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2015

The current economic conditions are causing many companies to revisit their business beliefs. When we are in the midst of good economic times, it’s easy to be profitable despite of processes that are not as efficient and airtight as they should be.  However, in times of economic disarray profits are declining and the time is now to remedy those business practices which are grinding down profitability and potential growth.  

The primary area which is most often neglected is returns.  Businesses all realize and try to account for customer returns, which can occur for a variety of reasons.  It represents a reduction in revenue and an unwanted increase in logistical costs. How a company handles their returns will have a palpable affect upon the bottom line.   During demanding economic times, a company must control both sides of the profit equation – revenue and costs.

There are six ways to control this equation. Each one to be discussed in detail below:

  1. Happy Customers
  2. Brand Equity
  3. Secondary Markets
  4. Reutilization
  5. Streamline Return Policy
  6. Receiving Returns in a Timely Fashion

 

Happy customers cannot and should not be over emphasized.  The costs of searching for new customers usually outweigh the cost of keeping present customers.  Returns signify a level of customer dissatisfaction with either the product or service or perhaps both.  Even more so, there are customers who view the return process as aggravating.  Never underestimate the power of a poorly handled return situation as tipping the balance towards eroding customer loyalty. One needs to view a return situation as a red flag on the customers’ satisfaction index.  A lack of a customer satisfaction index points to an area for immediate improvement.


Long term brand awareness is nothing to ‘sneeze’ at and will be maintained through a proper return policy.  Returns that are recycled and put to environmentally responsible used can only augment the firm’s reputation in the consumer marketplace. 


Secondary markets can allow for a useful revenue stream that was often overlooked in the past.  Consider to what extend the returned products can be refurbished or rebuilt to a sellable condition.  There will be costs to accomplish this but the margin gained can create a significant revenue stream.


Reclaiming products or parts that can be reutilized in the supply chain can reduce the cost of goods sold.  The firm has already paid for the raw materials and does not have to procure again or completely transform the product/parts to gain additional revenue.


Logistical expenses can be lessened with effective and efficient return management policies.  Customer service costs can be reduced if the return process is streamlined from the customer’s perspective.  Additionally, encapsulating statistics concerning the reasons for the returns can be used to improve the product or service, thus reducing waste costs.


Companies must be aware that some returned products do not age well.  This issue requires that returns are received in a timely fashion so that alternative uses can be found.  Otherwise, the only option is to write the product off. This is especially true for seasonal or short life cycle items, where end of season returns has little possibilities for substitute forms of use.  In these scenarios making earlier decisions about inventory dispositions can provide for the inventory to be reused before it becomes obsolete. 


Effective return management procedures will aid in the search for profitability and add real value to the organization.

Lean is quickly becoming the next significant improvement enterprise for both manufacturers and distributors. This took place when General Motors and Chrysler emerged from bankruptcy vowing to adapt all aspects of Lean methodology. Whether or not these companies and others merely adapt the theory of Lean as opposed to the actual practice is still open for debate and question.


A Lean index tracker called the “Superfactory 20”, which focuses on the top 20 Lean companies, observed that these stocks outperformed those of Standard & Poor’s by approximately 22%.  As major players in the manufacturing field move towards Lean, wholesalers and distributors will be required to follow suit. This “following” will allow distributors and wholesalers to benefit in the following ways:


  1. Asset Utilization
  2. Cost savings
  3. Profitability

Perhaps a short history of Lean would help.  Lean was developed by Kiichiro Toyoda and Taiichi Ohno in the 1950’s in Japan.  Japanese industry devastated by World War II needed to be rebuilt and revived. This was the way.  They received the vision from the most unlikely place – not from American automobile industry but from a visit to Piggly-Wiggly, an American grocery store chain. They observed that replenishment occurred only when items were purchased by the customers. 


Toyoda and Ohno adapted this method to their own companies in Japan and achieved continuous flow of goods and a wide variety of product offerings.  For distributors and wholesalers a whole new world opened up. It meant for them; a wide variety of inventory and a high inventory turns and profitability.


Lean methodology or theory rest on five principles or pillars:

  1. Customer Value
  2. Value Stream
  3. Flow
  4. Pull
  5. Perfection

For wholesalers and or distributors value is characterized by customer value – having the right product, for the right time and right price.  The value stream includes actions that must be performed to achieve customer value:


  1. Buying
  2. Stocking
  3. Shipping Inventory

Through streamlined distribution processes companies will attain a constant flow of products.

For manufacturers “Pull” is make only what is needed, only when it is needed and allows for the customer to put the product through the system.  For distributors “Pull” is slightly tweaked to perform in this manner: 


 

  1. Stocking only what the customer wants

    2- Replenish what the customer buys

 

Perfection merely means allowing the continuous improvement in all areas of a company.

In addition to the five principle or pillars of wastes Lean defined and put into the methodology eight areas of wastes that require constant attention.  It can best be remembered with this acronym – DOWNTIME.


D = Defects

O = Overproduction

W= Waste

N = Non-Value Added Processing

T = Transportation, Internal or External

I =  Inventory Excess

M = Motion

E = Employee Underutilization


Other wastes can and sometimes include: missed delivery dates, damaged or slow moving inventory, over complicated tasks and time spent searching the warehouse for inventory.  On the surface each waste seems to be simple enough to understand but discussing each waste in further detail, which I hope to do in future articles, will focus on the difficulties they can expose a company to.

As distributors continue the journey towards Lean they will discover good news and bad news. The good news is that Lean will be relatively easy, fast and inexpensive to implement and the high payoffs. The negative aspect of Lean is that it requires tremendous discipline, strictness and a complete cultural makeover for success.


The savings attained through Lean is astounding. Entire task and processes can be eliminated with the wealth of revenue saved can then be used for expansion or right to the bottom line. Lean combined with an effective upper management and engaged employees will lead to significant competitive advantages for distributors. 

Can Your Company Benefit from a Postponement Strategy?


Whether it is make-to-stock or make-to-order fulfillment processes, either one can lead to overproduction or underproduction risks.   In an attempt to avoid one or both of these risks many manufacturers are taking fresh approach to procurement with….postponement strategy.


With the holding of production in a pre-finished form and pushing the point product delineation closer to the point of the customer order, a sound postponement strategy can improve the forecasting capability. Customers, then, have a greater range of variety.  Companies have the lessened risk of lost sales and lower inventory costs and lessen chances of obsolescence.


However, is this answer for all companies?  It depends.


Postponement strategy in essence is a LEAN supply chain that involves the deferral of end of manufacturing activity such as packaging, labeling, assembly, etc,.  Upon enacting this strategy any particular step might be pushed toward the end of the process.  This is done with the goal of scheduling production as close to order fulfillment as possible.


Since the company is no longer speculating on demand and thereby possibly creating excess inventory the holding costs of inventory can be reduced by 30%. Additionally, stock out are minimized so customer satisfaction increases accordingly. 


A perfect example of this strategy is the paint store.  Instead of stocking hundreds of cans of paint in multiple colors, stores choose to stock tints and colorants. These are mixed on site per customer order. Customers end up happy as they get the infinite number of hues they demand.  The stores / vendor are happy as they reap the benefits of order fulfillment, lower inventories and customer satisfaction. 

There is one company that seems to have completely mastered the postponement strategy and that is Dell Computers.  Dell embraced this strategy beginning in 1993 and continuing to this day.  Computer components were held in generic form and custom assembled as it received customer orders.  Dell implemented this strategy while its competitors held onto inventory for months on end. 


Of course prior to any such implementation a company should review its costs and any organizational changes to determine and ensure any such changes do not exceed expected benefits.  I recommend eight such costs / benefit considerations:


  1.       Cost to realign manufacturing, warehousing, shipping, order taking and or purchasing
  2.       Warehouse and or plant reconfiguration?
  3.       Increased warehouse costs due to possibility of increasing warehouse space to serve as a consolidation area.
  4.       Cost to install new manufacturing equipment
  5.       Product design changes
  6.       Increased shipping expedition costs
  7.       Changes in skill levels and labor costs to reflect new employee responsibilities.
  8.       IT system changes and costs

As I stated that it depends on whether or not a company implements such a strategy. There are several clear markers which can assist in that decision.  They are as follows:


  1.       Are some of the company’s products seasonal?
  2.       Is the firm operating on a short order lead time as compared to its production cycle?
  3.       Is there a good deal of differentiation to satisfy customers
  4.       Is there any  one step in the production process that adds significant value to the end product
  5.       Do the product lines have customized end products

Implementing and executing a postponement strategy is the same as applying any other continuous improvement process.  It begins with the buy-in and collaboration of the major stakeholders mapping out a coordinated plan.  This process and mapping involves five steps:


  1.       Key stakeholders – executives and employees meet and map out current products and financial processes to establish a baseline. It is essential to include key engineering and manufacturing personnel at this stage.
  2.       Planning discussions held in regard to process changes in packaging, design or warehouse location
  3.       Discussion and plans made for materials, labor, logistics, inventory and supplier locations
  4.       A mutual understanding of the scope and timeline of project and how progress is established amongst stakeholders.

Finally, it is imperative that information is clearly communicated to all internal and external partners who may be affected in some manner by the postponement strategy implementation.