Survival of the leanest
February 1st 2009

Crisis... recession... depression... However you describe the state of the global economy, the world is a very different place to the one we lived in a year ago, and profitability is no longer the name of the game. Survival is, says Barloworld Optimus MD, Kevin Boake

Ayear ago, supply chains were designed for growth: now we've gone volte-face. 20% growth has turned to 20% decline, and firms that aren't actively taking the right steps to drive supply chain cost down in order to free-up working capital may well not be around to witness the upturn once it arrives.

A bit doom-and-gloom and 'in-yer-face', maybe? Well, actually no, because the choices companies are now having to face up to are frighteningly simple, and for many it's been whittled-down to just one: profitability or survival, which frankly amounts to no choice at all.

And in today's economy 'Cash is King' – whereby hangs the key to survival...

Because many supply chains were designed for growth – a factor that has now all-but evaporated – the harsh truth is that right now they're sucking a lot of cash out of businesses, and unless steps are taken to reverse that trend, there is no future.

For those companies – and maybe you too – the road ahead has already been mappedout: either reduce your working capital and aggressively re-balance your supply chain, or suffer the consequences. Final.

In December we signed a new client whose inventory levels had swelled to such an extent that it was forced into looking for an overflow warehouse – a potentially fatal move sucking up even more cash. At the same time, we also worked with a client whose supply chain manager had been tasked to reduce his company's inventory by 30% – a major feat which he managed to pull off after a lot of hard work: then last week he was asked then to do it all over again and take another 30% out.

Tough measures indeed, but by no means untypical. But at least in the case of the latter, resulting in the right solution for no reason other than that while this downturn shows every sign of continuing throughout 2009, being profitable is an accessory: being liquid is vital.

So my advice is this: get real, get tough, get the job done and reduce your inventory now... Don't wait for the cataclysmic event to happen because by then it'll be too late. The time for talking is over, the time for action is now and if ever there was a time to smash a few taboos, it's here. Yes, today.

As an organisation that has run over 400 inventory optimisation programmes and can stand witness to the success of inventory reduction programmes standing or falling exclusively on how well companies address often what amounts to just a few key issues, take good, hard note of the following - and mark my words, in the fullness of time, you'll be glad you did...

1) Your ERP system is not good at optimising inventory. The simplest and most immediate improvement you can make to inventory levels is through applying the appropriate inventory policy. This policy drives the replenishment triggers – particularly in terms of max/min levels. And no, your ERP system is not the way to approach it. However good ERP systems may be at executing your plan, they are not designed to model and optimise these levels.

Just ask your planning team if they use an Excel spreadsheet to help them determine these levels? 2) Improve demand accuracy. If ever there was a time to completely understand your demand, it's now. If ever there was a time to engage the sales team and customers in this process and for an organisation to create a single view of the future, it's now. If ever there was a time to have a robust demand management process, it's now. And if ever there was a time not to be just using your 6- month old budgets or not to build buffers into your forecasts, it's now. Do you know what your forecast accuracy is? Probably not - but then, most don't! 3) 'But my customers will not wait 12 or 24 hours for a part'. A saying favoured by sales people. Another is 'if we don't have it in stock we can't sell it'. Fine: they may hold true when you are a retailer or a B2C type business, but the fact is that a lot of companies are B2B with a regular known client-base, yet they too have allowed these paradigms to rule! The result is that many are stocking items in a series of locations across their supply chain – despite the fact that with very little additional cost, they could get them to their customers overnight. What's more, the formula is pretty simple: the more times you stock it, the more stock you have to hold.

4) 'But I have to offer a broader product range to the market'. Another much-loved paradigm is that companies are compelled to stock a full range of products to complete their customers' shopping basket or run the risk of losing the sale. It's a belief many still cling to even in the full knowledge that some of this stock will make a loss. This may be a new one to you, but the banking term 'toxic assets' applies here. Yes, toxic assets may be a fact of life, but do you know what these items are and what your exposure is? 5) Don't just accept your suppliers' terms and prices, collaborate. As much as you know you're struggling, your supplier knows that you are struggling too. So now is a great time to work together to improve everything from lead-time to pricing to minimum order levels to consignment stock. In fact, it's unlikely that you will ever get a better opportunity than now – but a word of caution first: never forget that you still need your supply, the economy will turn and the power will shift. So be careful.

By now you'll have gathered that survival means taking control and making tough decisions. If your supply chain is not efficient, it'll prove to be the bad apple – mark my words. So focus on these five key areas.

And then what? Reducing working capital is not an end in itself. So make sure it's spent wisely. And continue to make sure you're reducing as much stock as you can, as often as you can.

It's my firm belief that not all, but certainly most companies will find their own ways out of this crisis – but only by injecting nimbleness, intelligence and quality into the supply chain and understanding that excessive inventory spells trouble with a capital 'T'.

Competitiveness in the future will be decided by the supply chain, but for many the future will only be a dream. Make sure that for you it's a reality.

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