Tariffs and Intelligently Protecting Profits

Summary: The trade wars are in full force with the Administration’s decision to impose 25 percent tariffs on $267 billion worth of Chinese goods and China’s retaliation announcement effective June 1. The short term and possibly long-term financial consequences for companies are very serious.

For some time now, many companies have been looking at alternative options for manufacturing capacity as production costs have increased in China. But when potential tariff increases were announced last year, companies immediately began to stockpile their inventory levels before the increases took effect.

Now that significant increases in tariffs are a reality, how should companies explore the options to manage these additional costs? Options include absorbing the costs, increasing selling prices, adjust discounting strategies or creating product substitution strategies. One thing is certain. Approaching this problem with a “one size fits all” strategy can be disastrous.

Points of Focus: What is essential in developing effective strategies that intelligently protect profits is to have a clear understanding of the financial importance of each customer. This means NOT just measuring net revenues but understanding the specific profits generated by the products they are purchasing.

Take a look at the following graph that segments customers based on their profit contributions. In summary, 2,843 customers provide 80% of the total profit for this company while 110,174 customers are very marginal or unprofitable.

A typical performance distribution

If the marginal and unprofitable customers are buying products that have an increased tariff, their profit contributions will only become worse. Therefore, additional strategies need to be developed to address these customers to minimize additional profit drainage.

However, to begin to protect positive profit earnings from the impact of significant tariff increases, a good place to start is on the smaller number of customers that bring the most to the bottom line. Concentrating on these high-performance (“Key”) customers is critical. If they are not handled correctly, the result could be significant issues related to their future earnings potential for your company

Immediate Action: It is important to understand the financial performance of the products that the Key customers are buying and then select the right strategies to drive the behavior needed to intelligently protect corporate earnings. Strategies that take into account overall profit performance (net earnings for all products), the specific product financial performance drivers as well as the mix of the purchased products that are impacted by the tariff increases.

Having accurate and specific customer / product financial performance visibility can then support questions like:

Which customers are buying high volumes of relatively low margin products of which many are now affected by the tariff increases? (possible strategy – pricing/discount adjustments)
Which customers are primarily buying products that have a strong margin and have a limited impact from the tariff increases? (possible strategy – do nothing approach)
Which customers are buying products that have a wide mix of margin contributions and will be impacted by the tariff increases? (strategy – dependent on the product insights)

Takeaway: Proactively handling the impact of tariff increases is a critical issue. Addressing it with generalized information is like asking a Scout Leader to lead a Troop out of a dangerous ravine without having a map or a compass.

The key is to use accurate and specific customer-product-centric financial information. Information that can be used to develop sustainable profit protection strategies which will effectively minimize the overall negative impact of significant tariff increases.

I would love to know your thoughts on this. Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a founding officer of the American Logistics Aid Network(ALAN) and designated by DC Velocityas a Rainmaker in the industry. For the last 25 years, Richard has been passionate about driving business value through the adoption of process and technology innovations. His current focus is to support CI’s mission to enable companies to gain maximum value through specific, precise and actionable insights across the organization for smarter growth. CI delivers Enterprise Profit Insights (EPI) solutions that enable cross-functional users to increase and protect profitability. Prior to his current role, Richard was President of CAPS Logistics, the forerunner of supply chain optimization. Richard is a frequent speaker at national conferences and leading academic institutions. His current focus is to challenge executives to improve their company’s competitive position by turning enterprise wide data from a liability to an asset through the use of applied business analytics.

Digitizing The Supply Chain – Maximize The Value

Summary: A lot is being written about companies recognizing the need to “digitize” their supply chain. But what does that really mean? Generically, digitization is to convert information into a digital format. But in the context of supply chain, let me offer the following:

Digitizing the supply chain is to meaningfully connect and make available data associated with the Plan, Source, Make, Deliver and Return (SCOR) functions of the supply chain.

In other words, having repeatable and trusted digital visibility of the end to end supply chain. This information can then support:

the proactive monitoring of product flows (Control Towers)
improvements in operational efficiencies (S&OP applications) or
critical insights regarding the total actual cost to serve for each product and customer

Why is this a topic that is top of mind for many supply chain executives? Is it correlated to serving customers better, driving efficiencies, lower costs or beating the competition and therefore driving profitable growth? Absolutely!

But achieving these objectives and maximizing value is not only an investment in digitization. Achieving real value requires breaking down the organizational silos using this information to gain maximum advantage; investments in the people and processes as well as the technologies.

Case In Point: I was recently interviewed by Supply Chain Radio Now and told the story about a major Waste Disposal company. The company wanted to use digital supply chain operational data to better plan and execute servicing their residential customers on a national basis. They had selected our company’s technology but the CFO sponsor had a traditional, technology focused strategy for it’s deployment. We explained to the CFO that his deployment strategy would not work because it did not address the required attention needed to address the process and people related requirements.

Action: The CFO took the position that if his deployment strategy was not used, the business (worth several million dollars) would be given to another company. We respectfully but clearly explained our position and he left the building. The next day, he returned and said that he had changed his mind because of our conviction in the proper deployment strategy. The subsequent adoption of the solution was extremely successful and led to additional national solution rollouts for the same company.

Takeaway: Digital visibility that provides connected, trusted and actionable end to end supply chain information is one key for “thriving” and not just “surviving”. But it also requires addressing the people and process considerations in order to take full advantage of the information across the organization.

Mastering the digital supply chain will separate the winners from the losers. It can support multiple critical needs including knowing the exact financial contribution of every product or service sold to every customer. That type of insightful knowledge can make servicing my trash can and yours an even more profitable venture.

I would love to know your thoughts on this. Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Increasing / Decreasing Costs – “Smart” Cost Decisions

Summary: With the uncertainty of an economic downturn, companies in 2019 will look to cut costs in an attempt to meet shareholders’ earnings expectations. Typically, cost reduction programs are established by functional areas of the business (sourcing, supply chain, inventory, etc.) and may be tailored to certain groups of customers based on top line revenue contributions. Why is this a problem? Simply stated, not all customers are the same as it relates to their true profit contributions. In fact, for most companies, a small minority of customers actually provide the vast majority of profits that subsidize marginal and unprofitable accounts.

Cost cutting decisions made across a customer base can have serious, unwanted consequences. Reduction in service levels or inventory availability for highly profitable customers can cause them to become dissatisfied and to look to your competition for alternative choices. The end result, your cost cutting measures may actually have the unwanted effect of significant decreasing the profitable performance of your company.

Case In Point: Prior to looking for ways to reduce operating costs, a profitable 5 Billion dollar company in Chicago decided to accurately measure the profit contribution of each customer and customer delivery location. Their customer base comprised of 110,000 delivery locations across the United States. Want to venture how many locations provided the vast majority of their profits? Most people would say use the 80 / 20 rule and therefore over 20,000 customer locations. The actual answer was less than 3%. Without knowing this and relying on higher level revenue or gross margin information, typical cost cutting measures could have had catastrophic results.

Action: The approach that this company used for this analysis ensured that the entire organization had confidence in the profit performance information. As a result, the information was very actionable. Cost reductions were implemented for the unprofitable and very marginal customers while protecting the service and support of the high yield customer group.

Takeaway: Wholesale cost reduction programs can be dangerous. It is imperative to identify customers that provide significant profit contributions to your bottom line and protect that business relationship. However, determining the root cause for poor performance is equally important. With that information in hand, cost cutting programs can be tailored to customers or customer segments to not only reduce operating expenses but also improve these customer’s margin contributions.

I would love to know your thoughts on this. Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Pinpointing Profit Leakage

Summary: Earnings reports are a key indicator of a company’s financial health but they are an aggregation of a vast array of incurred costs and realized revenues associated with running a business. The financial impact of specific decisions in managing product and customer transactional costs and revenues is typically visible at an aggregate level such as categories of costs or revenues by customer or customer groupings.

However, individual actions or decisions in sourcing, supply chain or sales can significantly impact operating margins and create negative performance exceptions. Profit leakage exceptions can be hidden in standard financial reporting. Finding these specific profit leakage opportunities and the root cause can be like searching for a needle in a haystack.

Case In Point: On a monthly basis, a Retailer would have a team of Financial Planning & Analysis Managers perform analysis on procurement, specific supply chain activities and store sales to try and find significant opportunities associated with incurred costs or reductions in revenues. The process was time consuming and did not catch all of the significant exceptions that needed to be analyzed. A decision was made to create a scalable approach that would not only review all exceptions but would also track the progress of resolving previously identified items.

Action: To be scalable, the company recognized that the solution had to have several key characteristics. It had to provide for an approach that would ensure that the data that would be analyzed would be accurate and specific. The identification of the exceptions needed to be fast and the ones with the biggest impact prioritized. Finally, the analysis needed to examine opportunities across the entire operation including procurement, supply chain, inventory and sales activities on a recurring basis. The company selected a cloud-based technology platform that provided data governance capabilities as well as robust processing and reporting.

With the initial activation of the solution, profit leakage exceptions across every functional area were identified that totaled several million dollars. What would historically take the company weeks to accomplish was now done on a repeatable basis in a matter of days.

Takeaway: Profit improvement opportunities can be significant by having the ability to pinpoint exceptions in financial performance by product, customer, store or channel. For some, the root cause may not be something that can be easily changed. But for many exceptions, actions can be taken to minimize the future impact on margin erosion. Having this type of robust and repeatable capability insures that the company is proactively looking for all opportunities to maximize shareholder value.

I would love to know your thoughts on this. Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Don’t Use Data Integrity Issues As A Crutch

Summary: “Our data has significant challenges and this is a real handicap for us.” It is rare to talk to a company that believes they have very little challenges with their data. In fact, the recent Supply Chain Quarterly Big Data Analytics Survey found that data quality and access issues were one of the main frustrations that business users have in getting true business value from their analytical initiatives. Unfortunately, many companies use their data liability issues as a crutch to justify why they are not getting true value of business analytics.

Case In Point: Several years back, a meeting was being held with the CFO, COO and SVP of Supply Chain for a well-known apparel company. They knew that they needed to build the analytical capabilities of their organization but were skeptical because of their perception of the current state of their data. Fortunately, the SVP of Supply Chain had previous experience in tackling this issue. He convinced the others to take a first step that would demonstrate that their data could be turned from a liability to an asset to produce meaningful insights on opportunities to reduce costs and increase profit margins.

Action: A Project Team was assembled and all sources for their transactional data associated with their supply chain and sales operations were identified. Data Subject Matter Experts were involved to address any data issues. Consensus was reached by the Team on how the data should be intentionally transformed to build a foundation for SKU and customer specific cost and profit performance information. Cloud-based technology was then used to further validate the data and to create specific and actionable financial performance insights that could be refreshed periodically. By benchmarking performance of similar customers and products, significant financial opportunities were identified. The Project team also found an unexpected bonus associated with potential inventory working capital reductions in excess of $10 million dollars.

Takeaway: Competitive Insights presented at the CSCMP Global Conference in November of this year. As part of that presentation, recommendations were made on basic building blocks to address data issues. You can receive a copy of this presentation at this website.

Data integrity issues can be proactively handled to ensure that operating data becomes a valuable asset. An asset that allows for visibility into actionable insights that drive trusted, fact based decisions. The companies that take this seriously will consistently move ahead of their competition and drive additional profitable performance.,/h3>

I would love to know your thoughts on this. Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Knowing Your Actual Cost To Serve For Each Customer

Summary: Most companies can measure gross margin contributions for customer or store sales orders. However, when it gets down to decisions regarding servicing those orders it becomes a little grayer. Often the incremental and varying levels of costs associated with fulfilling those orders is buried and certainly not visible through the P&L. So whats at stake? Missed opportunities to realize significant cost reductions! This is particularly true as companies struggle with the current shortages around transportation capacity.

Case In Point: One Chicago based company created an initiative to accurately measure the Cost To Serve of every customer through every sales channel. The results were shocking. For one specific channel, all customers were receiving 24 hour service deliveries (a one size fits all approach). However, less than a third of these customers generated a positive contribution to the company’s operating margin.

Action: Taking action on this discovery was made easier because the decisions were being made on fact based insights on the true cost to serve to each customer location. Customers were categorized into performance segments based on sales volume, the cost to service those sales and the profit generated by those sales. Delivery service levels were then aligned based on financial performance and an immediate $3.2 million dollars in transportation cost savings was realized.

Takeaway: Ongoing knowledge about the specific and accurate costs to serve your customers or stores should be a core competency of your organization. It is essential in managing the dynamic variations of operational costs and their direct impact to profit performance. Using generalized information in managing your operation can lead to missed cost reduction opportunities. Accurate, specific and repeatable Cost To Serve insights will allow you to out pace your competition and delight your stakeholders.

I would love to know your thoughts on this. Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Case Study: Blue Ridge Area Food Bank

The results illustrated in this case study are specific to the particular situations, business models, data input, and computing environments described herein. Each Competitive Insights (CI) customer’s experience is unique based on business and technical variables and all statements must be considered non-typical. Actual savings, results, and performance characteristics will vary depending on individual customer configurations and conditions. CI does not guarantee or represent that every customer will achieve similar results.

Case Study: Under Armour

Global Survey Results – Recognition, Frustration & Action

The results are in. At this year’s CSCMP Global Conference in Nashville, the Team of professionals that conduct, analyze and report on the Annual Analytics & Big Data Benchmark Study (Lisa Harrington – lharrington group LLC, Susan Lacefield – Supply Chain Quarterly, Dale Rogers – Arizona State University, Zac Rogers – Colorado State University and myself) presented the findings of this year’s survey (a copy of the presentation can be made available – see below). The results clearly indicated that companies continue to recognize the need to gain business value from Big Data Analytics but that there is a significant amount of frustration across industries.

Challenges with data, struggling with meaningful analytics and ultimately getting to actionable strategies were clear drivers for this frustration. As an example, look at the attached graphic on data:

The good news is that companies are gaining a deeper appreciation for the business value that can be derived from Big Data Analytics and are being more objective with regard to the effort that is needed to achieve that value. So what are some key steps to cross that gap faster? Four primary areas and specific actionable steps were cited to drive success as depicted in the following graphic:

So the race is on. Companies get the fact that in the fast paced environment that we all operate in today, it is critical to make fact based decisions using the all of the transactional data that is available through a set of business user analytics. Decisions that drive competitive and profitable performance.

For a copy of the presentation, please contact us at [email protected]

Thank you,

Richard Sharpe

Presentation: 2nd Annual Big Data Analytics Survey: The Path to Profit and Performance

Technology is enabling supply chains to gather enormous amounts of data. But are companies harnessing that data? Who is leading and who is lagging? Are companies realizing benefits or still stuck in neutral? Find out from results of the 2nd annual CSCMP-Supply Chain Quarterly Big Data Survey.

Understand benefits, opportunities, and challenges associated with harnessing supply chain analytics

Learn where your peers are in using big data to drive greater profit and improved performance

Find out which industry sectors are leading and lagging in the race to deploy big data analytics

Presentation: 2nd Annual Big Data Analytics Survey: The Path to Profit and Performance

1 file(s) 1.24 MB

Download

Council for Supply Chain Management Professionals
CSCMP 2018 Edge Supply Chain Conference & Exhibition

Gaylord Opryland
Nashville, Tennessee • USA
October 1, 2018 • 3:45 - 5:00 pm CT

session presenters:

Susan Lacefield, Editor, CSCMP's Supply Chain Quarterly
Lisa Harrington, President and Chief Executive Officer, The lharrington Group
Dale Rogers, Professor of Supply Chain, Arizona State University
Zachary Rogers, Assistant Professor, Supply Chain Management, Colorado State University
Richard Sharpe, Chief Executive Officer, Competitive Insights, LLC

solutions
••••••••••••••••••••••••••••••
data assurance

cost insights

category insights

enterprise profit insights

supply chain risk insights

services
••••••••••••••••••••••••••••••
• education
• training
• support
resource center
• blog
• customer stories
• articles
• infographics
• videos
• white papers

about
••••••••••••••••••••••••••••••
• history
• social responsibility
• press release
• events
• contact