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| RightChain™ Wiring Diagram Linking Shareholder Value to Supply Chain Performance (click image to enlarge) |
A few years ago we were working with a large frozen food company. A group of us were in the executive board room waiting for the CEO to show up for our meeting. I was seated next to the CFO, and while we were waiting he decided to take me through their financial statements. He was especially proud of their expense statement for the prior twelve months. He insisted on showing me that all but one of their expense items had been reduced as compared to the prior year. He indignantly pointed out that the single line item that had increased in comparison to the prior year was transportation. (I think he thought I was single-handedly responsible for that increase because I was a supply chain consultant.)
He then asked me what I thought they should do about their transportation expenses. Instead of replying right away I asked him what had happened to profit during the period that transportation expenses had increased. He said that profit was up. I asked him what had happened to market share during the period in which transportation expenses had increased. He said that market share was up. I asked him what had happened to customer satisfaction during the period when transportation expenses had increased. He said that customer satisfaction had increased. He got upset and impatiently asked, “But Dr. Frazelle, what should we do about transportation expenses. They are increasing.” I said, “It looks to me like you should spend even more on transportation, because it seems to be working.” That was the last time he spoke to me. Six months later it was the last time he spoke to anyone in the company because he was let go. I expect because he was bound and determined to reduce every single expense in the company, even at the cost of lower profits, lower revenue, and poor capital utilization.
Before he was let go, this same CFO tried to push his expense reduction point with my partner, Juan Rubio. The CFO was insisting that we help them reduce transportation expenses by 20%. To get our point across and to point how ridiculous the CFO had become, Juan suggested to him, “Just transport the orders 80% of the way to the customer. Drop the product off one exit before the customer’s exit. Call them and let them know they can pick up the product there.”
It’s not just about the expenses. Transportation exists as a key component to an overall supply chain strategy. The supply chain strategy exists to maximize the financial and service performance of the company.
