Perspectives on Various Issues of Interest

The Smiling Baby

Supply Chain Disruption from Rail Strike

Disruption in supply chain affects multiple enterprises and eventually the customer. A case in point is the recent rail strike at one of the largest railroad companies in Canada - Canadian National Railways Co. The strike of 2,800 conductors and yard workers cut in half the cargo volumes handled at Vancouver, Canada's largest port. A senior economist at BMO Capital Markets, the investment and corporate banking arm of the Bank of Montreal indicated that the strike could result in shortage, cost increases and lost sales. Some freight shipments that the railroad regularly hauls between Canada and U.S. also was affected. U.S. customers receive chemicals, lumber and paper from Canada and several containerized shipments from around the world enter U.S. via Canadian ports. The shortage of propane for heating was felt by some Northeastern states that were served by Canadian National. The Canadian chemical industry had to resort to trucks for shipping chemical products.

According to some analysts, the strike represent the inevitable conflict between increasingly aggressive rail union and efficiency minded railroad. The negotiations between the union and the railroad has been complicated by a rift within the U.S. based United Transportation Union (UTU).

The counter the negative effects of the strike, Canadian National has used management crews to replace stiking workers. However, the shipments have still been adversely affected forcing companies to cut production. As an example, in British Columbia, 1300 employees of Canfor Corp, a forest products concern in Vancouver are losing shifts due to the delay in shipment of lumber.

Source: Belkin, D. & Machalaba, D. 2007. "Canada rail strike disrupt supply chain," Wall Street Journal, 22 February.

Linking Quality with Financial Metrics – Invoking key points from the Sarbanes-Oxley Act

Out of the total 11 titles in the Sarbanes Oxley act, two titles (Title III and Title IV) aid in linking financial metrics to quality.

Title III – Corporate responsibility

Key points:

1. Section 302 requires that the financial reports filed under the Securities Exchange Act of 1934 present true status of financial position and the results of operations.
2. As per this section, if cost of quality is material then it needs to be accurately reported. This amounts to having appropriate metrics to measure the cost of quality.
3. The International Accounting Standards Board (IASB) defines materiality as: “Information is material if its omission or mis-statement could influence the economic decisions of users taken on the basis of financial statement.” From this point of view, it can be argued that since financial statements are about the cost of doing business and these costs include cost of quality, the omission of these costs from the general ledger is a federal crime, particularly so if these costs are high.
4. This suggests the need for embracing and more fully understanding the implications for quality by top management. The cost categories of failure, appraisal and prevention can be mapped into appropriate items of general ledger as follows:
   1. Failure category measures include such items as: scrap, rework, labor, sorting,       downtime, slowdowns, complaints, investigations, travel, recall, unpaid invoices and lost sales. These can be mapped into operating costs, operating expenses (labor), variable expenses and losses items of general ledger.
   2. Appraisal       category measures include such items as: receiving, in-process and final       inspection, test equipment, test technicians, special tests, lab maintenance, quality control, QC overhead. These can be mapped into operating expenses, fixed expenses, depreciated assets (equipment), fixed assets (technicians).
   3. Prevention category measures include items such as: quality planning, design       tolerances, training, house-keeping, packaging, special sourcing, life cycle tests, field tests, pre-production tests, shelf tests, inventories, cash flow. These can be mapped into operating expenses, fixed expenses, variable assets (cash flow) and inventory.

Title IV – Enhanced financial disclosure

Key points:

1. Section 404 requires that top management verify the effectiveness of internal controls in the areas of finance and operations. While the extent of operations that must be verified is not yet resolved, the consensus as of now is that IT controls must be verified since most of the financial data resides in IT system.
2. The definition of internal control as used by the Securities and Exchange Commission (SEC) and adapted from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) says that internal control is a process to ensure the effectiveness of operations, reliable records and reports and compliance with standards.
3. To meet Sarbanes Oxley Act compliance, management must come up with a set of internal controls for finance and IT and this requirement will need to extend to other processes identified as material.
4. A common metric can be used by mapping IT Governance Institute’s standard control objectives for information and related technology (CobIT), ISO 14001 and other standard requirements into the appropriate compartments of ISO 9001 in terms of policies, procedures, controls, audits and practices.     

Source: “Financial Control and Quality,” by William Stimson and Tom Dlugopolski, Quality Progress, May 2007, 26-31.

 

Impact of coordinating supply chain policies and price markdowns on short lifecycle product retail performance

In this paper, co-authored with David Closs, we evaluate the implications of coordinating price markdown policies with supply chain policies of inventory replenishment, and transportation expediting on retail performance of a short lifecycle product.

The product replenishment policies consider the freeze quantities and times for order placement along with the replenishment mode (typically water or air) in situations with demand uncertainty. The replenishment policy highlights the situation where the retailer commits for supplier capacity and material resources in case additional manufacturing and supply of product is needed due to high demand. Simulation model development and the related parameter assumptions are based on extensive discussions with executives from a leading US-based firm involved in retail operations for short lifecycle products. The situation in retail environments of products with short lifecycles is compared with a base case of low demand variability. Based on the current practices of the US retailer, we investigate the scenario in which only price markdown policy is used and the scenario in which the markdown policy is coordinated with the operational replenishment and expediting policies.

Monte-Carlo simulation approach is used and statistical analysis is conducted to test the research hypotheses. Our results suggest that while in low demand variability situation relying solely on price markdowns result in better overall retail performance; in the presence of high demand variability th  retail performance achieved by coordinating price markdowns with supply chain policies is higher.

The citation for the paper is as follows:

Nair, Anand and Closs, David. 2006. An examination of the impact of coordinating supply chain policies and price markdowns on short lifecycle product retail performance. International Journal of Production Economics, 102(2): pp. 379-392.