As described in our first blog of the series, we recently completed a customer survey project with TechValidate and are very pleased with the over 150 survey responses and the many stories we can share. And so, every Friday for the next few weeks, we will feature different customer results.

I was fortunate to attend the GT Nexus user conference this week in Hollywood Florida (GT Nexus is a Kinaxis strategic partner). I sat in on a panel discussion on how ERP data can be extended to global partners, and why this matters.

One of the presenters was describing how they can use this information to very quickly assess exposure when world events occur that put the supply chain at risk.  In this case, however, we are not talking about a traditional natural disaster situation but instead safety/ethical issues at the factories where their products are being made.  The example they gave was the garment factory disaster in Bangladesh last month.

Brand owners (those whose labels are on the products) face several challenges:

• As these horrific events occur, customers are starting to look closer at the source of the products they buy.  They are starting to evaluate how and under what conditions products are made when making their buying decisions. As such, they are asking brand owners to reveal where products are made.

• The problem is that in many cases, especially in the garment industry, brand owners often don’t know where, exactly, their product is made. Seem absurd? Perhaps. But consider this.  You are responsible for procurement of clothing branded for your company. Now, you could go to the individual factories and through a translator, negotiate contracts, navigate legal and governmental regulations, establish quality standards, figure out logistics, etc.  Or, you could create a single contract with a third party and have them take care of everything. However, that third party might also contract to a forth party, who actually arranges to have the goods made.  With this many levels of middlemen, it becomes very difficult to determine where your product is actually made.

• If you were relying on this factory to manufacture your goods, you need to assess your supply chain exposure. At best there will be a lengthy delay before they can start producing again.  At worst, the factory won’t recover from this and you need to source elsewhere permanently.  You need to understand what impact this will have on revenues and customer satisfaction.

One of the companies on the panel discussion described how they are using technology to solve the sourcing issues. This garment company has approved a set of factories and equipped each approved factory with QR codes and readers. As the garment leaves the manufacturing floor, it is scanned and the manufacturing location of that garment is captured. This way, the manufacturer knows exactly where each garment is made. And to take it further, with the sourcing information on hand, they could use tools like RapidResponse and GT Nexus, to instantly assess their exposure when significant events occur.

Additionally, customers who want to know, can also scan the code (still attached to the garment) which brings them to a website that shows where the garment is made and the safety/working condition history of that site.

Are your customers asking for more information on where your products are sourced?  How are you dealing with these demands?  Comment back and let us know!

A few weeks ago, Trevor Miles wrote a blog series entitled, “Truth, Lies, and Statistical Modeling in Supply Chain: Part 1, Part 2 and Part 3. In it, he discusses how companies often model manufacturing and supply chain systems using deterministic models, when in fact everything around us is stochastic. I thought it’d be important to mention that we also model project management using deterministic models, such as the Critical Path Method (CPM). Yet, we are living in a world where projects and tasks might actually follow a stochastic trend.

An alternative to CPM is Program Evaluation and Review Technique (PERT), which is an effective method and gives you room to include as much variation into your projects as you want. It is used to analyze and evaluate the time needed to complete tasks in a given project, as well as to identify the minimum time needed for the completion of that project.

We know that a single task or project can be delayed for many reasons, such as unforeseen events, which force project managers to tie tasks to completely different predecessors or successors. This randomness forms a very important aspect for project management systems. We simply cannot assume any given project will be managed according to the targets set at the beginning of that project.

CPM was developed by Du Pont in 1960 and the emphasis was on the trade-off between the cost of the project and its overall completion time (e.g. for certain activities it may be possible to decrease their completion times by spending more money – how does this affect the overall completion time of the project?). CPM is used in production management for jobs that are repetitive in nature where the activity time estimates can be predicted with considerable certainty due to the existence of past experience.

When we look at the CPM being commonly used today, we see there’s something missing. This is due to the fact that CPM uses a deterministic model, which only incorporates a fixed time estimate for each activity. Although this is pretty easy to implement, it’s not sufficient for big-scale projects which can get complicated (and more variable) over time.

PERT was developed in 1958 by the US Navy for the planning and control of the Polaris missile program. The emphasis for this model was on completing the program in the shortest possible time. In addition, PERT had the ability to cope with uncertain activity completion times (e.g. for a particular activity the most likely completion time is 4 weeks, but it could be anywhere between 3 weeks and 8 weeks). PERT is often used in project management for non-repetitive jobs, for example, research and development work, where the time and cost estimates tends to vary.

PERT uses beta probability distribution, which in its essence, models the behavior of random variables and can be implemented by either using the statistical probability theory or discrete-event simulation. The way it is used in project management is through calculating the time allocated (Expected time) for the completion of a given activity. The way PERT deals with variation is its main differentiator. You determine the probability of any given activity to be successfully completed within three time estimates – optimistic (shortest), most likely and pessimistic (longest) times. These estimates (called random variables) represent the reasonable values you can give as the rate at which an activity can be possibly completed. Then, these time estimates are used in a weighted average assuming a beta probability distribution, and this weighted average forms the Expected time for a given task. Here`s how the Expected time is calculated:

Expected time = (Optimistic + 4 x Most likely + Pessimistic) / 6

Let’s dig into some background information now:

Pert Beta Distribution uses three parameters:

a: the optimistic time, which will be required if activity execution goes extremely well

m: the most likely time, which will be required if activity execution is normal

b: the pessimistic time, which will be required if everything goes badly

Depending on the values provided, the Pert Beta distribution can provide a close fit to the Normal or Lognormal distributions and it has:

Mean = (a + 4m + b) / 6

Standard Deviation = (b – a) / 6

Pert Beta distribution emphasizes the “most likely” value over the minimum and maximum estimates. It constructs a smooth curve which places progressively more emphasis on values around (near) the most likely value, in favor of values around the edges. In practice, this means that we “trust” the estimate for the most likely value, and we believe that even if it is not exactly accurate (as estimates seldom are), we have an expectation that the resulting value will be close to that estimate. Assuming that many real-world phenomena are normally (or log normally) distributed, the appeal of the Pert Beta distribution is that it produces a curve similar to the normal (lognormal) curve in shape, without knowing the precise parameters of the related normal (lognormal) curve.

The figure below shows three such distributions.

As I said, Pert Beta distribution emphasizes the “most likely” value over the minimum and maximum estimates. The figure below illustrates this effect and shows the various density function shapes that occur as m varies from 1 to 9 when a is 0 and b is 10.

Let’s now take a look at some characteristics:

So knowing the characteristics of these two different models, which one do you really need to implement? This totally depends on what type of project you are dealing with. Since PERT concentrates on variation and thus gives you the ability to be more flexible time wise, an R&D project would be a good fit considering the uncertainties a development work could have in the earlier phases of the project.

The following decision tree model can help you answer this question.

Still undecided? Well, consider that PERT can answer questions not applicable in CPM such as:

• What is the probability that my task will take longer than…?
• What is the probability that my task will be finished by…?

And, PERT can also be used for risk analysis and to identify potential opportunities and difficulties for the activities, as well as for the calculation of the worst case scenario. Imagine a famous band going on a world tour. They are on their way to play another concert that day in a neighboring country, but production trucks cannot cross the border because there is a strike at the border of the country they are currently in. To make it in time to perform, the truck has to cross the border by a certain time. In such a case, it’s out of the organizer’s (or project manager’s) control to project how long it will take until the production truck makes it to the concert area. To avoid such a situation, it’s more realistic to have implemented PERT, allowing some buffers between ongoing tasks, much like transporting rock stars between concert venues.

If you are managing a more conventional project with more predictable durations that can be accurately calculated and there’s no need to factor a possibility of changing requirements, then CPM is a good fit. For all other cases (and there would be many!), I recommend going with PERT. After all, like the transportation algorithm is a special case of the regular simplex method, CPM is simply PERT where a = m = b.

As described in our first blog of the series, we recently completed a customer survey project with TechValidate and are very pleased with the over 150 survey responses and the many stories we can share. And so, every Friday for the next few weeks, we will feature different customer results.

I know, I know.  Do I really want to open up the debate on what is IBP?  I understand that it has been discussed ad nauseum, but I have to say that Michael Uskert’s presentation (Deconstructing Integrated Business Planning) the other week at the Gartner Supply Chain Executive Conference did a good job with making some clear distinctions between S&OP and IBP and breaking down the process. For me, it all boiled down to a very evident analogy. IBP results when the supply chain has been a successful parent.

Consider this…

The supply chain gives life to new supply chain processes, grow it into S&OP, and help it mature.  In this stage, they are the owners of the process (the parents of the child).  They make most of the decisions and bring other people into fold as and when needed/desired. They are largely in control of the process and the outcome. And the network and circle of influence of S&OP for the most part is the supply chain (the parents) with specific involvement from neighboring functions (close family and friends).

But at some point, it’s time to fly the nest.  The process that the supply chain gave life to becomes bigger than them.  S&OP evolves into a business process (IBP), not just a supply chain process. The supply chain (the parents) remains a critical piece of the equation as an integral contributor and supporter, but it is no longer in the driver seat.  The process (the child) has grown and now has the foundation to mature beyond the home.  The original child, now an adult, makes decisions and takes actions that not only have a greater magnitude but they also impact and are influenced by a larger network of people. IBP spans multiple functions (including supply chain, marketing, sales and finance) across all time horizons, and is ever closely aligned with business strategy.  Its goals are broader and more strategic in nature.

A mature sales and operations planning is a foundational prerequisite for achieving IBP.  Eventually an adult will leave the nest, but they had to first be the child.  And as with parenthood, IBP is not a project, it’s a journey.  And given the state of S&OP right now, it would appear there is a lot of parenting for the supply chain left to do.

My daughter turned six earlier this month.  As her birthday approached, she was completely undecided as to what she wanted to do and not at all open to any of my very many suggestions (which is nothing new).  Two weeks before the big event, with no ideas and nothing booked, I knew that we needed to have a party at home, but I was at a loss as to what to organize.  Obviously, I knew the basic elements of a children’s party (cake, games, loot bags, etc…), but was less than inspired about pulling it together.  And then she had her brainwave.  She decided she wanted a Christmas-themed birthday party.  The minute she said it, the focus of the party was clear, I was totally on board, I was eager to be really creative and so excited at making it as successful as possible.  The loot bags were Christmas stockings, they played musical chairs with Christmas carols, the birthday presents were put under the Christmas tree, my husband was Santa, and my son was a party helper elf. So what turned the party from something that I felt I had to do, but was hazy and doubtful in how to approach it, to something that I passionately wanted to do and knew exactly how? The theme:  A Christmas Day in May.

What on earth does this have to do with supply chain?

I was at the Gartner Supply Chain Executive Conference May 21 – 23 and was struck with how many times I heard the notion of having a “theme” – and that was the specific term that was used … repeatedly.

It really came through in Matthew Davis’s session: “The Yes, But…” Value Chain: The Path to Profitable Trade Offs; however, I heard it in other sessions, and some elements of it during the keynotes with Johnson & Johnson Health Care Systems and with Cummins, and even with Jim Collins, renowned speaker and author of “Good to Great.”

In Matt’s session he showed a laundry list of CEO priorities, many of which directly conflict with one another (expand into new markets and create new products and services … but reduce enterprise costs and standardize/streamline operations). If you tried to maximize each priority with every decision, you wouldn’t ever be able to make a decision.  Matt suggested that often the CEO priorities are both a combination of business results and the initiatives that will act as levers to create those results. The trick is to categorize the priorities according to which describe the long-term vision (broad and steady) or the short term strategy (specific and changing), and then from there, understand the unifying strategic theme.  The theme is what helps translate the vision into the cascading set of initiatives to act on.

Consider the case study example of one company’s vision to be the fastest to market. The theme centers on achieving differentiation through speed. You can then translate that into everything from the metrics you want to affect to the processes and programs you need to focus on.

By having the context of “fastest to market”, when supply chain decision makers are faced with a trade-off, there is a guiding principle in how they make their decisions.  There is a direct or implied value to certain performance measures over others. Defining the unifying theme ultimately helps operationalize corporate strategy, which is evidently a struggle for most. In 2012, Gartner asked 100 supply chain professionals what was impeding their demand driven value network (DDVN) maturity progress. Of the respondents, 85% were tied to people understanding what is needed and being convinced to participate.

Jim Collins talked about this issue in the context of leadership. His definition of a “Level 5” leader was one who was able to communicate a clear theme that their organization could identify with and rally around.  It gave direction and purpose to their cause. And, it can bring people together under the same set of values (and weed out those that may not share the same principles.)  Level 5 leaders don’t incite people to follow, they impassion people around ideas and goals.

Consider again the Gartner’s CEO study that listed off 15 varying priorities. Jim Collins said that if you have more than three priorities, you don’t have any.  If you have the direction to maximize this, while minimizing that, and achieve this while still achieving that – you can get lost along the way really easy. What is needed is an overall context for decision making.  What’s your motivation? In every action you take, what should your intention be?  In the face of complex and conflicting considerations, a unifying theme can give clarity to what decisions should be made, and what tradeoffs make sense.

I think the question everyone should be asking is, “Can you hold a theme party for your organization?”

What a week we had at the Gartner Supply Chain Executive Conference in the wonderful venue of the JW Marriott Desert Ridge! I missed the event at Palm Springs last year, so it was great to catch up with many old friends from my AMR Research days—from analysts to account leads to supply chain leaders.

After the event, I drove back from Arizona to San Diego. Six hours in the desert brings clarity … or insanity … well, there’s a fine line between them.

So, I’ll take the heat up front. I challenge you as a reader to respond…

“There needs to be a structural change to the Top 25 method”

Why? Well, six hours of staring at the desert made me reflect on my “Bold Predictions for the 2013 Top 25” blog post from a few weeks ago.

I had Amazon at #1, Coca-Cola at #2 and Intel at #3. I had Dell falling out of the Top 10. At least I got the Dell pick correct J

Intel did move up, but not to #3. They got #5. I was directionally correct. Intel has been out there speaking about their supply chain success, as well as creating end-to-end supply chain strategies with their partners. I’ll put some of the blame on my good friend Stan Aronow. Stan took the High Tech role I left at AMR, and my one piece of advice was to push his old company’s supply chain. I did that with Apple, and Stan is doing a bang up good job with Intel – he got them to #3 in the Gartner opinion vote.

Coca-Cola was off. They came in at #9. Aside from Samsung, Apple, and Amazon, Coca-Cola had the highest 3-year weighted revenue growth for those above them, and the 4^th highest peer opinion vote. I do think their strategy on the bottling model will improve their margins & ROA, so I expect them to finish above #9 in 2014.

I would like to say something on Unilever at #4 and P&G at #6, but will leave that up to my buddy Roddy Martin’s blog J. Plus, while Roddy gave me a ton of insight, I forgot to bring a pen & notepad to the après Top 25 dinner gathering at the outside patio.

Then comes Amazon. I had them at #1, but Amazon came in at #3. However, since they got 3,315 in peer opinion vs. McDonald’s 1,197, I think I’ll give a nod to my Amazon #1 pick.

Wait you say … what about Apple at #1?

Apple at #1 is exactly why I think the structure of the Top 25 Supply Chain model has to change. Apple received the highest peer opinion vote and the 6^th highest Gartner opinion vote. I love Apple. Apple was one of the best companies I’ve ever worked for. I love their products – my wife and kids are addicts to the next release. But, supply chain knowledge of Apple? What did Foxconn say as a key supplier? I’d love to hear what the channels say. Have you been to the AT&T store a month after a release? They can’t tell you when they will have product available. Outside of a few suppliers, who has talked in depth with Apple executives —Jeff, Ber, Dierdre, Rita, Sabih— about their supply chain strategies? Ok, Ok, I’ll stop venting … all this dry heat from the desert….

Ultimately, the Top 25 model should change because the purpose has changed. AMR started the Top 25 to “raise the awareness” of supply chain in the company. Well, we got it. Most supply chains are part of the corporate discussion. Thanks, in part to the recession for shining the light on cost controls.

There’s a new purpose I believe. And it came from Steve Steutermanns’ opening theme – FAST. Not in our Plan/Buy/Make/Deliver functional silos, but rather in the END-TO-END. Top 25 supply chains should be measured on their speed to control end-to-end processes. And in this measurement, there needs to be a unique set of people to validate this end-to-end speed.

A side vent: leveraging one’s cash and market share position to force your suppliers and channels to jump should not be considered successful collaboration J

The Voters Need to Change:

I give great props to my friend Lora Cecere. She advocates doing a top supply chain by Industry. I think that’s a great concept. It would even make the Top 25 Dinner more interesting: something like a Top 10 by Industry. It would open up the possibility of having smaller companies be recognized. And, the most important part of this change would be to identify those key leaders in the Industry to vote. These leaders are more likely to know the inner workings of the companies for whom they are voting. Jake Barr is a great example for CPG. Roddy Martin is a great example for Food and Beverage. Dave Aquino is a great example for Apparel. Hussain Mooraj is a great example for Life Sciences. Angel Mendez is a great example for High Tech. They could come from any area: supply chain leader, vendor, analyst, etc.., but they would fit unbiased criteria, for example:

• they know the end-to-end supply chain network in the respective industry;
• they’ve “talked” with at least 25 companies in that industry in the past year;
• they can speak to the talent and leadership of each company, and
• can validate their end-to-end focus.

The Metrics Need to Change:

I understand the need to have “readily available, audited” numbers, and that’s why there is revenue growth, ROA and inventory turns. But, there’s got to be some better metrics to reflect Stage 4 & 5 (end-to-end success!). Otherwise, iTunes and french fries will keep crushing the “turns” competition….

If things were done by Industry, then ROA could be acceptable. Companies in Chemical, Semiconductor, and Life Sciences would be compared equally. I do agree with Lora that ROIC would be a better metric than ROA, as some companies are building assets to enable future growth. Look at Amazon’s ROA – 1.9%. That got them slotted behind McDonald’s, but that investment in Services and Cloud infrastructure is the right strategy. As well, depending on the life cycle of a drug, some Life Science supply chains may be great, but get low votes on ROA and revenue growth. Just wait until that drug hits the market ….

My Solution:

Make it a Top 10 by Industry. Have the #1 from each industry come up on stage at the Top Supply Chain Dinner and accept the award, and let them make a pitch for their supply chain success. Then, put all the #1’s from each industry on stage. Have everyone sitting at the dinner get on their mobile devices and have a live vote for the overall #1. It would make for a fun evening and an exciting conclusion.

Make Four Key Metrics

1. End-to-End Focus:

• Do they have an integrated end-to-end business planning process?
• Can their outcomes be measured against value?
• What is their speed in responding to change, and how many nodes can they accurately assess the impact?

2. Ability to Translate Demand into a Profitable Response

• Measure of their marginal profitability – e.g.: what is their ability to achieve and maintain profit levels?
• Market share – are they #1 or #2 in their market?

3. Leadership and Talent

• This is a soft measure, but can be seen in a supply chain’s ability to reach out and learn. Do they engage externally with the academic world? Do they share their supply chain successes and strategies?

4. Agility in the Supply Chain Network

• Ask their top 2 Suppliers to rate them on flexibility
• Ask their top 2 Customers to rate them on flexibility

I’ve tested some parts of this model. One company that has nailed the end-to-end focus gets praises from their suppliers, engineering team & customers/install partners, and has one of the top leadership teams country is NCR. There’s been some papers written about NCR, but this is the classic example of a top tier supply chain that didn’t make the 2013 Top 25 and seriously should have. (I think it is because they are under $5B in revenue, and those “small” companies are not considered.)

So, this is it. My new Top 25 Supply Chain Model. It’s going to take some adjustments and elbow grease, but let me know your thoughts, and I will take it to Oz and see what can be achieved!

In Closing:

We are past the challenge of making the CEO and the “Board” aware of supply chain. It’s time to redesign the structure. Steve Steuterman had it correct. “Fast”. There’s a foundational shift in supply chain. Gone are the days of functional excellence. Gartner calls it Stage 4 and Stage 5. I call it end-to-end engagement —knowing a LOT sooner, and acting a LOT faster – regardless of the functional tools, functional processes, and functional data. I’ve been doing this supply chain gig for 24 years, and I’m more excited today than ever about what’s happening. You can see those companies that are acting end-to-end. They have the ear of the CEO, and they are executing a new supply chain concept – the end-to-end value concept.

As described in our first blog of the series, we recently completed a customer survey project with TechValidate and are very pleased with the over 150 survey responses and the many stories we can share. And so, every Friday for the next few weeks, we will feature different customer results.