Saturday, May 14, 2005

Opportunities for supply chain improvements

My friend, Kelly Thomas, gave a great speech on what has been accomplished by companies through their supply chain initiatives till date and what can be achieved by them in the future. Was a very inspiring speech. Thought I will document some of the facts from that speech here.

First let us look at the US supply chain as it stands today. There is a total of 1.2 trillion dollars of inventory in the supply chain. Nearly 3/4th ($760 B) of it is in the distribution and the retail portions of the supply chain. There is nearly 3.7 Trillion dollars in plant, equipment and other assets deployed to run this supply chain. Nearly 1 Trillion is being spent in transportation cost from material to product on the shelf. The global supply chain is three times this size.

Alan Greenspan said a few quarters back: “New technologies for supply-chain management and flexible manufacturing imply that businesses can perceive imbalances in inventories in real-time – and can cut production promptly in response to developing signs of unintended inventory building.” Average inventory levels have dropped by nearly 30% in the last 10 years. Productivity rates have gone up by 70% when we compare the last 10 years with the 30 years before that. That comes to nearly 700B$ of value that supply chain initiatives have created on top of a reduction of 50B$ per year of inventory carrying costs.

Businesses are not sitting on their laurels. They are trying to get better with a focused initiatives which will bear fruits in the next few years. For example,

  1. improved visibility through increased sharing of POS data (companies are just starting to analyze POS data well even though they have had access to it before),
  2. trying to get better tracking of inventory information (through Radio Frequency Identification (RFID), for example),
  3. trying to get faster execution of price changes to counteract demand variations (demand shaping),
  4. better coordination between sales, marketing, operations, product design with in a company through better Sales & Operations Planning and Management
  5. better planning of assortments (Best Buy's effort towards making their stores more targeted around Barry, Jill, Buzz etc.),
  6. better service level optimization through understanding of customer ordering behavior, demand and supply variations etc. (On Semi, TI and others improving service levels while decreasing inventory)

Over the next 10 years, with these type of initiatives that are being undertaken by companies, we could conceivably get savings of $1 Trillion in operational efficiency, savings of $1 Trillion in inventory investment & savings of $1 Trillion through capital investment avoidance (assets).

What an exciting area to be working in ...

Kelly Thomas wrote back with some clarifications on the data above. The central point of the huge opportunity for companies to improve their supply chains remains though.

The inventory imbalance between manufacturing and distribution-transportation-retail is not as bad as portrayed because the US runs a substantial trade deficit. I did not figure that part of the supply chain into the equation. The trade deficit for the past few years has been about $40B-$50B per month. So if we say it is about $500B per year and apply inventory turns to that type of output, then there is probably about $50B-$100B in distribution and retail that represents goods manufactured outside of the US. The numbers may be larger, because the turns on these goods may be lower due to the long lead times. This probably changes the split between manufacturing and channel inventory to about a 40/60 ratio.

What do you think?

Karthik Mani

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