Our original Return on Assets (“ROA”) article generally used a literal definition of assets (as opposed to an accounting one) – assets: things of value. Improving ROA is then asking, how do you get more from what you currently have or use? Inventory, however, is an asset in both senses (literal and accounting); how you manage it can make a difference.
Inventory Management
The fact that the holding costs of inventory are often difficult to calculate does not make them any less real. One prediction we’ll make here and now is that cash will still be king in 2011. Since cash is tied up in inventory, how it is managed is worth considering and innovation in areas such as multi-tier inventory replenishment and capacity collaboration should be pursued. On the procurement side of things, opportunities may exist for sourcing teams to do a better job of understanding inventory holding costs and including them in their bid evaluations. Items that directly impact inventory holding costs (when title is taken, transport times, storage costs, insurance, interest, etc.) and items that indirectly impact these costs (lead times, order and shipment volumes, geography, any need for increased inventory for risk mitigation, certain SLAs, etc.) should be considered in a ‘total cost of ownership’ evaluation. The recommendation here is to utilize eSourcing to evaluate the bids and analyze different award scenarios. eSourcing can speed the process by automating it and improve the analysis by leveraging the advanced analytical capabilities embedded in some of the eSourcing tools available in the market, like the one provided by BravoSolution, for example (of course, the CPO Rising readership, which is comprised of staunch proponents of eSourcing 2.0, doesn’t need the reminder). Staying on the procurement side of this issue (where we like to be), there are solutions like SciQuest’s Supplies Manager solution that can help enterprises manage their onsite supplies by providing visibility into what’s available in the different onsite supply rooms or centers. Finally, in certain industries, some suppliers may be willing to invoice when an item is used versus ordered – it does not hurt to ask.
Mini-postscript: I recently attended a small party/reception where Professor David Simchi-Levi of M.I.T. discussed his latest book, Operations Rules. The topic of David’s discussion was sustainability and he presented several case studies that showed how the number and location of warehouses can impact an enterprise’s carbon footprint and logistics expense. I’ve only just started it, but David’s book looks to be a great read for any Supply Chain leader looking to improve their operations performance.
Receiving
In the context of children, friends, and family, it’s generally better to give than receive (except, mind you, with that rich aunt or uncle, who always, always, always gives presents that are far superior to anything you buy); but, in the context of corporate receiving departments, the best gift may be a more orderly and efficient plan. At the end of last year, one Chief Procurement Officer, at a large retailer, initiated a program that was designed to reduce the number of daily shipments of paper and cardboard placards, product descriptions, and similar items at each store. Some stores were receiving more than 15 different shipments of these card/paper stock packages each day which required a significant amount of store resources. The sourcing team worked with the stakeholders to rationalize the number of suppliers and developed a more streamlined ordering process to dramatically reduce the number of these daily shipments. The program was a success and here’s the upside: this retailer is sophisticated enough to quantify the positive impact on store sales that moving the person who used to spend all day receiving these packages out onto the store floor. This is a great example of a procurement strategy directly impacting revenue. Talk about the gift that keeps on giving!
Tagged in: Case Study, Chief Procurement Officer, CPO, Return on Assets
