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Blogging the Art of Change™
From:
Arthur Koch -- Management Consultant Arthur Koch -- Management Consultant
For Immediate Release:
Dateline: Miami , FL
Tuesday, June 09, 2020

 
Blogging the Art of Change™ - Arthur Koch Management Consulting, LLChttp://www.arthurkochmgt.com/blog/Thu, 04 Jun 2020 15:25:46 +0000en-USSite-Server v6.0.0-4040-4040 (http://www.squarespace.com)Two things every CEO must be doing post COVID-19 to improve their supply chain lead-timesArt KochThu, 04 Jun 2020 15:32:03 +0000http://www.arthurkochmgt.com/blog/2020/6/4/two-things-every-ceo-must-be-doing-post-covid-19-to-improve-their-supply-chain-lead-times577571a3197aea746a60b6ec:5bbd02fc71c10b4d7553d68f:5ed9127a8553fe38e9cd04a3Every CEO or executive should be driving reduced lead-times.

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Two things every CEO must be doing post COVID-19 to improve their supply chain lead-timesTo CEOs: You’ve Been Misguided by Antiquated...Art KochFri, 22 May 2020 11:17:18 +0000http://www.arthurkochmgt.com/blog/2020/5/22/to-ceos-youve-been-misguided-by-antiquated577571a3197aea746a60b6ec:5bbd02fc71c10b4d7553d68f:5ec7b01acbb6a32b29d4a451shutterstock_605267072.jpg

Art Koch’s Profit Chain® Series

To CEOs: You’ve Been Misguided by Antiquated Cost Accounting and Incorrect Performance Indicators. 

Volume 3 | Number 5 | May 2020

 

One important lesson that COVID-19 has taught Executive Leaders is that their assumptions are misguided when assessing the Total Cost of Ownership, TOC.

Total Cost of Ownership (TCO): TCO includes all of the direct and indirect costs associated with an asset or acquisition over the entire life cycle of the product or service. TCO includes not just the purchase price, but also the cost of transportation, handling and storage, damage and shrinkage, taxes and insurance, and redistribution costs.

Art Koch’s Profit Chain®

Total Cost of Ownership Model

TCO High Level.jpg

In my experience over the years, I have noticed most organizations make procurement and sourcing decisions based solely on the purchase price.   Leaders will talk about the total cost of ownership; few, if any, actually use a TCO calculation or model that determines an accurate TCO. When there is a model, the numbers are usually off by 25 to 40% because it underestimates the actual offshoring costs.

Additionally, many organizations have only used incremental inventory carrying cost of Prime +1% when making make vs. buy decisions.  The actual inventory carrying cost is between 31% and 58% of COGS when all costs are considered.  These numbers are the cost metrics that should be used when determining the internal rate of return – IRR, for long-term inventory carrying cost when calculating the TCO.

Incremental Inv Carrying Cost.jpg

Breaking the Cycle

It’s time to break the cycle of being misguided by antiquated costing and incorrect performance indicators.  It’s no longer a game of paying the lowest price for goods purchased from a supplier. We can no longer assume the relevance or accuracy of the costing models from the 1960s and 1970s when attempting to strategically reduce today’s TCO.  And the only “levers to pull” or options for cost reduction are NOT negotiating lower prices and longer payment terms from suppliers and transportation are for larger shipments and slower modes of transportation from freight carriers.

Organizations, whether it’s executive leaders or supply chain professionals, are greatly underestimating the cost of carrying inventory, and the impact of greatly reduced lead-times;

Inventory Is Evil! ™

“Inventory delays problem resolution.  Delays cost money.”

 

Shorter Lead-times Improves:

  • Responsiveness and flexibility to customer demand and design changes.

  • Rework and Scrap is reduced with higher inventory velocity.

  • Obsolesce and Slow-moving inventory are reduced with higher inventory velocity. Phase-in and Phase-out of new part numbers becomes easier and makes it quicker to implement changes since there are fewer variables and inventory to consider and manage.

  • Forecasting solutions become simpler, easier to maintain, and less costly.

  • When Total inventory decreases, Customer Service and Profits improve.

Art Koch’s Profit Chain®

“Dramatic improvements to inventory velocity increased customer service and corporate profits.”

 

Building A Total Cost of Ownership Model

TCO Detail.jpg

The above model displays the seven functions that make up the Total Cost of Ownership and the components for each of their cost elements. 

The TCO Iceberg, below, illustrates how 90% of the costs are hidden and not taken into account for outsourcing and decisions.  The top 10% of the iceberg, which we can see, are the only cost used to make TCO decisions. 

The Iceberg illustration highlights the fundamental differences between Professionals and Amateurs.  Professionals build their models to include ALL costs.

TCO Iceberg.jpg

I am never one to shy away from a good debate. However, be careful of the critics who can’t back up their biases with facts and data.  Transportation are one of the common critics of reducing order size and having frequent deliveries. They argue, if we start to receive items more frequently, costs will increase.  We need to reframe the argument.  The amount of freight over time doesn’t change, just the frequency of deliveries.  Actually, the predictability of delivery times, dates and weights greatly improves.  In case you missed it; variability is the curse of cost containment. Executive Leadership needs to demand the same level of professionalism from support organizations as they do of Operational Excellence practitioners.

Be cautious of cost center accounting.  To break this cycle of erroneous and antiquated costing, and to shift the paradigm, the focus must be on TCO and not just on a few localized costs.

Entropy Busters®

“Stop letting the process manage you! Become the champion of your game plan and achieve sustainable profits.”

 I would like to give special thanks to Brian Keyser for recommending this newsletter.  If you have any suggestions for future newsletters, please feel free to e-mail me or call me to discuss ideas.

 

Art Koch | Art Koch’s Profit Chain® Entropy Busters® | Inventory Is Evil!™

Mobile; 1-336-260-9441

art@arthurkochmgt.com

 

Art Koch's Profit Chain® and Entropy Busters® are the registered trademarks of Arthur Koch Management Consulting, LLC.

© 2020 Arthur Koch Management Consulting, LLC, all rights reserved.

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To CEOs: You’ve Been Misguided by Antiquated...
Leadership in the Face of COVID-19Art KochFri, 15 May 2020 13:16:09 +0000http://www.arthurkochmgt.com/blog/2020/5/15/leadership-in-the-face-of-covid-19577571a3197aea746a60b6ec:5bbd02fc71c10b4d7553d68f:5ebe94677e25fe0db2a1691bShort Term: As a manufacture, what can be done now?

  • Leadership.

  • Establish a triage team to manage the crisis.

  • Be proactive.

  • Don’t waste the opportunity: A Crisis or Recession is a Terrible thing to Waste.

Long Term:

What lessons can we learn?

  • Focus on long-term and not quarterly profits.

  • Don't ignore the warning signs.

  • Avoid group think. Just because other organizations are "doing it" does not mean it's a good idea. As the guardian of an enterprise, there is a requirement to think beyond the current frame of focus.

  • We need to think regionally.

  • Focus on inventory velocity, part and process quality, and become a zealot for total cost of ownership.

  • Software providers have done an excellent job of "selling" integrated supply chain solutions. However, how integrated can your enterprise be with 90 to 120 days of total pipe line inventory?

  • Manufacture products regionally for regional customers.

  • The stewardship of low-cost country sourcing.

  • Imagine customer loyalty when your enterprise keeps products and services flowing when others can't?

Art Koch's Profit Chain® and Entropy Busters® are the registered trademarks of Arthur Koch Management Consulting, LLC.

© 2020 Arthur Koch Management Consulting, LLC, all rights reserved.

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Leadership in the Face of COVID-19
Fail Fast...Fix Fast...!Art KochFri, 08 May 2020 12:28:06 +0000http://www.arthurkochmgt.com/blog/2020/5/8/fail-fastfix-fast577571a3197aea746a60b6ec:5bbd02fc71c10b4d7553d68f:5eb5460777ae6a5652100486If not constantly trying something new and different; you are not learning and falling behind peer groups.

In todays fast pace business environment we don’t have the time and luxury to incubate ideas. Wins are from many little failures that create the template for break through success.

Unlocking the Art of Change

Fail is Future Success!

Art Koch's Profit Chain® and Entropy Busters® are the registered trademarks of Arthur Koch Management Consulting, LLC.

© 2020 Arthur Koch Management Consulting, LLC, all rights reserved.

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Fail Fast...Fix Fast...!
Is Just in Time Broken?Art KochWed, 22 Apr 2020 22:12:25 +0000http://www.arthurkochmgt.com/blog/2020/4/22/is-just-in-time-broken577571a3197aea746a60b6ec:5bbd02fc71c10b4d7553d68f:5ea0be24a1d16a570b8a4ca3JIT

In the last couple of months, we have gone to grocery stores and pharmacies only to find empty shelves where the toilet paper, paper towels, antibiotics, cleaning supplies and hand sanitizer used to be.  

Let’s take a moment to discuss supply chain as it applies to the retail industry.  For non-perishable goods, canned foods and dry-goods, the only use of JIT in the retail sector is from the distribution center to the store location.  From manufacturing to distribution centers, is traditional “push”, manufacturing utilizing highly sophisticated forecasting / demand planning, or just-in-case inventories.  When digging deeper into the outages occurring today, the demand variability of these items is extremely low; meaning their demand is highly predictable.  What we are experiencing is a once in a 100-year event!  No demand planning / forecasting system is capable of predicting this type of event or crisis.  If demand planning processes  were able to forecast this event, I guarantee that this kind of knowledge would not be wasted on toilet paper and paper towels!  Someone would be using that information to make billions in the stock market or to accurately predict weather patterns.  Additionally, push systems are not flexible, responsive or agile enough to quickly pivot for sudden demand changes.

So why are we out of toilet paper and paper towels?  Let’s ask the question a different way.  Are YOU out of toilet paper at HOME?  Very few people actually are, and likely not more than would be under normal circumstances.  Why are the store shelves empty?  Since COVID-19 is a respiratory disease, long-term toilet paper demand will be unchanged.  With no long-term significant demand changes for these goods, manufacturers are reluctant to spend over-time money on already thin profit margin products, only to see in-store demand drop once the pandemic fear subsides.  With this false demand, if manufactures were to make more of these products, technically they would be over-producing at a higher cost, which would cause long-term financial distress.

As for antibiotics, cleaning supplies and hand sanitizers, for the most part the U.S. no longer makes these products or the antibiotics that go into them.  The last U.S. penicillin factory closed in 2004, and +85% of all generic drugs and their precursor production was shipped off-shore to China and/or India. This had dramatic negative impact to the length of the supply chain, what should have been two weeks is now + 12 weeks.  I just published my April newsletter titled, The Economic Colonization of American Health Care Supply Chain, that  discusses the impacts to our national security and sovereignty of manufacturing overseas and how it negatively impacts supply chains.

For many products, the supply chain starts or begins from half-way around the world.  When a product is shipped thousands of miles, there is nothing Just-In-Time about it!  The longer the supply chain, the lower the flexibility and responsiveness to meet consumer changes, and the higher total cost of ownership.  A large contributor to the total cost or ownership is inventory carry cost.  Total inventory carry cost is typically between 31 and 58% of Cost of Goods Sold.  This builds the case for implementing shorter supply chains.  Shorter supply chains translate to shorter lead-times; increased flexibility and responsiveness, and lower total cost of ownership, all of which are better for the consumer.

Incremental Cost of Inventory

Is it time to rethink JIT?  YES!  We need more JIT!  We need to shorten supply chains and manufacture the product regionally or locally.  Shorter supply chains equate to reduced lead-times, increased delivery speed, flexibility and responsiveness, improved quality and total cost of ownership.  JIT has my vote!

Art Koch's Profit Chain® and Entropy Busters® are the registered trademarks of Arthur Koch Management Consulting, LLC.

© 2020 Arthur Koch Management Consulting, LLC, all rights reserved.

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Is Just in Time Broken?
The Economic Colonization of American Health Care Supply Chain - April 2020Art KochThu, 16 Apr 2020 11:04:39 +0000http://www.arthurkochmgt.com/blog/2020/4/14/the-economic-colonization-of-american-health-care-supply-chain-april-2020577571a3197aea746a60b6ec:5bbd02fc71c10b4d7553d68f:5e95fd105309184f8a1ee603
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