The ‘Profit’ track heard two very different approaches to boosting the bottom line: one involving a market-based dynamic discounting model while the other highlighted the technological capabilities of vendor-managed inventory in the world of coffee vending.
To boost the bottom line you need to get the basics right, says Jan-Martin Nufer of Borealis. He believes that traditional SCF programmes that are built around the relative credit ratings of two trading parties do not work, because there is not enough variation between the two parties’ cost of capital. And the myth around win-win-win solutions is compounded by the belief that they derisk the supply chain. So why the myth? Because there’s a financial service provider who could pull the plug if things take a turn for the worse, he said.
A good working capital discussion has to take place before SCF solutions are implemented. Who should own that conversation? This matters because processes and responsibilities get changed when such programmes are implemented. Inventory is an example where there can be pressure to reduce stock levels – but there could easily be huge regulatory implications: the bags used for drips in hospitals must be made from regulator-approved plastics and cannot be easily or quickly swapped with product from another supplier.
Borealis uses an in-house bank and a payment factory to not only streamline payments but to get straight-through processing, where possible without any manual intervention so as to eliminate errors. It’s all about getting the basics right, Nufer says. You need to look holistically end-to-end and pay particular attention to the interfaces between different systems. With the right governance, one thing Borealis achieved was a sharp reduction in the number of different payment terms.
“Avoid the single-KPI trap”
Organisations need to avoid the ‘single KPI trap’, he added. For example, having a KPI that requires suppliers to all be put on 60 days ignores the potential benefit of finding out what discount suppliers might offer in return for immediate payment. Borealis uses a working capital cost calculator, but being careful to use the right cost of capital for the particular circumstances.
Nufer talked about taking a ‘situative’ approach – keeping flexibility, considering the impact on the customer (such as inventory impact), and being conscious of the ‘balance sheet playground’. Borealis wanted to improve its WCM beside its existing securitisation programmes. It looked at a classic SCF and dynamic discounting model. But then considered a market-based auction dynamic discounting (self-funded) solution. The bidding process gives insight into supplier behaviour which can feed back into the model.
Implementation was swift and the adoption rate was good. It is a flexible concept that gives full control to the company: “I can put as much cash into it as I want,” said Nufer.
The key takeaways, he said, are these:
- Get the basics right before looking at optimisation
- Organisational embedding to ensure full end-to-end responsibility
- Straight-through processing and a holistic view of processes
- Education on goals and drivers (KPIs)
- Embrace new technologies – but there’s no rush (“I don’t want to be a guinea pig!”)
- Clear governance and rules
- Evaluation of the key drivers
- Dynamic working capital approach
- Keeping control and review
Smell the coffee!
Martin Woodward of ToolsGroup Brookes talked about ‘key conformance indicators’ – compliance with appropriate processes – which he says are better than conventional KPIs. They allow you to take decisions that may, for example, mean you have to increase inventories to meet a particular customer’s requirements.
The Costa Coffee case study he presented is leading edge technology, not bleeding edge, he said. The technology is all about working from as close to customer demand as possible to drive the supply chain. Costa Coffee had a type of coffee vending machine (in fact, 7,000 of them) that contained a SIM-card – in other words, it is internet-enabled. By monitoring its own sales, the machine can send signals back to the company so that invoicing and replenishments can get initiated.
“This is machine-to-machine communication. There are no people. The whole supply chain is entirely automated,” said Woodward. The coffee cups, lids, the coffee, the maintenance all happen automatically. The retailer whose premises the coffee machine is in doesn’t have to get involved. “There were a thousand spreadsheets in the system before” to make sure that inventories to deliver to the machines were never out of stock and to make sure retailers had what they needed. Things got out of sync because there was no reconciliation between (for example) cup volumes and coffee volumes – and so retailers’ excess stocks were winding up on eBay!
There are many variables: brown sugar usage in Scotland is lower than in the rest of the UK, for example. Machines located in university areas often find more of their coffee cups being used than elsewhere as the cups are regarded as ‘free’. And there are seasonal variations of course. But the main lesson is the closed lop of demand-sensing, inventory optimisation and dynamic replenishment.
Key figures from this project: ten-times sales growth without adding headcount; a 30% reduction in logistics costs; a 20% reduction in field stocks; and improved customer satisfaction – all from the visibility that comes from a demand-driven supply chain forecasting system.