Monday, September 13, 2010

The 700-billion Dollar Supply Chain Opportunity

Logipi has recently started a blog talk radio show. It is on every Thursday at
On September 2, I spoke with Dustin on the supply chain opportunity still available to companies in America. Here is an audio blog of my interview or scroll down to read the script.

Dustin: Vivek, welcome to the show, before we start, I would let you introduce to our audience
Vivek: Absolutely - my name is Vivek Sehgal and I work for Manhattan Associates that is a best-of-breed solution provider in the supply chain applications area. We have over 1200 customers world-wide and most of the largest retailers use our solutions. I have consulted in the supply chain solutions space for a long time and have implemented these solutions at several large US corporations in retail, CPG, and hi-tech sectors. I have also written two books on supply chain, one on the supply chain processes and the other on supply chain strategy planning, both of which are published by John Wiley and available at all major book stores and online at Amazon.
Dustin: Companies have been investing in building their supply chain capabilities for quite some time now, do you think there are still savings to be had through such investments?
Vivek: I do and so says the CFO magazine as well, based on their reporting of a survey by The Hackett Group. For those interested, they can go to my blog at and search for my blog in June on AMR’s top 25 supply chains. Within the blog, I refer to the CFO magazine article “Good to the Last Drop” where it says that, “Opportunities still abound for doing more with less,” and then goes on to mention that, “according to a new study of the 1,000 largest U.S. companies (in terms of sales) by REL, a division of The Hackett Group. Indeed, the study concludes that those companies could wring a total of as much as $709 billion in excess cash flow from their supply chains by adjusting their inventory levels, getting their customers to pay their bills on time, and managing their accounts payable carefully…”. That is 709 billion dollars in cash-flow to be saved by building better supply chain capabilities. That as you see, is the size of the opportunity still out there to be leveraged through supply chain.
Dustin: What areas of supply chain help you in creating these savings? Can you give me some examples?
Vivek: Great question and hard to answer as well, because this is something that companies need to take time and analyze for themselves. But in general, I would say that building or improving any supply chain capability is either going to make you more efficient or going to save to direct costs - either way, you will see improvements in the cash-flow and financials of your company. Let me take an example, let us say you enhance your labor planning and scheduling processes in your warehouses - that improves your throughput in the warehouse, let us say you can handle more receipts, more pallets, cases, LPNs, you can process more orders, you can ship more orders - all of these are going to show up as improved efficiency of your warehouse assets. You can do this through automation of material handling, automation of order fulfillment process, implementing radio-frequency terminals and getting rid of the paper process or a combination of all of these… In the end, though, this is improving the efficacy of your assets and that shows up in your financial statements as improved return on assets, your investors are going to love you for that.
Another example will be inventory. If you can reduce inventory without affecting your ability to service your customers, you reduce the operating cash required to buy that inventory, transport it to your warehouses, stock it and so on - inventory reduction can have significant effect on the working capital required to run your company. And there are several things you can do to improve your inventory levels starting with implementing better demand planning and inventory optimization processes. Inventory reductions show up in reduced cost of goods and reduced working capital - both of which means increased profitability for your company.
I can go on - but again this is a huge subject and one that is close to my heart as well. I have written several articles on the relationship between supply chain efficiency and its financial impact - that are available on my blog at
Dustin: I read in one of your blogs, you talk about a quarter of a trillion dollars opportunity for retailers, what is behind that number?
Vivek: Oh, you are right Dustin, that number appears in the same article that we started this discussion from. Here is how I got to it: The Bureau of Economic Affairs, which is a federal agency charged with the GDP reporting, says that the US GDP for 2009 was just over 14 trillion dollars. Then, there is the Census Bureau that reports numbers on the size of the retail in the country - for 2009, the size of the retail sector was just around 4 trillion dollars. Putting the two together, retail is just over a third of the GDP in the US. Like I said in the beginning of this discussion that Hackett Group believes that the total supply chain opportunity is 709 billion dollars in excess cash flow. Out of that 709 billion dollars, then the share of retail will be at least one third, since retail contributes that much to the GDP. One third of that number is 236 billion dollars. That is the supply chain opportunity that retail industry can realize through improved cash-flow if they implement better supply chain processes.
Dustin: What do you think, the CFOs realize that and they are on-board with it?
Vivek: I guess so, let me tell you a little story. There was a time 5-6 years back, when I was part of a team with the charter of finding out where we can make biggest supply chain improvements for a retailer. Naturally, inventory planning was top of the list - we presented that to the executive team and the reaction from the CFO was that they did not want to reduce inventories because they were a cash-rich business with a very healthy cash-flow. It was shelved. Now after all those years with the recession beating them down, of course, they are trying to play catch-up! But one good thing that this recession has done - is to bring the CFOs firmly on-board with the supply chain initiatives. I think most of the CEOs now realize the potential and have made themselves more knowledgeable about the role of supply chains to achieve their financial goals. And, that I think is real good, for all of us, the investors, the companies, supply chain professionals and even the CFOs.
Dustin: That is good, what else is on your mind?
Vivek: Well, I think we can wrap-up and before we do that, I would want to remind that my second book on supply chain strategy is coming in December. It discusses the business strategy and the need to align the business strategy with supply chain strategies of the company. It is full of examples from the industry and I think will make a compelling read for supply chain professional all over. All for today from my side Dustin, and thanks!