You have taken the time to map out your extended supply chain (or supply web), and you understand all of the different touch points, activity flows, inputs and outputs that your company goes through to get product from its source, to its ultimate customer. You have validated the steps with subject matter experts in your organization and filled in all of the gaps. The finished product is immense in scope and beautiful in its complexity. Now, what?
Looking at a puzzle of this magnitude can be overwhelming, just like emptying that 5,000 piece puzzle on the card table and seeing all of the little pieces that have to be fit together. Luckily, it is not as daunting of a picture as it may seem. Now is the time to find a way to organize, segregate and start the process of prioritization. It is time to assemble the puzzle, piece by piece.
First, begin by organizing the major pieces of work into blocks of related functions. For example, take all procedures having to do with getting products unloaded and received into your warehouse environment and label that whole part of the supply chain as “Receiving”. Then, find another block of tasks and bundle them into their own grouping like, perhaps, “Returns Processing”. Then do the same for all of the other major segments of your supply chain. Often times, these major areas may correspond to sub-divisions of your general ledger accounts, which could be helpful for the next steps.
Once the supply chain has been organized and segregated into major blocks of work, it is time to start applying costs to each area. These are typically expressed as; labor, buildings and facilities, equipment and machinery, consumable supplies and/or raw materials, etc. Some expenses will be easy to calculate, such as building rents, corrugated usage and equipment costs. Other expenses may require consultation with your engineering group to determine work units per hour and doing calculations with payroll figures for a value of task based activities. The most complicated calculations will be those attributed to labor costs of personnel that have varied job duties. For example, if you are trying to calculate the costs of procuring products from suppliers, you may have to look at the salary and wages for your inventory department and determine the amount of their time that is spent on creating and maintaining purchase orders, versus other duties that they may be responsible for. This figure could be calculated as a plug number to be used at a high level. Or, more calculations can be done to break that number down to a cost per purchase order, or cost per unit, for that activity. This cost can then be combined with other steps in the procurement process to come up with an overall expense for that activity.
At the end of the exercise, every major activity block should have a high level cost associated to it. This is where the prioritization comes into play. We are looking for areas that have the largest burden of cost to determine where we will start the deeper dive into analyzing processes. The logic behind this approach is in looking at economies of scale for the best proportional gains. For example, if you find a cost bucket that is costing your company a million dollars, and another that is costing fifty thousand dollars, you will need to generate a twenty percent improvement of efficiency in the fifty thousand dollar process, to equal just a one percent improvement that could be made in the million dollar process.
This is how we prioritize; look for the biggest cost buckets to find the biggest opportunities to make a positive impact to the costs of operating your supply chain. Once you find the areas needing more scrutiny for a deeper dive, then the same approach is used to dig into those activities. For example, if your million dollar cost bucket was receiving operations, then you start to break down all of the different activities that build up to that million dollar nugget. Instead of looking at labor on a macro level, it is time to start breaking activities down to more finite tasks and assigning values to them. Unloading of trucks would be calculated as its own costs, versus scanning pallets or cartons into the inventory system. These activities would be tracked separately from even more activities, such as auditing and quality control. Equipment costs are also broken down by the type used, and the costs associated with their use.
As all of these costs are being calculated at a more granular level, the element of time needs to come into play. Time really is money, and if certain activities require more time to accomplish than others, these need to be factored into the overall picture of your operation. A pallet that comes in with 60 cartons of the same SKU, that can be scanned once and put into an inventory location, is a lot less expensive to process (on a per unit basis) than the pallet that arrives with 60 cartons of various SKUs that need to be broken out and individually scanned into inventory, then re-bundled by SKU and put into their respective stocking locations.
This can end up being a lot of work, both in the quantity of costs that need to be captured and also in the amount of time it will take to calculate the time and money associated with each task. But, other than the time involved, it is not very hard to accomplish – and the results are worth the effort! When completed, you will have a true picture of your operation, from the perspective of time and money. Now, the numbers that are presented will jump off of the page at you, and the areas needing more scrutiny will be very apparent. Then, it will be time to look at process improvement exercises. But, that is a topic for another day….
Adams Industries 