When Dr. Stephen G. Timme, adjunct professor at the Georgia Institute of Technology and president of Atlanta-based FinListics Solutions, asked Supply Chain Summit attendees if their companies used Gross Margin Return on Investment (GMROI) to measure effectiveness and efficiency, everyone in the room said yes.
Identifying common metrics, such as GMROI, and a mutually understandable language, is a critical first step in moving logistics discussions and decisions from the back room to the boardroom. Timme was joined by Jose Li, principal, retail and e-commerce, at FedEx Services, in leading the Supply Chain Summit session dedicated to the creation of a “chief logistics officer” mentality.
Although finance and logistics executives may not understand or appreciate the linguistics inherent to the other’s department, all business leaders understand cash flow and the concept of cost relative to operating profits.
To initiate dialogue between finance and logistics, Timme advised retailers to “prioritize decisions by putting a dollar value on the decision.” Retailers can do this only when they understand the real costs and the real benefits of supply chain efficiencies.
In a white paper co-authored by Timme and Li, they delve deeply into financial and logistics metrics, highlighting how chief logistics officers can impact shareholder value, how logistics, speed and inventory interrelate, and how to establish a top-down approach to creating a financial-logistics connection. During the Supply Chain Summit, Timme and Li shared their research, including three retail case studies that illustrated the value of a real cost/real benefits analysis.
Improving gross margins: The first study featured a 1,000-store retailer that wanted to reduce its time to market on product sourced from Asia and increase its sales of holiday merchandise.
“The retailer had 15 different parties to deal with on imports,” explained Li. “They engaged FedEx’s Ocean to Ground Distribution service, which allowed them to bypass the DC and ship direct to stores.”
After switching to the FedEx service, the retailer gained increased visibility to its import shipments, reduced days in inventory and improved gross margins by 5.5%. The following holiday season, the retailer sold more holiday merchandise in one week than it had sold in an entire month the preceding year.
Inbound savings of $1 million: Like most retailers that manage inbound freight under a Freight-Free Paid (FFP) model, meaning the logistics provider maintains responsibility for the inventory in transit, the retailer in the second case study was paying a 20% to 40% markup on its freight costs.
FedEx converted the retailer’s vendors to Freight-Free Collect, eliminating the wasteful markup charges, and established time-definite deliveries from the DC to the retailer’s 230 store locations so all inbound shipments could be received within a two-hour window. As a result of the freight savings and labor efficiencies, the retailer realized a savings of $1 million.
Prioritizing supply chain initiatives: In the third example, Li reported, “A 100-store, multichannel retailer wanted to understand supply chain best practices in the industry, involve all of the stakeholders in the value chain and prioritize key initiatives.”
FedEx conducted workshops for all of the cross-functional decision makers within the retail organization so the processes and solutions would be “owned” throughout the supply chain. As a result, executives within the organization had a better understanding of how their individual role fit within the total effort as well as a greater appreciation for their colleagues’ responsibilities.