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Poor Supply Chain Systems will drag down your asset velocity

Many of the systems that we have designed to deal with financial accountability in the supply chain, are in my opinion not only cumbersome, but in many cases, create more complexity that in the end reduces transaction visibility and flow. This in turn even further “muddies the waters” and works against financial transparency, and hence accountability. Purchase orders is one of the biggest elements of “friction” today. One executive I interviewed described this clearly.

“Purchasing is simply too transactional. It can’t seem to conduct a commercial transaction without a purchase order. But what has happened is that we have created a proliferation of purchase orders for every single order, and because the volume has escalated, organizations have once again used labor arbitrage to move their PO processing to China or India. And an entire industry has sprung up around processing PO’s which is a non-value added function!”

Another recent interview I had with an executive working in a major electronics company emphasized how their systems were creating massive problems for them – and driving the exact opposite effect of asset velocity. On the customer end, the company had millions of dollars of orders that had already been delivered to their customers in Brazil but the ERP system they invested in was unable to general the invoices in a format that complied with the Brazilan regulatory requirements. As a result, customer were unable to pay the company, as doing so would violate the law. The company had orders that had been delivered six months earlier, but had not yet been paid for, or even invoiced properly. On the supplier end, their purchase order systems were so completely dysfunctional, that several suppliers of common items like utilities, contract manufacturing, and other services had stopped performing against their contractual obligations until they were paid, thereby halting operations and further delaying deliveries to customers! What a nightmare! The company was effectively shrinking its assets BOTH on the customer and the supplier end, due to a systems issue!

The other component that is working against us is just-in-time delivery and kanban – mainly because it is being used for all the wrong reasons. The original intention was to reduce inventory through multiple deliveries – and this worked well in places like Japan, where suppliers are located near the production facility. But in a country like the US, or in global supply networks, it is actually doing enormous harm to the environment, and is complicating transportation networks. There are more trucks more deliveries, and more boxes. Suppliers are being asked to carry more inventory for their customers, under the guise of “vendor managed inventory” – which in turn makes them less responsive and is a financial burden on their balance sheet.   In my mind, supply chain managers should be thinking “shame on us”. The procurement engine is running with a PO shot gun, and is ordering way too many orders, and generating too many shipments of small quantities.  Time to re-think our procure to pay systems, as well as invoicing systems as we move to a global operating environment.