Counting the Cost of Liquidity in the Euro Zone

Finance and Supply Chain execs need to collaborate on ways to release cash locked into supply chains

Alejandro Serrano – Feb 6, 2012 – | US

The liquidity crisis in Europe has cast a spotlight on the need to bridge the divide between finance and supply chain management (SCM). More than ever, executives in these two key disciplines need to collaborate on ways to release some of the cash that is locked into supply chains.

Reducing inventory is probably the most obvious strategy for liberating these financial resources, particularly for companies that maintain high stock levels. In addition to tying up large sums of money in the products stored, inventory adds cost in others forms, such as insurance premiums, investments in storage facilities and related transportation budgets, and obsolescence costs.

Large companies in Europe have become very concerned about this cash-equivalent mountain, as it has become more difficult to meet their working capital requirements (WCR). But addressing the problem requires a concerted effort to understand the financial implications of SCM decisions.

When firms resolve to outsource production to low-cost manufacturing centers in countries such as China, for example, the move may enhance their profit and loss (P&L) statements. But the overall impact on the balance sheet could be much less favorable. The longer pipeline and corresponding increase in uncertainty require higher inventory volumes, which eats up precious cash reserves.

Transferring production to remote suppliers also is likely to involve larger lot sizes. These vendors often need to sell big batches of product to make the business profitable. Again, this consumes the buyer’s WCR when it purchases 1,000 units even though the enterprise only needs, say, 30 units. Sourcing domestically might be a better option because it is easier to work with local producers to reduce lot sizes.

Stock-keeping unit (SKU) proliferation is another supply chain issue that can have far-reaching financial implications, and a number of multinational companies are striving to rationalize their product assortments. In positive economic times, the inventory holding and ordering costs associated with multiple SKUs tend to be underestimated.

In April 2012, sports apparel company Adidas announced plans to cut its 46,897 SKUs by 25%. Other successful companies have followed a similar path. Apple’s iPhone offers only 10 SKUs worldwide for the product’s color and memory variants, for example. Compare this to Nokia, which sells 37 different models in Germany alone. Spanish supermarket chain Mercadona boasted a net profit of more than 19% at its 1,500 supermarkets in 2011. The retailer has about 4,000 SKUs per store compared to a typical U.S. supermarket, which sells around 40,000 SKUs.

Assorted Products
The product-assortment issue is a good illustration of how the lack of a holistic view of the supply chain can rob a company of working capital. Often, the marketing department believes that introducing more SKUs delivers more buying opportunities and hence boosts sales. But the marketers may fail to consider how the wider product selection both decentralizes and increases inventory, and has an adverse effect on the company’s balance sheet. Many senior executives also suffer from this myopic view of operations.

Extending payment periods or shifting inventory to suppliers are tactics that many financial departments adopt in a tight economy. Again, understanding how such actions ripple through the supply chain – working capital is more expensive for small suppliers so their performance declines, for instance – may not be a high priority.

SCM leaders are just as culpable. They might take an outsourcing decision without giving much thought to how such a move constrains WCR. Basic financial concepts, such as “WCR equals cash plus receivables plus inventories minus payables,” need to be an integral part of the SCM decision-making process. Supply chain professionals should appreciate that inventory levels directly affect financial risk.

Firms that understand the impact of SCM decisions on their financial statements can capture huge competitive advantage. That holds true in any commercial environment, but especially in one where there is a scarcity of working capital.

Alejandro Serrano ( is a professor of supply chain management at the Zaragoza Logistics Center, Zaragoza, Spain. He teaches “Finance for Supply Chain Management” as part of ZLC’s masters and executive education programs. This article will be published in the MIT Supply Chain and Logistics Excellence Network newsletter, “Supply Chain Frontiers.”


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Let Spanish universities compete with each other

Shanghai Ranking 2012: Not a single Spanish university made it to the top 200

It struck me as surprising the fact that not a single Spanish university made it to the top-200 at the last Academic Ranking of World University 2012, published by Shanghai University. Two European ones made it to the top ten (Cambridge and Oxford).Image

In addition, a number of universities from major European countries (Belgium, Denmark, Finland, France, The Netherlands, Germany, Norway, Sweden, Switzerland, UK) made it to the top 100. The first Spanish university (Autonomous University of Madrid) appears somewhere between positions 200 and 300. Other university rankings cast similar results.

As of 2012, there are 79 universities in Spain, 50 of which are public and 29 private. Given this number of universities, it seems obvious that there must be some special causes that explain this rather surprising fact, that none of the 79 universities appear in the first two hundred positions of the ranking.

Someone might suggest that it is the lack of appropriate management that produces such disappointing results. However, this does not seems to be the case, if one considers the encouraging fact that three (private) Spanish business schools (IESE, ESADE, and IE) always get outstanding marks at the European and world level. For instance, in 2012, The Economist ranked IESE’s MBA program as the top two-year MBA in Europe and 9th in the world. There are indeed great managers and professors at Spanish universities, both public and private.

In my opinion, the main reasons, among others, for Spain lagging behind in the rankings are somewhere else:

First, universities do not compete to each other. This is especially true among public universities. Spaniards do usually care about the type of degree (e.g., Engineering or Business), but not much about at which university such a degree has been issued. Therefore, there is no incentive to be the best school of Law in the country, as the market does not reward it. This leads to potential students selecting the university to study purely on a convenience basis. A large amount of undergrads study in or nearby their home towns. This has been reinforced by the autonomous communities in Spain, which have created a university (or at least a campus) at each of the fifty Spanish provinces, following a me-too policy that challenges the most elementary social planner’s common sense.

Second, public universities are not allowed to select students and have very astringent rules to hire and fire its faculties, and its staff in general. This leads to 1) mediocrity, as incentives to stand out are nonexistent (other than intrinsic) for both students and staff, 2) the formation of tightly-knit groups, which are commonplace in many universities, 3) the runaway of talented professors or professors-to-be, who find their place in the industry as incentives at universities are not appropriate for them.

Third, students (or their parents, who are the ones paying the bill for a vast majority of youngsters) are not usually willing to pay much money to get best-in-class education in a top-notch university. Many years of  inexpensive fees at public universities have made potential students believe that university education is a fundamental right in society like, say, health care, thus they do not see the point of paying what they consider to be a huge amount of money to get tertiary education. This leads to private universities reducing fees to be able to compete with public universities. Lower fees means less funds to be spent on top-notch professors, laboratories, and so on, preventing the formation of virtuous circles of excellence and meritocracy.

The good news is that the solution for the above-mentioned problems is quite straightforward, at least in theory, given that university competition should be perceived  as a healthy exercise and has proved to work well in the countries leading the ranking. The challenge, as usual, is the execution part of the plan, which can be seen as highly unpopular by those who feel comfortable with the status-quo.

These are my two cents. I would love to hear other opinions.

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La maldición del perro

Una amplia gama de colores para cada prenda. Prestaciones y diseños combinables en cada producto tecnológico. Mil y un tipos de yogures o de panes… Comprar es elegir. El estudio del comportamiento humano lleva a entender por qué no se deben creer ciegamente las teorías del márquetin cuando se trata de definir el número de variantes de los productos que se ofrecen al público

Alejandro Serrano – Heraldo de Aragón, Nov 9, 2012| Spain

«Cuanto más, mejor». Esta parece ser la idea dominante cuando se trata de definir el número de variantes de un producto que se ponen a la venta.

El razonamiento habitual del márquetin parece impecable: cuantas más opciones tenga el cliente para elegir, mayor es la probabilidad de que se produzca una venta y más satisfecho quedará. Sin embargo, según Barry Schwartz, autor del libro ‘The paradox of choice’ (’La paradoja de la elección’), esto no es siempre cierto: no siempre es deseable ofrecer más variedad de productos a los clientes.

En una interesante charla TED, Schwartz expone que ofrecer al cliente demasiadas variantes es  incluso contraproducente.

Hay cinco razones principales para esto, que por cierto forman el acrónimo PERRO. Son las siguientes:

PARÁLISIS La existencia de demasiadas variantes pueden llevar al cliente a realizar un estudio exhaustivo sobre cuál le conviene más. Este análisis  puede hacerse tan complejo que le lleve a posponer su decisión o incluso a abandonar la compra al verse desbordado por tanta complejidad. Nos podemos referir a este fenómeno como ‘la parálisis por el análisis’.

EXPECTATIVAS A mayor número de variantes, mayor es la expectativa de encontrar el producto que se ajuste exactamente a las necesidades del cliente. Si este no es el caso, el producto elegido puede crear frustración, incluso si es mejor que el que habríamos comprado si no hubiera habido variantes.

REMORDIMIENTO Si la variante adquirida no satisface completamente al cliente, éste puede pensar que dejó en la tienda aquélla que era mejor que la adquirida. Este sentimiento de remordimiento será mayor cuanto mayor sea el número de variantes.

RESPONSABILIDAD Si el cliente compra la única variante existente y después comprueba que no le satisface plenamente, se justificará pensando que, al fin y al cabo, era la única opción disponible. Sin embargo, en el caso de disponer de muchas variantes, puede que se sienta culpable por haber elegido mal, ya que ha sido él el responsable de la elección, lo que aumentará su frustración.

OPORTUNIDAD El valor de una compra depende de que el comprador perciba el ‘gap’ existente entre lo que se lleva a casa y la mejor alternativa no comprada. Si el número de variantes es grande, es fácil imaginar las buenas características de aquellas variantes que no compramos, haciendo al cliente sentirse menos satisfecho con la elección realizada.

Así las cosas, puede ser que, para algunas empresas, haya llegado el momento de plantearse una reducción en el número de variantes de los productos ofrecidos a los clientes.

Quizá sea esta la razón por la que Herbert Heiner, el consejero delegado de Adidas, anunció el pasado abril que iba a eliminar el 25 por ciento de los casi 50.000 artículos ofrecidos por la compañía.

Quizá también por esto, por citar un ejemplo más cercano, Mercadona ofrece en su lineal ‘sólo’ unos pocos miles de artículos, un orden de magnitud por debajo de lo ofrecido por muchos de sus homólogos americanos.

Desde el mundo de la gestión de la cadena de suministro se viene haciendo hincapié desde hace tiempo en la importancia de reducir el número de artículos para contener los costes de mantenimiento del inventario, no sólo por el coste financiero inherente a las necesidades operativas de fondos, sino también por los costes no financieros como la obsolescencia, los seguros, los robos o el coste de almacenamiento.

Ahora se suma el no poner en riesgo la satisfacción del cliente. Un argumento de peso.

Alejandro Serrano Valenzuela Profesor del Zaragoza Logistics Center

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The Dog Curse – When More is Less

Why you should not blindly trust the Marketing wisdom when it comes to defining assortment

Alejandro Serrano – Sep 27, 2012| Spain

Last week I watched a very interesting talk TED talk by Barry Schwartz based on his book “The paradox of choice” . He argued that having more options to choose from does not necessarily imply having more freedom. This is despite the usual approach from Marketing, which claims that “more is better” when it comes to definition of assortment. His argument stems from some findings which show that having many SKUs to choose from may actually be counterproductive, as it could lower the customer’s utility.

I have summarized the five main findings and packed them under the acronym “PERRO” (thus the title of this piece) for me to easily remember them. Here they are:

  • Paralysis. Too many SKUs force customers to try to analyze each option with respect to the others, pondering pros and cons, until a decision is made. The process can become so messy that customers simply postpone their decisions for later. Put differently, we could say that “too much analysis drives paralysis”.
  • Expectation. If assortment is large, customers usually significantly raise their expectations about the quality of the product they are going to buy. Since utility can be measured with respect to expectations, rising expectations leads to decreasing utility.
  • Regret. If a bought product does not completely satisfy a customer, she may ask herself, what if I had bought an alternative? Therefore, the higher the number of alternatives, the higher degree of regret she will have as she becomes more convinced that one of the others was better.
  • Responsibility. If there is just one variant, and that one does not satisfy the customer, he will think “What can I do?”, with no blame. However, if there are many alternatives and the one chosen does not satisfy the customer, he will blame himself, as he was the one who chose the “wrong” product.
  • Opportunity. As variety increases, the opportunity cost decreases, as the alternatives are closer in value (not necessarily in price) to the product considered. The more SKUs available, the lower the incremental value of the product chosen with respect to the second-best choice.

Given these, it is maybe time to reconsider your marketing strategy, and start reducing the number of variants so as to increase your customers’ utility (aka happiness).

The TED talk is here. The book “Paradox of choice” can be seen here.

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ZLC, a safe bet

The crisis forces us to establish priorities when deciding what to do with public money. ZLC is one of the most promising bets to achieve economic growth.

Alejandro Serrano – Heraldo de Aragón, Sep 1, 2012| Spain

Original article is aquí (in Spanish)

The years of economic bonanza drew many public and semipublic initiatives to our region geared to incentivizing economic growth in the region. Aramón, walqa, and Motorland are all examples of initiatives of this kind. In the university realm, the existing infrastructure was extended to create new campuses in Huesca and Teruel. Lastly, as a result of an agreed commitment to logistics, given our region’s potential in this industry, we witnessed the creation of PLAZA—with its younger brothers PLHUS and Platea—on the one hand, and the establishment of Zaragoza Logistics Center (ZLC) by  MIT (the world’s leading school of engineering), on the other. Years prior to joining this latter project, I already praised its creation and the commitment shown by the regional government to this project  in this newspaper (April 2004, May 2005).

Source: Heraldo de Aragón

With the advent of the economic crisis, the rules of the game have undergone a profound change. It is no longer about achieving all the goals established at a lower cost, but rather about achieving the greatest number of goals on a restrictive budget. In other words, it has become necessary to establish priorities, because it is impossible to achieve everything, which implies abandoning certain commitments viable in the boom years in order to commit firmly to others. In this regard, it would be disastrous for our region to apply a ‘one size fits all’ economy, attempting to keep all the projects running by reducing the budget of all initiatives, good ones and bad ones, by a similar percentage.

What criteria should be followed to establish which projects should be given priority? Logically, focus should be placed on those projects that are aligned with the strategy of the region, which can be inferred from the electoral program presented by the governing party last year. It stated that Aragón should be a “territory of excellence in teaching”, “achieve an optimal collaboration between companies and University”, “attract international teachers and researchers” and seek excellence “in those areas of knowledge susceptible to becoming niches of excellence comparable with the best in the world”, mentioning logistics as the first example.

In this regard,  Zaragoza Logistics Center has many of the attributes required to be part of the group of initiatives to be focused on. Some examples: The ZLC international masters course has been ranked the best logistics program in Spain in the last two years (El Mundo newspaper ranking). As to collaboration with companies, ZLC worked both with Aragon companies (two consultancy projects currently under way with Saica; seventeen alumni contracted by Transportes Carreras to date, …) and multinationals (the list is long: companies such as Adidas, Amazon, BASF, Caterpillar, Cummins, DHL, P&G or Roche have come to Zaragoza to finance projects or hire students). These brilliant students (from Aragón or from elsewhere) will eventually reach decision-making positions in the multinationals that are now hiring them. And it is then when the investment made will more than yield its return, in the form of job creation, projects or research centers.

The first significant initiative of this kind that comes off shall justify economically the existence of ZLC for more than a hundred years. But we have to give it more time. It is not fair to demand from  ZLC in 10 years of existence something that nobody has demanded from the University of Zaragoza in 450 years. ZLC is still a “start-up” in the academic sector. MIT has just celebrated its 150th birthday. Harvard Business School celebrated its centenary in 2008. Excellence in academia takes its time. It is tempting to forget priorities and focus on short-sighted, short-term projects. But if we really want our region to become a reference for others and not turn it into a piece of land with no hope, we should continue to give our firm commitment to ZLC and other similar initiatives.

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ZLC, una apuesta segura

La crisis obliga a establecer prioridades y a decidir qué hacer con el dinero público. El ZLC supone una de las apuestas con mejores perspectivas para el futuro desarrollo de Aragón

Alejandro Serrano – Heraldo de Aragón, Sep 1, 2012| España

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     Read it in English

Los años de bonanza trajeron a nuestra comunidad autónoma multitud de iniciativas públicas o semipúblicas para incentivar el crecimiento económico en la región. Así nacieron por ejemplo Aramón, walqa, o Motorland. En el ámbito universitario se desdobló la infraestructura existente para crear nuevos campus en Huesca y Teruel. Finalmente, en una clara apuesta por la logística, y dado el potencial de nuestra región en este capítulo, se impulsó la creación de PLAZA—con sus hermanos menores PLHUS y Platea—por un lado y del Zaragoza Logistics Center (ZLC) de la mano del MIT (primera escuela de ingeniería del mundo) por otro. Años antes de unirme a este último proyecto ya alabé en este periódico (abril 2004, mayo 2005) la creación del mismo y la apuesta que el gobierno regional había hecho por él.

Fuente: Heraldo de Aragón

Con la llegada de la crisis económica las reglas del juego han cambiado profundamente. Ya no se trata de conseguir todos los objetivos marcados al menor coste, sino de conseguir el mayor número de objetivos dado un presupuesto restrictivo. Es decir, hay que marcar prioridades porque no todo se puede conseguir, lo que implica desechar algunas de las apuestas que podían ser sostenidas en los años de bonanza para apostar decididamente por el resto. En este sentido, sería nefasto para nuestra comunidad aplicar una economía de “café para todos”, tratando de mantener todos los proyectos en marcha reduciendo un porcentaje similar el presupuesto de todas las iniciativas, buenas y malas.

¿Cuál debe ser el criterio para marcar qué proyectos potenciar? Lógicamente es preciso seleccionar aquéllos que estén alineados con la estrategia de la región, que puede inferirse del programa electoral que el partido en el gobierno presentó el año pasado. En él se habla de que Aragón debe ser un “territorio de excelencia en la enseñanza”, “alcanzar la óptima colaboración entre empresas y Universidad”, fomentar “la atracción de docentes e investigadores internacionales” y buscar la excelencia “en aquellas áreas de conocimiento que sean susceptibles de convertirse en nichos de excelencia equiparables a los mejores del mundo”, poniendo como ejemplo de esto último en primer lugar la logística.

En este sentido, el Zaragoza Logistics Center posee muchos de los atributos requeridos para estar dentro del grupo de las iniciativas por las que apostar. Algunos ejemplos: el máster internacional de ZLC ha sido considerado como el mejor programa de logística en España en los dos últimos años (ranking del diario El Mundo). En cuanto a la colaboración con empresas, ZLC trabaja tanto con empresas aragonesas (dos proyectos de consultoría actualmente en marcha con Saica; diecisiete exalumnos contratados por Transportes Carreras hasta la fecha, …) como multinacionales (la lista es larga: empresas como Adidas, Amazon, BASF, Caterpillar, Cummins, DHL, P&G o Roche han venido a Zaragoza a financiar proyectos o a contratar alumnos). Estos alumnos brillantes (aragoneses o no) llegarán con el tiempo a los ámbitos de decisión de las multinacionales que ahora los contratan. Y es entonces cuando retornará con creces la inversión efectuada, en forma de creación de empleo, proyectos o centros de investigación.

La primera de estas iniciativas de calado que cristalice justificará económicamente  la existencia de ZLC durante más de cien años. Pero hay que darle tiempo al tiempo. No se le puede exigir a ZLC en 10 años de existencia lo que por ejemplo no se le ha exigido a la Universidad de Zaragoza en 450. ZLC es todavía una “start-up” en el sector académico. El MIT acaba de cumplir 150 años. La escuela de negocios de Harvard celebró su centenario en 2008. La excelencia en el ámbito universitario toma su tiempo. Es tentador olvidarse de las prioridades y apostar por políticas miopes y cortoplacistas. Pero si de verdad queremos hacer de nuestra comunidad un referente para otras y no convertirla en un solar sin esperanza debemos seguir apostando firmemente por ZLC y otras iniciativas similares.

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The challenge of invisibility

Why Supply Chain innovation is unlikely to be appreciated

Alejandro Serrano – . Jun 2012 | Spain

When faced with the question “What is the name of the most innovative company in the world?”, people will most likely answer “Apple, of course”. The answer seems undeniable, and there are good reasons for that: iPhone, iPad, and iWhatever are synonyms of great innovative products these days.

However, there is a bias there; when people think about innovation, the first idea that comes to mind is product innovation. However, a company can gain a huge competitive advantage trough process or supply chain innovation. I am referring to notorious cases of companies who have completely redefined the way of doing business in their industries. Some examples include Benetton, which changed the sequence of operations by delaying the time where pieces of garment were dyed (postponement), or Barilla, one of the first firms to adopt VMI (Vendor managed inventory) by managing its customers’ inventory so as to reduce order variability amplification. These changes had a large impact on the bottom line and gave these firms a clear competitive advantage in front of their competitors.

The good thing about process innovation is that it may be hard for competitors to copy: there is no “product reverse engineering” to be performed. Competitors can and will try to emulate, but success is not by any means guaranteed. Think for instance about the well-known Toyota Production System (TPS). It has been around for about 40 years and still firms are trying to adopt it with bittersweet results. Why? It is simply that most of the changes cannot be seen, they are embedded in firms’ DNA, as pointed out by Spear and Bowen*, and followers just copy the visible part of it, such as Kanban systems in the case of TPS. A more recent example is Inditex, whose flagship Zara defined a new paradigm in a mature industry by betting on speed rather than cost. With more than 5,500 stores around the world, Inditex’s founder Amancio Ortega, is today the richest man in Europe, right before Ikea’s founder, Ingvar Kamprad, another visionary who also completely changed the rules of his industry.

This may not be the case for firms launching innovative products: Samsung’s Galaxy  Tab is closely following Apple’s iPad and even introducing features which go beyond what the Apple product offers. It is true that patents help sometimes, but the fact remains that a burden of expensive legal work is usually triggered as soon as competitors start copying or including almost identical products in their portfolios. The legal battle triggered when Windows 95 was launched by Microsoft or the generic drug business in India may be good examples of this.

All in all, supply chain innovation is likely not to be appreciated as much as product innovation, but its impact on the financials and the value of firms may be larger and last longer. Also, given the relatively small efforts exerted so far on supply chain innovation, there must be indeed great opportunities available to explore, low hanging fruit to be taken by those smart people who are able to identify those opportunities.

(*) Spear, Steven and H. Kent Bowen. Decoding the DNA of Toyota. Harvard Business Review

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