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Updated: February 23, 2011 19:07 IST

Supply chain metrics of value to CFOs

D. Murali
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Ageing of stocks is something that service managers need to review periodically and sound the CEO about, says V. Sanjeevi, the Managing Director of Chennai-based eLogistics P Ltd (http://bit.ly/F4TVSanjeevi). This criterion can have a major impact on the P&L of the company if adequate action is not taken in time, he cautions, during a recent interaction with Business Line.

Adding that higher stock levels delay the introduction of new products in the market, Sanjeevi describes, for example, a typical situation in the white goods sector with two competing players, viz. Company A operating with three months of stock in the pipeline, and Company B with three weeks of stock. “If Company B introduces a new product, Company A needs to wait for at least three months before it can launch the new product, as it has to sell the old stock before introducing newer models. So, there is a huge risk of losing market share when one is not able to respond to market changes.” Our conversation continues over the email.

Excerpts from the interview.

What are the typical financial issues that arise in the domains of enterprise logistics and supply chain?

An important issue is about deciding whether to go for own or outsourced services for transport, warehousing, handling and billing operations. In India, while most of the companies have outsourced transport, only a few have outsourced the warehousing operations.

Commission paid to the stockists and retailers is one other major financial issue that merits the CFO’s attention. With the emergence of 3PL and 4PL services, the pros and cons of these are to be reviewed every year and decisions taken. Many start-up companies straightaway go for 4PL operations with full financial controls on the service provider.

The CFO also needs to work out what the desired customer servicing levels should be, and what level of stock-outs the company is willing to accept. However, one can also go for service matrix, of providing the best possible services for the A-class customers, and tapering down the servicing standards to an acceptable level to the C category of customers. This is being done in the health care, banking, and insurance sectors, and also in the spare parts service sector.

Taxation is a major point that requires to be tackled by the experts of supply chain and finance. In India, logistics decisions are often made based on the taxation policy rather than on optimum supply chain systems. As and when the GST (goods and services tax) gets introduced, the entire supply chain system, especially, the flow of materials from the manufacturing centre to the consumption point, and also from the sourcing point to the manufacturing centre, may demand a fresh look.

GST regime is expected to bring down the national logistics cost at least by a few percentage points, while improving servicing standards to customers.

Are there a set of logistics and supply chain metrics that CFOs should regularly monitor?

The most important financial indicator is the measurement of logistics and supply chain cost as a percentage of revenue. And this should be benchmarked with global norms.

Another important metric to monitor is supply chain cost versus servicing standard. This has to be developed for each company, and reviewed once a year, during the annual budget period.

Other metrics that need to be monitored are:

•The regular transport cost, warehousing cost, and other logistics costs, for each brand, product category, and for each location.

•Stock-outs vs stocking costs: This has relevance to days-of-stock kept at the factory, in-transit stocks, and stock kept at the distribution centres.

•Transporter’s market share vs servicing standard: Work out the servicing level provided by each transporter and their share of business. Based on this, one could ensure that the best service provider gets the maximum share of the business.

•Space utilisation report and warehousing rentals across various distribution centres.

•Ageing analysis of stocks: Many companies in the foods business monitor the average stock levels at the retail outlets to ensure that fresh stocks are available. In fact, in the late 80s, Frito-Lay was the first company to start measuring the average stocks at the retail outlets of their products and provide the report to the CEO on a daily basis. The company motto, then, was to provide the freshest stock to consumers.

Can you give a few examples of how the right supply chain decisions contribute to the bottom line?

In an inflationary economy, a cash-rich company can tweak its raw material stocking policy to a higher level to gain advantage of stock profits. This could be effectively used for all agricultural inputs that are used by various companies. So, predicting the commodities pricing is a major supply chain decision that can impact the bottom line of the company. As each and every product gets commoditised in the world, the capability to predict the future pricing and take a forward position plays a major role in improving the profitability of the company.

With respect to warehouses, a cash-rich company should buy land and build its own warehouses and give the same to third-party, i.e., the Carrying and Forwarding Agents, to manage. This way, the company could reap the benefits of appreciation of land prices, while at the same time contain their warehouse cost at a nominal level when cost pressures come to the fore. Of course, one could also sell these assets and move to cheaper locations after a few years.

While entering into transport contracts, the companies should go in for quarterly and six-monthly transport rate contracts with transporters, to take advantage of the peak and lean seasons of the Indian economy. The Indian economy is at its peak for goods movement during October-March and goes to a lean patch during April-September, every year.

In your experience, what do you find to be the oft-ignored areas of supply chain with a great potential to impact profitability?

Every company needs to work out a logistics strategy as in the case of marketing, manufacturing, and human resources. This strategy should be part of the corporate long-term plan.

There are companies that work out a three-year strategy, saying the customer servicing standard needs to go up from the current level of say 90 to 95 per cent, and so forth. One also should bring out a stocking policy and a transport policy with relevance to the targeted servicing standards.

For example, with one week of stock at distribution centres, the servicing standard could be 90 per cent (that is, SKUs available to SKUs ordered). If the stocks are kept at 1.5 weeks level, the standard could be 95 per cent. Awareness of these standards should permeate the company so as to ensure that customers are not lost, in today’s highly competitive scenario.

Handling and storage damages in bulk commodities are a major issue. The inter-depot movements of goods can be an avoidable waste of funds. One must focus on cycle time of each operation and aim to minimise the same; for, this will lead to increased rotations in a business. To improve profit, increase the rotations instead of margins; just on this core principle, the great Walmart works!

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