Losing money? It’s probably your supply chain
Companies scrambling for ways to turn a profit should pay more attention to their logistics operations
Not soooo long ago, a business providing goods or services would depend on other businesses in a somewhat limited sense: Shoemakers relied on cobblers for leather and blacksmiths for nails, but these were still local trades for the most part. Of course, the blacksmiths relied on miners to provide them with raw materials and so on and so forth, so even back then the supply chain was a long strain of relationships between links, each a customer of the one proceeding it.
That simple supply chain however is almost unrecognizable when compared to today’s modern logistic terrain. Most of the things in our home, from food to fashion through consumer electronics, were created, assembled and delivered undergoing and number of steps spanning various geographical locations and passing through an untold number of hands before their final destination. These steps may include a supplier, sub suppliers, assembler, packaging company, trucking company, port authority, shipping company, customs, cargo handlers, freight forwarders, and often many others.
As our supply chains continue to become increasingly longer, more complex and more globalized, ramifications for its disruption become greater. An event on one side of the world, be it a grand natural disaster (such as flood or earthquake) or man-made event like a factory fire or even a simple labor dispute or IT system failure, can very easily halt the production or delivery of a service meant for the other side of the planet. For the bottom line, it doesn’t matter whether the event or company experiencing it is large or small if it disrupts the supply of a critical component or service; its consequences can be equally severe in terms of financial and/or reputational impact.
Supply chains are important, if not critical to most businesses: Researchers suggest that 60% to 70% of the cost structure of a company is embedded in its supply chain (read: a LOT). A survey by FM Global examining over 600 financial executives determined that supply chain risks posed the most significant threat to bottom-line profitability and, in an Accenture survey of 151 supply chain executives, 73% had indicated that their firms had experienced significant supply chain disruptions sometime during the previous five years.
According to the Business Continuity Institute’s 4th annual Survey of Supply Chain Resilience, the primary cause of supply chain disruptions was IT and telecommunications at the supplier level, with hostile weather in second place and outsourcer’s failure to provide services in third place.
When considering these findings, it becomes clear that the main obstacle in the way of optimized profit margins are in fact man made errors, not acts of nature or circumstance.
Want examples? Everyone loves examples, here are three of my favorites:
Hershey’s
Like most candy manufacturers, industry giant Hershey Foods typically has a significant surge in its business during Halloween season. For the holiday of 1998–99, Hershey spent more than $100 million on a new order management, supply-chain management (SCM), and CRM system to transform the company’s IT infrastructure and supply chain. Finally, everything will be streamlined!
Except that’s not what happened. Instead, Hershey failed to validate the data in their shiny new system against existing data and, expecting to go live in April 99, the schedule fell through. In many cases, Hershey has product on the dock, but can’t get transactions to work which would enable it to load the product onto the trucks and ship it to customers. In other words, different important moving parts in their supply chain were not in sync — Hershey’s inventory was not visible to the order management system for allocation, so the orders never processed.
The company ultimately says it lost at least $150 million in orders missed that season. The quarterly profit dropped 19% in the 3rd quarter and took another hit in the 4th quarter. The fiasco makes headlines across the business press, hitting the front page of Wall Street Journal when it caused Hershey’s stock to drop from 57 in August 1999 to 38 by January 2000.
Cisco
Cisco rode the technology wave of the 1990s to incredible growth, profits, stock valuation, and prominence for itself and CEO John Chambers as global business giants. As the tech bubble burst infamously however, Cisco was slow to see the dropping demand, and had inventory system and visibility issues that left it unprepared when the market finally tanked. As a result, it had way more routers, switches and other early net gear than it needed.
How much more? In May, 2001, the company announced it was taking a whipping $2.2 BILLION inventory write down, potentially the largest in history. In one fell swoop, the “Cisco bubble” also burst, with the company being bashed mercilessly by the business press, and their stock price being cut in half. It has pretty much stayed close that price level ever since.
Nike
In February 2001, multinational athletic gear superbrand Nike went live with a new — and highly complex — supply chain planning system. Suddenly all sorts of glitches such as software bugs and system integration issues, complexity and lack of software training, etc., lead to major challenges (read: problems) in Nike’s ability to focus on the demand and on deploying their inventory. At its next quarterly conference call, the company publicly cited “software problems” for causing the upcoming $100 million revenue shortfall, when then CEO (and co-founder, btw) Phil Knight said the supply problems had created substantial inventory shortages and excesses. Nike would have to slash prices to get rid of the inventory surplus in many cases, adding to the pressure on margins and profits. Wall Street reacts swiftly, knocking almost 20% of the company’s stock price.
Can you think of another example of a company or industry hemorrhaging money through its supply chain? Let me know!
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Olam is a not-for-profit foundation undertaking global supply chain inefficiencies by means of a standard, open-source platform on the blockchain, enabling supply chain’s stakeholders to seamlessly connect, communicate and develop their business in a trusted environment.
If you would like more information about the Olam Foundation, its vision, and it’s token generation event, join us on Telegram or reddit! The project’s whitepaper and proof of concept (in real-time) can be accessed via the website http://olam-platform.org.
