Over the past few years, the most in-demand new software to evolve for merchandising industries is for supply chain management (SCM).
When I performed a Google search, it responded with 1,680,000 web addresses containing the term “supply chain management.” There are hundreds, maybe thousands, of companies offering software solutions for every industry that has goods and services to sell. Colleges and universities around the world offer degrees in supply chain management. And yes, there is a relevance to the jobbing business.
The “supply chain” in supply chain management can be thought of as the pipeline that goods and services flow through. The manufacturer is on one end, and the consumer is on the other end. The various steps of distribution are in the middle. There is a supply chain for each business in every merchandising industry. SCM software is comprised of modules, each designed to accomplish a specific task. In talking to many people about the topic, I am frequently asked similar questions. So, here are a few “FAQs” to get started with.
Q. What are some of the common modules included with SCM software?
A1. Customer Relations Management (CRM):
Who are your best customers and what product lines do they buy?
Which are your best product lines and which customers buy them?
A2. Demand Chain Management (DCM):
DCM establishes inventory stock levels focusing on sales to consumers, not vendors.
Collaboration between the manufacturer and the distributors, which tends to put the right inventory at the right place in the supply chain. The resulting speed-up in the order cycle allows reduction in stock levels.
Internet-enhanced purchasing tends to automate receivables, payables, and stock level verification between the players in the supply chain.
Q. What benefits does SCM provide?
A. SCM improves return on investment (ROI) by reducing inventory investment and lost sales at the same time. Reduced operating expenses are shared by all. Some of the larger chain operations have doubled their ROI and found enough excess inventory to open more stores.
Q. How much does SCM cost?
A. The 2002 AMR Research Survey reports that 39% of companies spend more than $10 million annually on supply chain solutions, and 69% have plans to make additional SCM investments in the coming year.
Q. How could a typical automotive jobber afford the high cost of SCM?
A. The first part of the answer might be to use the computer system you already own instead of buying a new software/hardware combination.
The second part of the answer is to use Proactive Gross Margin Return on Inventory (GMROI) to develop procedures that duplicate each module of supply chain management.
Proactive GMROI is a double-edged sword when it comes to ROI. It measures your current status, and as you design new strategies it measures the results in advance.
Looking back, the January 1997 edition of Jobber News contained the first article of a 13-month series on Proactive GMROI. It is possible to apply a strategy based on it to duplicate the modules of supply chain management.
As a recap, GMROI measures the number of gross profit dollars being generated from each inventory dollar invested. The highest GMROI score yields the highest return on investment.
There are several ways to calculate GMROI. The traditional formula for calculating GMROI is:
Traditional GMROI = ( Annual GP $ / AVG. INV. $ ) = ( Ann. Sales Units * Avg. GP $ / Avg. QOH * Avg. Cost $ ) = ( 12 * 4 $ ) / ( 4 * 6 $ ) = 2.0 GMROI
I believe the traditional formula yields a Reactive GMROI. I say this because the numbers to calculate GMROI usually come from the period-ending reports and financial statements of a previous time period. It’s like looking at GMROI in a rear-view mirror.
I wanted a GMROI that is easier to use and is computer friendly, which was the genesis of Proactive GMROI.
This new formula calculates Proactive GMROI.:
Proactive GMROI = ( (Inv. Turns ) * ( GP Margin % ) ) / Cost of Goods Sold %
Q. What makes the Proactive GMROI formula computer friendly and what makes it proactive?
A. The elements to calculate inventory turns are annual sales units and average stock level. The elements to calculate gross profit margin percentage are average selling price and average cost.
This information is displayed in the part number records of your computer. By substituting changes to these values in the formula you can see the effect on GMROI in advance of bringing those changes into reality.
Q. How do you use the Proactive GMROI formula?
Inventory Turns = Sales Units per year / Avg. Units Quantity on Hand (QOH)
Avg. Units QOH Tends To = Order Point
GP Margin% = ((Sales $ – Cost $) X 100 / Sales $)
40%= ((10$ – 6$ ) X 100/10$)
Proactive GMROI = (Turns X GP%)/Cost %
2.0=(3 X 40%)/60%
(If you know GP%, you know Cost %. Cost % always = 100% – GP%.)
If all of this is not readily apparent at this point, don’t panic. Next month we’ll start on the first module of SCM.