{"56530":{"#nid":"56530","#data":{"type":"news","title":"Speed: The Solution For Margin Myopia","body":[{"value":"\u003Cp\u003E\n\u003C\/p\u003E\u003Cp\u003EMargin has long been a key measure of how well a business is doing, and an increase\u003Cbr \/\u003E\n  in margin has been seen as the route to success. But focusing on margin alone\u003Cbr \/\u003E\n  may prevent companies from tapping into one of the most powerful opportunities\u003Cbr \/\u003E\n  to improve their performance: speed. Speed can turn even low margin products\u003Cbr \/\u003E\n  into big business. \u003C\/p\u003E\n\u003Cp\u003EYou need only look at Wal-Mart and Tiffany \u0026amp; Co. to see that margin is\u003Cbr \/\u003E\n  neither the only -- nor the best -- yardstick for success. Wal-Mart stores\u003Cbr \/\u003E\n  have a margin of less than 4%, and Tiffany \u0026amp; Co. commands an 11% margin.\u003Cbr \/\u003E\n  But Wal-Mart\u0027s speed -- the revenue it can generate with each dollar of investment\u003Cbr \/\u003E\n  -- gives it the higher return on investment (ROI). Tiffany generates only $.96\u003Cbr \/\u003E\n  per dollar of capital invested in its high-end merchandise and upscale stores,\u003Cbr \/\u003E\n  while Wal-Mart yields nearly $3.50 in revenue on the same dollar investment.\u003Cbr \/\u003E\n  So Wal-Mart\u0027s ROI is more than 13% compared with Tiffany\u0027s of less than 11%.\u003Cbr \/\u003E\n  The reason? Speed. Wal-Mart is simply faster at in turning dollars invested\u003Cbr \/\u003E\n  into dollars in revenue.\u003C\/p\u003E\n\u003Cp\u003ESpeed is even more important than margin for companies that want to capitalize\u003Cbr \/\u003E\n  on emerging markets, where margin often must be sacrificed because consumers\u003Cbr \/\u003E\n  have less discretionary income and are price sensitive. Yet just because the\u003Cbr \/\u003E\n  margin is low doesn\u0027t mean that opportunity isn\u0027t there. Consider the fact\u003Cbr \/\u003E\n  that Colgate sells roughly a billion toothbrushes in China each year, and Unilever\u003Cbr \/\u003E\n  sells more than $8 billion of brand-name consumer products in Africa, Turkey,\u003Cbr \/\u003E\n  the Middle East, and Latin America. \u003C\/p\u003E\n\u003Cp\u003ETo create effective strategies for increasing speed, you first have to break\u003Cbr \/\u003E\n  down and understand the elements of speed by focusing on components of the\u003Cbr \/\u003E\n  capital invested. While supply chain executives do have influence on the capital\u003Cbr \/\u003E\n  tied up in good will, property, and plant and equipment, they are primarily\u003Cbr \/\u003E\n  responsible for the capital tied up by operations. In particular, supply chain\u003Cbr \/\u003E\n  activities influence the cash-to-cash cycle-the time elapsed from when a company\u003Cbr \/\u003E\n  pays for raw materials until it collects revenues from the sale of those materials\u003Cbr \/\u003E\n  as finished goods. \u003C\/p\u003E\n\u003Cp\u003ESupply chain activities that improve order and invoice accuracy, for example,\u003Cbr \/\u003E\n  do influence receivables, but generally credit terms on sales and purchases\u003Cbr \/\u003E\n  are related more to financial arrangements than to operations. On the other\u003Cbr \/\u003E\n  hand, supply chain activities directly influence the time it takes to transform\u003Cbr \/\u003E\n  raw materials into delivered finished goods -- a factor represented by the\u003Cbr \/\u003E\n  inventory component of the cash-to-cash cycle. \u003C\/p\u003E\n\u003Cp\u003EOne company doing an excellent job of reducing raw materials inventories is\u003Cbr \/\u003E\n  Nokia. \u003C\/p\u003E\n\u003Ctable border=\u00220\u0022 width=\u0022100%\u0022\u003E\n\u003Ctbody\u003E\n\u003Ctr\u003E\n\u003Ctd\u003E\n\n\u003C\/td\u003E\n\u003C\/tr\u003E\n\u003Ctr\u003E\n\u003Ctd\u003EDays of Inventory\u003Cbr \/\u003E\n            from 2001, 2002 and 2003 for Nokia and competitors Motorola, Ericsson,\u003Cbr \/\u003E\n            and Siemens. These companies are quite different. Siemens, for example\u003Cbr \/\u003E\n            makes everything from cell phones to hydroelectric plants. But the\u003Cbr \/\u003E\n            trend is clear: Nokia\u0027s days of inventory are significantly lower\u003Cbr \/\u003E\n            and decreasing.\u003C\/td\u003E\n\u003C\/tr\u003E\n\u003C\/tbody\u003E\n\u003C\/table\u003E\n\u003Cp\u003E\u003Cbr \/\u003E\u003Cbr \/\u003E\n  Nokia has reduced raw material inventory through such efficiencies as its global\u003Cbr \/\u003E\n    supply web linking Nokia suppliers and plants. This system enables the company\u003Cbr \/\u003E\n    to stay in close contact with suppliers and logistics service providers for\u003Cbr \/\u003E\n    demand forecasting and order management and tracking. Although Nokia insists\u003Cbr \/\u003E\n    that suppliers own component inventory until it is used, the company also\u003Cbr \/\u003E\n    supports vendor-managed inventory, which allows the vendor to determine how\u003Cbr \/\u003E\n    much inventory is kept on site. And Nokia tracks inventories not only for\u003Cbr \/\u003E\n    its own operations but for its suppliers as well. In addition, Nokia uses\u003Cbr \/\u003E\n    a single logistics service provider to coordinate all the in-bound transportation\u003Cbr \/\u003E\n    to each manufacturing site so that the company can consolidate shipments\u003Cbr \/\u003E\n    and exploit economies of scale. The result is a flexible and responsive environment\u003Cbr \/\u003E\n    where speed is achieved by reducing days of raw material inventory. \u003C\/p\u003E\n\u003Cp\u003EThe Toyota manufacturing system operates in a similar manner, but with the\u003Cbr \/\u003E\n  added element of small, frequent deliveries. In fact, Toyota assembly plants\u003Cbr \/\u003E\n  hold only about four hours worth of component supplies. These are replenished\u003Cbr \/\u003E\n  every 37 minutes or so from a cross-docking operation that loads the trucks\u003Cbr \/\u003E\n  not with individual parts but with complete car sets -- just enough for the\u003Cbr \/\u003E\n  next 37 minutes of production. This strategy has the double advantage of keeping\u003Cbr \/\u003E\n  raw material inventories low and of mitigating the risks of supply interruptions.\u003Cbr \/\u003E\n  If something happens to one or even a few trucks, the plant can continue to\u003Cbr \/\u003E\n  operate smoothly until the next vehicle arrives. \u003C\/p\u003E\n\u003Cp\u003EWhen it comes to work-in-process inventory--transforming raw materials on\u003Cbr \/\u003E\n  hand into finished goods--two examples come to mind: Northrop Grumman and Samsung.\u003Cbr \/\u003E\n  What makes them even more interesting is that they represent extreme ends of\u003Cbr \/\u003E\n  the spectrum. \u003C\/p\u003E\n\u003Cp\u003ENorthrop Grumman participated in the Lean Aerospace Initiative and launched\u003Cbr \/\u003E\n  its own Lean Enterprise Initiative to apply Toyota\u0027s method for manufacturing\u003Cbr \/\u003E\n  automobiles to the much more complex defense industry (an automobile has about\u003Cbr \/\u003E\n  4000 components compared with the hundreds of thousands of components of a\u003Cbr \/\u003E\n  nuclear-powered aircraft carrier, like those Northrop Grumman builds). By implementing\u003Cbr \/\u003E\n  a traditional lean production approach, the company was able to reduce throughput\u003Cbr \/\u003E\n  time for major systems by 21% to 42%. And they didn\u0027t stop there. Northrop\u003Cbr \/\u003E\n  also implemented a Supplier Lean Initiative to help its vendors benefit as\u003Cbr \/\u003E\n  well. \u003C\/p\u003E\n\u003Cp\u003E\u0026nbsp; \u003C\/p\u003E\n\u003Ctable border=\u00220\u0022 width=\u0022100%\u0022\u003E\n\u003Ctbody\u003E\n\u003Ctr\u003E\n\u003Ctd\u003E\n\n\u003C\/td\u003E\n\u003C\/tr\u003E\n\u003Ctr\u003E\n\u003Ctd\u003EDays of Inventory\u003Cbr \/\u003E\n            from 2001, 2002, and 2003 for Northrop Grumman and competitors Boeing,\u003Cbr \/\u003E\n            Lockheed, and General Dynamics. Northrop Grumman has dramatically\u003Cbr \/\u003E\n            reduced days of inventory over the past 3 years.\u003C\/td\u003E\n\u003C\/tr\u003E\n\u003C\/tbody\u003E\n\u003C\/table\u003E\n\u003Cp\u003EBeyond the obvious differences in the scale of their products, Samsung differs\u003Cbr \/\u003E\n  from Northrop Grumman in that manufacturing in the semiconductor industry is\u003Cbr \/\u003E\n  not linear. Wafers return again and again to the same equipment as the different\u003Cbr \/\u003E\n  layers of the product are added. Samsung has applied the Theory of Constraints,\u003Cbr \/\u003E\n  which focuses on identifying and managing bottleneck processes. It realized\u003Cbr \/\u003E\n  that keeping equipment use high on non-bottleneck processes simply produces\u003Cbr \/\u003E\n  more inventory, not greater value. So Samsung makes sure that all of the other\u003Cbr \/\u003E\n  operations in the process keep pace with the bottleneck. \u003C\/p\u003E\n\u003Cp\u003E\u0026nbsp; \u003C\/p\u003E\n\u003Ctable border=\u00220\u0022 width=\u0022100%\u0022\u003E\n\u003Ctbody\u003E\n\u003Ctr\u003E\n\u003Ctd\u003E\n\n\u003C\/td\u003E\n\u003C\/tr\u003E\n\u003Ctr\u003E\n\u003Ctd\u003EDays of Inventory\u003Cbr \/\u003E\n            from 2001, 2002, and 2003 for Samsung and competitors Sony, Panasonic,\u003Cbr \/\u003E\n            and Micron. Samsung consistently maintains fewer days of inventory.\u003C\/td\u003E\n\u003C\/tr\u003E\n\u003C\/tbody\u003E\n\u003C\/table\u003E\n\n\u003Cp\u003EFinally, speed can be achieved by accelerating the movement of finished goods\u003Cbr \/\u003E\n  to the customer. When forecasts are poor and supply doesn\u0027t match demand, companies\u003Cbr \/\u003E\n  are faced with the unpleasant options of turning the excess goods into scrap\u003Cbr \/\u003E\n  or selling at deep discounts, which erodes profits. The goal is to have supply\u003Cbr \/\u003E\n  match demand in ways that enhance rather than erode profits. \u003C\/p\u003E\n\u003Cp\u003EGeneral Motors is aggressively reducing its order-to-delivery cycle through\u003Cbr \/\u003E\n  the way it builds its vehicles. Its objective is to sell the vehicles people\u003Cbr \/\u003E\n  want, when they want them, and at full price. The company has focused on reducing\u003Cbr \/\u003E\n  the queue of orders waiting to be built, and rescheduling production so that\u003Cbr \/\u003E\n  customer orders are moved to the front of the line. In the process, GM has\u003Cbr \/\u003E\n  reduced its order-to-delivery window from roughly 80 days in 1999 to between\u003Cbr \/\u003E\n  20 to 30 days today.\u003C\/p\u003E\n\u003Cp\u003EThat\u0027s absolutely critical in an industry where BMW is closing in on a 10-day\u003Cbr \/\u003E\n  order-to-delivery capability. In the past, BMW was a build-to-order operation.\u003Cbr \/\u003E\n  Production didn\u0027t begin until there was an order. Today, the company builds\u003Cbr \/\u003E\n  painted bodies for stock and pulls from that stock to build vehicles to order.\u003Cbr \/\u003E\n  This simplifies the manufacturing process and, most importantly, shortens the\u003Cbr \/\u003E\n  order-to-delivery window. \u003C\/p\u003E\n\u003Cp\u003EThe ability of companies to increase speed, especially by reducing days in\u003Cbr \/\u003E\n  inventory, pays off in their overall success as much if not more than increasing\u003Cbr \/\u003E\n  margins. And that can help attract investor dollars for the future. Some of\u003Cbr \/\u003E\n  the companies we have mentioned in this article provide compelling examples.\u003Cbr \/\u003E\n  Compare Samsung\u0027s 406% total shareholder return from January 1, 2000, to January\u003Cbr \/\u003E\n  1, 2004, with that of its competitors Sony (total shareholder return 0%) and\u003Cbr \/\u003E\n  Micron (total shareholder return -46%). \u003C\/p\u003E\n\u003Cp\u003EOf course, there are other factors at work as well. The fact that Siemens\u003Cbr \/\u003E\n  AG enjoyed a 76% total shareholder return from January 1, 2000, to January\u003Cbr \/\u003E\n  1, 2004, compared with Nokia\u0027s 10%, Motorola\u0027s -96%, and Ericsson\u0027s -69% may\u003Cbr \/\u003E\n  have more to do with currency and diversification issues than with supply chain\u003Cbr \/\u003E\n  performance. Similarly, the fact that Northrop Grumman stock performance has\u003Cbr \/\u003E\n  been poor compared with its competitors over the past four years probably has\u003Cbr \/\u003E\n  more to do with the $19 billion in good will the company carries on its balance\u003Cbr \/\u003E\n  sheet from some ill-timed acquisitions. But while stock performance and total\u003Cbr \/\u003E\n  shareholder return depend on many aspects beyond speed and margin, speed is\u003Cbr \/\u003E\n  the most direct way supply chain executives can influence them. You can\u0027t fix\u003Cbr \/\u003E\n  everything, but you can fix speed. \u003C\/p\u003E","summary":null,"format":"limited_html"}],"field_subtitle":"","field_summary":"","field_summary_sentence":"","uid":"27279","created_gmt":"2004-11-02 01:00:00","changed_gmt":"2016-10-08 03:06:15","author":"Barbara Christopher","boilerplate_text":"","field_publication":"","field_article_url":"","dateline":{"date":"2004-11-02T00:00:00-05:00","iso_date":"2004-11-02T00:00:00-05:00","tz":"America\/New_York"},"extras":[],"groups":[{"id":"1242","name":"School of Industrial and Systems Engineering (ISYE)"}],"categories":[{"id":"145","name":"Engineering"},{"id":"135","name":"Research"}],"keywords":[],"core_research_areas":[],"news_room_topics":[],"event_categories":[],"invited_audience":[],"affiliations":[],"classification":[],"areas_of_expertise":[],"news_and_recent_appearances":[],"phone":[],"contact":[{"value":"\u003Cstrong\u003EBarbara Christopher\u003C\/strong\u003E\u003Cbr \/\u003EIndustrial and Systems Engineering\u003Cbr \/\u003E\u003Ca href=\u0022http:\/\/www.gatech.edu\/contact\/index.html?id=bt3\u0022\u003EContact Barbara Christopher\u003C\/a\u003E\u003Cbr \/\u003E\u003Cstrong\u003E404.385.3102\u003C\/strong\u003E","format":"limited_html"}],"email":["bchristopher@isye.gatech.edu"],"slides":[],"orientation":[],"userdata":""}}}