Supply chain metrics of value to CFOs

Ageing of stocks is something that service managers need to review periodically and sound the CEO about, says Mr V. Sanjeevi, the Managing Director of Chennai-based eLogistics P Ltd ( http://bit.ly/F4TVSanjeevi) . This criterion can have a major impact on the profit and loss (P&L) if adequate action is not taken in time, he cautions, during a recent interaction with Business Line.

He describesa typical situation in the white goods sector with two competing players, viz. Company A operating with three months of stock in the pipeline, and Company B with three weeks of stock. “If Company B introduces a new product, Company A needs to wait for at least three months before it can launch a new product, as it has to sell the old stock before introducing newer models” Our conversation continues over the e-mail. Excerpts from the interview.

What are the typical financial issues that arise in the domains of enterprise logistics and supply chain?

An important issue is about deciding whether to go for own or outsourced services for transport, warehousing, handling and billing operations. In India, while most of the companies have outsourced transport, only a few have outsourced the warehousing operations.

Commission paid to stockists and retailers is one other major financial issue that merits the CFO's attention. With the emergence of 3PL and 4PL services, the pros and cons of these are to be reviewed every year and decisions taken. The CFO also needs to work out what the desired customer servicing levels should be, and what level of stock-outs the company is willing to have . However, one can also go for service matrix, of providing the best possible services for the A-class customers, and tapering down the servicing standards to an acceptable level to the C category of customers. This is being done in the health care, banking, and insurance sectors, and also in the spare parts service sector.

Taxation is a major point that requires to be tackled. In India, logistics decisions are often made based on the taxation policy rather than on optimum supply chain systems. As and when the GST (goods and services tax) gets introduced, the entire supply chain system, especially, the flow of materials from the manufacturing centre to the consumption point, and also from the sourcing point to the manufacturing centre, may demand a fresh look. GST regime is expected to bring down the national logistics cost at least by a few percentage points, while improving servicing standards to customers.

Are there a set of logistics and supply chain metrics that CFOs should regularly monitor?

The most important financial indicator is the measurement of logistics and supply chain cost as a percentage of revenue. And this should be benchmarked with global norms.

Another important metric to monitor is supply chain cost versus servicing standard. This has to be developed for each company, and reviewed once a year, during the annual budget period. Other metrics that need to be monitored are:

The regular transport cost, warehousing cost, and other logistics costs, for each brand, product category, and for each location.

Stock-outs vs stocking costs: This has relevance to days-of-stock kept at the factory, in-transit stocks, and stock kept at the distribution centres.

Transporter's market share vs servicing standard: Work out the servicing level provided by each transporter and their share of business. Based on this, one could ensure that the best service provider gets the maximum share of the business.

Space utilisation report and warehousing rentals across various distribution centres.

Ageing analysis : Many companies in the foods business monitor the average stock levels at the retail outlets to ensure that fresh stocks are available.

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