Work Across Boundaries to Improve Supply Chain Profitability

Mar 24, 2005 2:07 AM  By

Improving supply chain visibility may just provide incremental improvements in overall cost savings for a company. The way to accomplish paradigmatic change in supply chain management is to manage productivity actively, not just ride herd on costs, according to a recent column in MIT’s Supply Chain Frontiers newsletter written by Jonathan Byrnes, a senior lecturer at MIT and president of consultancy Jonathan Byrnes & Co. In other words, if you are a supply chain manager, shift your focus from managing supply chain costs to managing supply chain productivity, or return on invested capital.

Byrnes suggests that supply chain productivity is a ratio, the return on invested capital (ROIC), whose numerator is profits generated by assets, and whose denominator is the assets (inventory) necessary to generate profits. By calculating the ROIC for all customers, supply chain managers can see in detail the patterns of profitability for the company.

The most common driver of sales compensation systems is revenue maximization, and that, Byrnes says, “is the underlying cause of most poor supply chain productivity, and doing something about it nearly always is simply assumed to lie outside the supply chain organization.” The way around such supply chain isolationism, according to Byrnes, is for supply chain managers to thing across organizational boundaries, work with their counterparts in other areas of the business, and change their focus from supply chain management to productivity, specifically ROIC maximization.

Byrnes offers five steps toward paradigmatic change:

1. Making budget is not the same as maximizing asset productivity. Survey your company to see if it does have a profitability management process. The chances are good that it doesn’t.

2. Analyze your company’s supply chain productivity by creating a database to show the company’s asset productivity. This database may be as specific as finding revenues and net profit for the inventory supporting each product, order, and customer. Such a database can be constructed, Byrnes says, at 70% accuracy, on a PC within “a few months.”

3. Coordinate with counterparts in sales and marketing to improve ROIC. Pay special attention to account, relationship, and sales process selection, service differentiation, and product life cycle.

4. Become involved in the account planning process.

5. Pay attention both to internal change and external change. Include customers’ operations in your assessment of company operations.