June 27, 2017


















SUPPORT NOTES FOR ARTICLE #2.23:

"SUPPLY CHAIN REDESIGN" NOW APPLIES TO ALL CHANNELS

  1. Consumer goods companies will spend 39% (more than any other industry) of their 2004 I.T. budgets on "edge of the enterprise" applications. Such applications were defined in a "Consumer Goods Magazine" article as "allowing external parties to access and interact with internal data and applications to perform a business task."
  2. This pattern of distributor consolidators growing too fast and falling apart has happened in a number of channels. For a copy of a speech that Bill Weisberg, the CEO of Affiliated Distributors, gave on this topic, go to the following URL: http://www.pipingequipment.com/Bulletin/Bulletin%2003-10.pdf.
  3. This speech is entitled "The Era of the Independent". Bill runs four different wholesale buying groups under one service firm umbrella for the following channels Ė plumbing; pipe, valves and fittings; electrical; and industrial supply. In every channel, there have been big roll-ups that have frozen, eroded and imploded allowing the independents that belong to his different groups to pick up market share.

  4. Because of Customer Relationship Management (CRM) and Activity Based, Customer Profitability software, more manufacturers are starting to realize the huge cross-subsidies that they have within both their product and customer portfolios. MinCon, for example, found out that one large distribution chain was their biggest losing account because it had truckload pricing with every location placing small orders that killed MinCon on transportation costs.
  5. Colinxís story is at www.colinx.com. The four founders had little competitive overlap when they set up their joint venture to take care of web order entry (check out www.ptplace.com) and distribution logistics. But, since 2001 they have all been acquisition consolidators, so that they do compete, but from a far more efficient and effective platform. Colinx is a unique and powerful model for manufacturers within a given industry to look at more closely.
  6. Captive MDCs can be used for different purposes: A) a better buying tool which involves bulk buying into a hub to then replenish branches on a disciplined weekly or bi-weekly basis. B) A master stocking facility for slow moving items that may be bought for branch stock or direct shipment to a given branchís customer. Many companies donít figure out the true activity based costing for each of the three service scenarios and charge branches accordingly. As a result, branches can game the system financially to their benefit and the MDCs loss, and/or the MDC provides a hybrid service level/process for all three functions which causes poor economics and service results.
  7. SuperValuís 3PL division is called Advantage Logistics. This divisionís home page is at www.advantagelogisticsusa.com. An overview article that tells their start up story is at: http://advantagelogisticsusa.com/al-webapp/news/stories/06012003_natural.pdf. And, an article on their latest deal is at this URL: http://ir.thomsonfn.com/InvestorRelations/PubNewsStory.aspx?partner=8462&storyId=112328.
  8. For a PowerPoint slide show on Aceís CPFR story and improvement metrics with Ace suppliers go to: http://www.cpfr.org/MembersOnly/CPFR_20Ace-2003_20_20Oct_20VICS%5B1%5D.ppt.
  9. For a case study promotional brochure on ORSNascoís "automated inventory management" system that they offer to their welding distributor customers check out the story at this URL: http://www.orsnasco.com/Assets/Distributor%20Profile3.pdf.
  10. For more on Bunzlís "outsourcing services" go to their home page and click on the "outsourcing review" link at this URL: http://www.bunzl.com/flash/index.html.
  11. Here are the re-enforcing "China Effects" that all US and first world manufacturers are confronted with:
  1. We are all aware of the "lost jobs" effect. Because the total cost of producing high-value-per-pound goods in China is significantly less than in the US, we have been firing workers that make commodity goods here and hiring them in China. Our direct investment dollars can build state of the art factories quickly and cheaply, because Chinaís free enterprise zone has no unions, regulations, liabilities, zoning, etc., just a low, flat-tax. So, American factory "productivity" continues to rise, because the stats donít count where the goods divided by worker are made.
  2. Once a US factory starts production in China, more complicated products can be shifted, because the quality, breadth and depth of Chinaís internal supply capabilities and infrastructure have exploded. They are just now starting to produce their first cars with 100% domestic content. Is the US auto supply chain ready for $6000 compacts and $9000 SUVís in a couple of years?
  3. Because Chinese production capacity is growing far faster than global demand, this imbalance is causing global deflation in produced goods, which means no pricing power for US manufacturers. But, US factories still have rising total employment costs due to pensions, health care, workerís comp, legal liabilities, etc. How can these be passed on to customers without pricing power? They canít, so the answer is to shift even more production to China.
  4. Chinaís growth is driving up the global inflation of all raw materials. Because US factories canít pass on their higher raw material costs for lack of pricing power, they are again forced to shift more production to China.
  5. The Chinese government sops up the US dollars that we invest directly and send to them for their exports by creating more of their money out of thin air to buy the dollars. They then recycle the dollars to us by buying US Treasury bonds to keep interest and mortgage rates low. This allows our consumers to keep refinancing and buying more Chinese goods. They are doing vendor-financing for US consumers and helping to create two building bubbles here and there which stokes raw material inflation some more. This financial support cycle keeps 1 through 4 above going. The net result is that China is getting a state-of-the-art, manufacturing base and jobs in exchange for our government paper, and we are getting debt-financed, lower-cost commodity clones from China.
  6. To get all of the outsourced Asian goods made and landed here, the next level of internet communication software and third party logistics (3PL) companies has emerged. The prototypical value-added 3PL firm, case study, is Li and Fung of Honk Kong run by my business school, "managerial economics" teacher in the early Ď70s, Victor Fung. He led his family business out of the brokerage business in which margins had gone to zero and into the networked, value-added business for every major retailer in the US.
  1. For a comprehensive case study on a distributor that has reinvented both their service value proposition for one customer niche at a time and then rethought how they should outsource a lot of their purchasing to master wholesalers, see are article #2.22 and the support notes that go with it. At these URLs: ./articles/2_22.asp and
  2. ./articles/2_22SupportNotes.asp.

     

    Ó Merrifield Consulting Group, Inc., Support Notes for Article # 2.23

    Link to Article 2.23: ./articles/2_23.asp.