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CONTENTS:
A Financial View of Inventory View
Why Contract Manufacturing in the U.S. Makes Sense View
Supply Chains and Demand View
What's Up With Warehousing View

A Financial View of Inventory
Inventory is the largest balance sheet asset in a business, yet many merchants are not aggressive enough in dealing with inventory, says Multichannel Merchant columnist Curt Barry. “In particular, marketers need to do more to liquidate aging inventory and look closer at how to achieve the optimal balance point between high order fill rate and increased inventory,” Barry says.

Barry offers some suggestions for handling inventory more aggressively and boosting profits in the process. First, he advises that firms get a handle on inventory status through use of a uniform inventory management system. This system includes reporting status codes that accurately describe inventory status to supervisors. Key inventory metrics should be agreed upon by senior management, the chief financial officer, and the inventory manager. The age of the inventory also should be analyzed.

Cash should be freed up from inventory, end-of-period inventory should by dynamically projected, and fill rates should be used to show how well customers are being served. Finally, Barry advises professionals to re-examine vendor management, use gross margin return on investment, consider cost of back orders as compared to retail and lost gross margin, and boost the effectiveness of inventory management staff.

Why Contract Manufacturing in the U.S. Makes Sense
Outsourcing the manufacturing of electronic equipment to the Far East may seem to be beneficial to U.S.-based original equipment manufacturers (OEMs) because of the lower labor costs; however, Reliable Plant reports that the increased logistics costs tend to increase supply chain expenses.

Approximately 50 percent of the $200 billion electronic manufacturing market is based in Far East, with China accounting for 75 percent of the Asian market. However, cheap labor in China slowly is becoming a thing of the past. Double-digit growth in wages now is the norm, and there is an increase in switching jobs. China’s economy also is growing, so there currently is a shortage of skilled manufacturing, quality control, and middle-management workers—precisely the profile of the worker that is needed in factories turning out high-technology products for American companies.

The 7,000 mile transportation cycle journey is long and expensive and results in high logistics costs because of the number of people through whom the goods must travel. The long cycle time also affects OEM managers’ ability to predict demand. Besides transportation and labor costs, these professionals need to consider language barriers, time zone differences, and other international obstacles. The difficulties of outsourcing to the Far East overpower the cheap labor costs. OEM leaders should instead consider outsourcing to U.S.-based contract manufacturers.

Supply Chains and Demand
The global supply chain has seen companies dragging each other down as one fails to gauge demand while another struggles to meet it—or to manage the cash flow needed to remain a viable part of it—reports a recent CFO article.

The supply chain currently is suffering from reduced customer spending. For example, Best Buy leaders realized they could have sold more electronics if their suppliers had not reduced their volume; Mattel saw its customer orders shrink; and 1,000 Chinese toy exporters went out of business, causing their income to drop.

“With weak consumer demand, the entire supply-demand equilibrium is out of whack,” says Frank Burkitt, national supply chain and operations practice leader at Deloitte Consulting. “Many suppliers have trouble funding their operations because they can't access working capital or a significant line of credit and are failing as a result.” Burkitt continues, “The financial risk of the supply chain is the biggest threat out there.”

At Sara Lee Corp., rising fuel and animal feed costs sent commodity bill soaring, even as the consumer products manufacturer confronted the consumer demand shift away from restaurant meals and toward eating at home. “That’s a plus and a minus for us, given our two lines of business in food service and retail,” notes Sara Lee Chief Supply Chain Officer George Chappelle. “It caused us to really think about how we schedule our plants to adjust to that kind of shift.”

One major change involved merging what had been essentially two separate supply chains. “This provided a 10 percent savings in administrative costs and made us more efficient in terms of how we deploy capital,” Chappelle says. The company also intensified its focus on lean manufacturing and six sigma efforts.

What's Up With Warehousing
A recent BusinessWeek article reports that an increasing amount of larger companies are outsourcing warehousing to third-party logistics firms and putting integrated warehousing into effect. The trend, however, has not carried over to smaller businesses.

“The average small warehouse operation doesn’t have a clue about forecasting, replenishment, order fulfillment, slotting, or any of what is done in integrated warehousing,” says Bill Harrison, president of Demand Management, a software firm that specializes in supply chain management for small and midsize firms.

Harrison advises smaller firms to use computer modeling to show which parts will be needed most frequently and then employ that information to make sure bins are positioned and stocked appropriately. “That gives a small company the ability to fill orders faster and get better productivity levels from their workers.”

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