Supply Chain is not Only About the Money

Veronika Hogard Supply Chain blog article

Commonly, effective supply chains are defined as having the right product, at the right time, at the right place, in the right quantities, and of the right quality. Doubtlessly, the majority of business owners and Supply Chain Managers intend to execute all the factors mentioned above at the lowest possible cost.

Having worked in supply chain for fourteen years in different areas from a Global Luxury brand to one of the biggest American IT corporations, I can say that executives seek projects and innovative ideas that lead to revenue-generating contracts, cost-saving initiatives and high-tech solutions that will engage and attract new customers and increase profits.

What about “no-profit” projects in supply chain? In other words, these are projects with benefits that are not visible in short-term financial metrics, but extremely important from a long-term perspective.

It is no secret that in certain countries with economic intractability the eliminating wastes in supply chain is not the highest priority. Even international corporations in certain countries don’t have much choice but to “close their eyes” at certain types of wastes eliminating procedures or by saying optimistically “postpone it to a better time”, because such procedures are extremely complicated due to hard local regulations. In terms of supply chain, projects to mitigate and eliminate waste could be called as “no fast benefit” projects as they do not lead to revenue boosts in short term.

The deal is that in certain countries export process of defective components exists only in the sense that it’s not forbidden in local law, but no one did it.

To explain it, let’s take the example of a country with customs clearance regulations. This means to perform legally import and export activities you need to provide to a customs officer, an active contract, invoices signed & stamped, certifications and the description of cargo with translation to local language. And let’s take as an example an international IT company that has HUB in European Union and performs business activities and technical services in one of the Commonwealth of Independent States (CIS), in Azerbaijan, for example.  Without diving too deeply into details I just need to mention that in order to be compliant with local legislation, companies should duplicate financial transactions in an international system such as SAP and in a local financial system such as 1C. Moreover, in the local financial system, the price for a defective component didn’t exist as a terminology at that time. In this local system, in general, consumed parts were written-off but still existed physically. Even if a spare part was used for technical service, for example, mother-board change or battery charge, and returned in defective condition – it’s still a component that can be refurbished or re-charged. To think a bit more globally – why do we need to destroy something that can be reused again with less resource than to produce a new one?

 To explain it simply – we can imagine a company that provides ink pens. New ink pens are used by the customer, and the ink is consumed. Which means that the pens are now empty and they are defective. So in this local financial system, in this country, they are written off and physically could be left at customer sites, destroyed or scrapped and that’s it. So you can imagine the volume of defectives pens wasted, which could be re-charged with ink-filter and used again and again.

To come back to the real world, the goal of the so-called “no fast benefit” project is to implement, at the country level, the compliance process which proves to local customs authorities that the defective component has a value even if it has been written off. As (or due to) it is used in accordance with local legislation it could be legally exported for further refurbish procedures to an appropriate company located in another part of the globe.

Nevertheless, such projects are not revenue-generating, but they make a difference that leads to innovative and important changes at country level, and in long terms, they bring effective cost-savings and a positive impact on the environment.

From my standpoint, what is extremely important in international companies is the possibility to share the best experience and best practices in different countries with both common historical backgrounds and diversities. The best practices could be and should be applied and taken from neighbors whenever possible, no matter how many approvals it will take.

To complete the story, I can tell you that after almost a year of conferences at  CEO-Country managers level, discussing the only possible legal solution to perform the export of defective parts. We gathered a comprehensive set of documents for the customs broker. This set included an “Acts of Compliance” signed by each client for every spare part, with the reference to the active service contract. In other words, we had to provide an exhausting explanation of why and where spare parts were consumed, and why it should be considered as defective and not “new”. This meant all invoices from the warehouse to the client were in accordance with the active service contract and returned from the client. So as a result for the business there was no immediate revenue, but from a wider viewpoint – a new process at country level had been successfully implemented. Which lead to saving costs at supply chain country’s level (Profit & Loss reduction of 15 %), and wastes not being kept in the warehouse anymore leading to freeing space for other products. Ecologically and environmentally this was a very important change.

Indeed, financially-oriented metrics do not show everything that is important. The world is evolving rapidly and is becoming very progressive. Companies are no longer only oriented toward financial KPIs but are also thinking on long-term perspectives with a wide range of factors and metrics, leading them to other kinds of success. Business and environment are not completely incompatible.