU with a 14 day lead time is projected to reach its safety threshold on May 10th therefore an order must be issued no later than April 26th.   Achieving JIT requires SKU level forecasting and inventory accuracy both of which fall under the domain of supply chain.

Days Payable Outstanding & the Perfect Purchase Order

Achieving the perfect purchase order at the lowest possible cost requires item data quality, automation, vendor engagement and efficient receiving. Quality item data will prevent costly errors – this includes up-to-date vendor pricing.  An automated procurement process allows for a continuous review of inventory levels to protect safety thresholds in support of JIT.  Furthermore the system should look for consolidation opportunities to reduce overall procurement costs.

 

With a truly integrated system, all the information relating to a vendor transaction is available in real-time to procurement, warehousing and finance. With the right tools, supply chain will transform this transactional data into performance metrics that help provide direction on potential optimization opportunities.

Days Sales Outstanding & the Perfect Customer Order

The fastest way to turn a sale into cash is to deliver in full and on time – error-free from start to finish. Again supply chain plays an important role by ensuring the right balance between monies invested in inventory and desired service levels.

 

Data accuracy plays an important role in shortening order cycle times. In fact, data errors are often the reason the wrong product/quantity was shipped.  Picking errors occur for a multitude of reasons; the wrong product in the right bin, a pack was picked instead of an each, the list goes on.

Aiming for the Same Goal

When you think about it, almost all supply chain processes affect either DIO, DPO or DSO in some way. At the end of the day, supply chain and finance both aim for business success – both can and should be considered business leaders.


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There has been a lot of focus on optimizing the supply chain for order fulfillment.  The on-going efforts to perfect the ‘order to cash’ process have yielded great rewards.  But what about returns?  Automation has reduced the number of returns due to errors however the world must move from a linear to a more circular economy and this will impact the entire supply chain.

 

The notion of a circular economy is really quite wonderful.  Imagine an industry that produces no waste or pollution, and where products are designed for safe and non-intrusive disposal.  Imagine an industry where 100% of unconsumed or partly consumed products are returned for re-use.

 

Kudos to the Association of Battery Recyclers for their contribution to the circular economy.  From their website:  “The members of the association share a dedication to environmental and community responsibility.” Spent batteries are turned into lead metal, plastic and sodium sulfate, which are used to manufacture new lead batteries and other useful products.  Their website also states that lead batteries have a 99% recycle rate within most of North America – impressive!

 

With greater awareness and increasing environmental pressures from various stakeholders, more companies are incorporating green practices into their daily activities.  I believe distributors can play an important role in the circular economy by selecting products and suppliers that behave responsibly and by participating in the efforts to recycle and/or re-use the products that they sell.

 

Goods are coming down the supply chain – we’re pretty good at that.  Now it’s time to move stuff back up.  Distributors can take an active role in balancing the financial responsibility of making money with their responsibility to benefit society as a whole.   This must include their responsibility to preserving the environment by actively engaging management into environmental thinking.


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Source: MIT Sloan Management Review

In my last post, I introduced the longitudinal study that MIT Sloan Management Review has been conducting over the past five years. From 2010 to 2012 they indicated that 67% of those surveyed believed that analytics gave their organizations a competitive edge. In 2013, that figure stabilized at 66% revealing the so called ‘Moneyball Effect’ where leaders lost their competitive edge that they once enjoyed because followers matured and made analytics core competencies. In 2014, that trend continued, falling to 61%.

 

But why?


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Forecastability is an important word in demand planning.  Oddly, the word forecastability is not listed in the Merriam-Webster dictionary nor is it found in Wikipedia.  However Wiktionary describes forecastability as “A measure of the degree to which something may be forecast with accuracy”.  That something could be an item used in the production of a finished good or the finished good itself.

 

In healthcare that something could save a life. Prudent healthcare providers must ensure the availability of products that play a critical role in a hospital setting. This is good news for the patient. Unfortunately, the bad news is that the strategy for achieving desired fill rates ties up huge amounts of capital. In fact, there is so much overstock that a company called Hospital Overstock has made a business out of buying excess inventory from hospitals and clinics. Sadly a lot of inventory is lost, damaged, expired or becomes obsolete.

 

It is estimated that billions of dollars are unnecessarily tied up in inventory not just in healthcare but in inventories everywhere. Demand planning and forecasting is the answer to this problem. The demand planning process helps organizations achieve the right balance between service levels, inventory investment and operating costs. Ideally it is a collaborative process whose output is a shared operational forecast used in production, procurement, logistics and financial planning. The forecast numbers are then monitored for accuracy as plans will need to be adjusted should actual demand be significantly higher or lower than anticipated.

 

With hundreds of items to manage, it is essential for planners to rate their assigned items. Along with rating items based on their forecastability, planners must rate items based on their importance as well. What are the costs and/or consequences in the event of a shortage?  High value or high impact items have a higher level of importance than low value or low impact items. More effort should be invested on important items with a low degree of forecastability and much less effort on items of lower importance and a high degree of forecastability.

 

Nobody can ever accurately predict the future yet planning for the future is essential. When conditions remain unchanged, the future demand for an item will probably be very similar to its past demand.  However nothing stays the same for long in today’s world therefore both the importance and forecastability of an item must be periodically reassessed.

 

A famous American author wrote “No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.”  Never have these words been more relevant.


In the movie Big, Tom Hanks plays a child trapped in the body of a 30-year-old who challenges the status quo at a toy manufacturer. To the audience it all makes sense as the movie progresses – think like a kid when selling stuff to kids. How revolutionary! Yet the audience also relates to the adults who pretend to know what kids like.

 

For me, the big thinking in this movie is demonstrated by the creativity of a child whose mind is unencumbered by preconceptions.

 

Dr. David Schwartz, the author of a book entitled The Magic of Big Thinking, attempts to define big thinking. He explains that visualization adds value to everything and that thinking big means training oneself to see not just what is, but what can be. Author Malcolm Gladwell writes, “A visionary is a person that takes a white piece of paper and re-imagines the world”. The Internet is full of success stories of such visionaries.

 


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In 2013, Gartner conducted a survey on Big Data Adoption in Supply Chain Industries and found that adoption has been flat and is lagging behind the overall adoption rate of other industries such as banking, insurance, and retail to name a few. Gartner ascertained that these characteristics pertaining to the Supply Chain industry are attributable to an inherent lack of understanding of what Big Data truly is and a fundamental lack of the required skill sets. This, in essence, is the challenge facing the Supply Chain industry.

 

In parts one, two and three of this four part series on Big Data, we looked at what makes data “big”, how it can benefit organizations that apply the right analytics, and the implications of doing so, respectively. In the closing segment of this series, we focus our attention on examples of how elements of Big Data can be leveraged. The challenges identified by Gartner translate to opportunities regardless of your organization’s analytical maturity level.

 


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The recent Becker’s Hospital Review Annual meeting in Chicago was invigorating and thought-provoking, with many presentations from CEOs of many leading healthcare systems. I wanted to share an overview of three breakout sessions that spoke specifically to Healthcare Supply Chain.

 

Can’t Deliver Care Without Stuff: Emerging Strategies for Supply Chain Management was a discussion with Brent Johnson, VP Supply Chain and Chief Procurement Officer at Intermountain Healthcare in Salt Lake City, UT. Brent comes from outside the healthcare industry. When he came into healthcare supply chain at Intermountain he was shocked at how, as an industry, healthcare managed its supply chain so casually, because “you know, outside healthcare, supply chain is seen as STRATEGIC to the organizational performance.”


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In my July post, I introduced the ‘Hierarchy of Supply Chain Metrics’, which is a framework of supply chain metrics conceived by Gartner, the world’s leading information research and advisory company.  The model provides 3 tiers of integrated metrics to assess, diagnose, and correct supply chain performance, and is a great example of what constititutes a supply chain scorecard.

 


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Health Systems’ Winning Strategies for the Deployment of the Right WMS

Brent Johnson, CPO-VP Supply Chain at Intermountain Healthcare, reveals how he built his distribution infrastructure from the ground up and was able to achieve long-term operational excellence and hard benefits in less than one year. You’ll also hear from Robert Colosino, VP Marketing & Business Development, how TECSYS is taking the lead in addressing current supply chain challenges and empowering distribution organizations to get ahead in their competitive landscape.

Learn How To:

  • Transform your health system’s supply chain into a cost-effective infrastructure and free your clinicians to deliver quality care.
  • Reduce your supply spend and the cost of expired products by millions of dollars, and recover millions in unclaimed expenses.
  • Select the right solution provider, one that understands health systems, and avoid mishaps and costly mistakes. Like the old saying: Measure twice, cut once!
  • Reduce implementation time by up to 60% by leveraging best-in-class business process blueprints specifically for health systems.
  • Provide your supply chain system users and clinicians with intuitive, user-friendly access to knowhow that empowers them to maximize the returns on your software investment.


 


Isn’t this the most interesting time in US healthcare? Actually, in healthcare across the globe? Because no matter how your healthcare system is funded, the containment and management of supply chain costs is a constant business reality we are all facing. To that end, supply chain is finally coming into its own in the C-Suite of most organizations. We are realizing, as an industry, that what has worked in the past will no longer work in our emerging reality — on all sides of the business equation. Everyone has to participate in the change.


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