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YOUR SHOUT: Jeff Stanton – Spicing things up a bit

30 July 2007 By db staff writer

“standfirst”>It amazed me that so little attention was given to the very high cost of operating the supply chain." Jeff Stanton, Jeff Stanton associates

Last month was a big one for news. Gordon Brown’s accession, terrorist attacks around the country and, most importantly, the return of Girl Power with the Spice Girls reforming. So, to paraphrase their words: “Tell me what you want, what you really, really want”, may I suggest, “improving net margins”?

Headlines in the drinks press make the usual depressing but familiar reading with price points not reached and margins squeezed – but maybe help is at hand if you look a little more closely at your supply chain.

Having spent 13 years at the head of a business offering logistics services to the drinks industry, it never failed to amaze me that so little attention was given to the very high cost of operating the supply chain, and how poor management of the supply chain produced a very detrimental effect on net profit margins. In the supply chain, much attention, rightly so, is given to individual failed deliveries. Obviously that’s important, but it’s an operational issue and not strategic. It was even not uncommon, in my experience, for the person responsible for the management of the supply chain to be operating in a vacuum with a different set of objectives to the rest of the business.

If we assume that gross margins in the off-trade are in the “very little” to “not very much” category and the on-trade maybe in the 20%-plus area it doesn’t take an accountant to work out that with supply chain costs at anything from 2% of sales to 15% there is generally not much left to support the required lifestyle of the leaders in our sector.

Defining total supply chain cost properly is a good starting point but, I have found, not necessarily that easy to determine. By supply chain cost I mean the complete cost, including inbound, storage, handling, outbound, financing, write-offs and the various supporting and post-production activities necessary to keep the show on the road. If you do not have a complete understanding of all elements of cost and the service that it buys then you will not have any opportunity to do anything about it.

I was once told a story of how in the days of the stagecoach there was a constant battle between rival companies to find the fastest way to travel between London and Oxford. Horses were bred for the purpose, trees felled to straighten roads and coachmen encouraged to ride through the night. Unfortunately trains were invented and at a stroke all the stagecoaches went out of business. There was now a better way to achieve the same objective and the stagecoach operators all had to go into the wine business.

What is my point? Well ask yourself these five questions about your supply chain:

Do I understand the complete chain?
Do I understand the true cost?
Is each element really adding value?
Why do we do it this way?
Is there a better way?

In my experience it is also probably not about improving what you do. It is about completely changing the way you do it. The best example I know of holistic change is in the automotive industry. It was clear because of competition and the need to improve margins that a new approach to building cars was needed, so the concept of feeding production lines on a just-in-time basis and reducing massive stockholding was introduced. The effect has been that, in real terms, car prices have fallen but margins have been maintained. Do you see any parallels with the drinks business? The massive amount of excess stock in drinks firms is primarily a function of poor forecasting and complicated supply-chains that are not flexible enough to react to market changes. I am not suggesting that each bottle can ever be produced to order, as with cars, but shipping the wrong quantity of product thousands of miles to sit in stock in the destination market place to be eventually sold off to a jobber, does not make sense to me either (and that is notwithstanding the damage to the environment). So a rethink of the whole way product is produced, shipped and managed might, just might, produce a new way of doing things. There must be a better way and there are big prizes and greater longevity available for those that find a better answer.

Where you fit in the league table of effectiveness and management of your supply chain is probably dependent on how much strategic attention is given to this critical aspect of your business. What I have found over the course of the last 13 years is that not enough attention is channelled in this direction. It is obviously much more pleasant to taste a few more wines than ponder on the more boring issues of the supply chain.

How good is your forecasting? It is my belief that the range is between “poor” and “atrocious” and it is not just the small suppliers that are the least efficient. Some of the most catastrophic errors I saw were being made by the larger players with the most professional teams of “experts”. It is usually even worse when the heavy hand of the finance director starts to interfere, as the short-term cost saving often turns into a long-term disaster.

Let’s be honest, there are going to be many more cost pressures in the future: increased congestion and road pricing to name but two examples. These and other adverse affects will make the proper understanding and analysis of your supply chain even more important. It might make the difference between being in business or spending a lot more spare time at Spice Girls concerts.

So the issue is not: “Tell me what you want, what you really, really want”. But, do you really, really want to do it?

Jeff Stanton was the chief executive of The CERT Group from 1994 to 2007 and now runs Jeff Stanton Associates – providing strategic supply chain solutions for the drinks sector. jeffstanton100@aol.com