Arthimetic in the Supply Chain

One of the study themes of my blog is that numbers are a tool that needs to used wisely. Let me use a non-logistics / supply chain example to illustrate this.

This week there was in the Chicago Tribune an article on the opening of a new Mariano’s grocery store in the Chicago area; This was former Dominick’s store as Dominick’s chain was closed by Safeway. Dominick’s closed most of its stores in December 2013 while a very few closed in January this year.

Some background first; for generations Dominick’s was one of the major grocery chains in the Chicago area. The independent chain was sold to Safeway in 1995. Safeway cut labor and raised prices. Lower costs and higher revenues the arithmetic said it should mean greater profits. It didn’t. Some years later after the sale, Mr. Mariano who use to run Dominick’s before it was sold, became President of Roundy’s and decided Dominick’s was vulnerable. It was very vulnerable.

When Dominick’s closed its 72 stores it laid off more than 6000 people. Mariano’s bought 11 stores and is hiring 3000 people. Dominick’s lost significant dollars and Roundy’s, the chain owing Mariano’s is profitable. Perhaps Dominick’s was understaffed to save money? Here was a case were a smaller staff cost less, but was harmful to profitability.  Mariano’s had a market focus that better customer service using more associates not only attracted customers to the store but also encourages to buy higher margin items. Mariano’s basic grocery line is competitive to the market, thus lower than Dominick’s prices were. It specialty products, which are the first items you see when you go into the store, gives the store the higher profits.

The lesson for the supply chain is this. The purpose of the supply chain is not to make good numbers. The numbers will measure how efficient a particular process is doing, but unless it helps the business be successful, focusing on those numbers will harm the business not help it. A classic logistic example: a cheap carrier comes into the market. The carrier takes the business away from the high service incumbent. The price is lower, but the customer is not timely served and many deliveries are late. The business is likely to be loss and management’s valuable time is used to resolve the problem, when it should have been focused on making the process better. Metrics needed to be reviewed to see if the focus is on the numbers or helping the business be successful.

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