Archive for December, 2006

IndustryWeek has published a list of top manufacturing trends for 2007. At the top of the list is “increasing customer demands.” This will undoubtedly put more pressure on companies to develop Response Management strategies to effectively compete since this trend will clearly drive more demand volatility. Combined with increasing global competition, manufacturers will increasingly be judged on their ability to respond to change.

There’s a great article here at Webpronews.com by Thomas Craig. The article is entitled “Are you inventory rich and cash poor?” and explores in some depth the causes of inventory. The article also acknowledges that most companies have too much inventory.

As Thomas points out, inventory is an asset from an accounting perspective and it provides a buffer against uncertainty. I would argue that the reason that most companies have too much inventory is because they have too little ability to deal with uncertainty - and therein lies the key to reducing inventory.

The article reminded me of some work that Charlie Barnhart of Technology Forecasters, Inc. did a few months ago. Charlie wrote a paper entitled “Are yesterday’s solutions conflicting with today’s challenges?” (available here, requires free registration) where he talked about the challenges of too much inventory. In the paper, Charlie says:

“While adding inventory to the supply chain may look like a quick-fix to the challenges created by remote supply solutions, it is not. In practice, it tends to make companies less responsive to market dynamics—not more.

Yes, you read that correctly, adding inventory reduces a company’s ability to respond to the marketplace. And it does so no matter which way the market moves. How can this be?

• When an up-tick in demand occurs, even if you have every line-item on hand to build the product, it’s probable that you will be limited by the availability of short term manufacturing capacity.

• When a down-tick occurs, inventory (in spite of its classification on the Balance Sheet as an asset) becomes a major liability to the enterprise. This is true for three reasons:

• When the market goes quiescent, like all complex systems, it begins to evolve. Current products get updated, new products are released, and old products get eliminated. None of which bodes well for inventory sitting on the self.

So if increasing inventory levels isn’t the answer, what other options exist? Two possibilities come to mind:

1. Reduce the complexity of the supply solution by dramatically shortening supply lines and reintegrating manufacturing into the core of the enterprise. An option that is unlikely as it would significantly increase costs for most OEMs without automatically assuring an improvement in flexibility and responsiveness.

2. Change the way change is managed. Change in customer demands and global supply conditions need to become the focus-of-opportunity for the enterprise not the issue that defocuses it. And as traditional solutions fall hopelessly short of accomplishing this goal, what is needed is a methodology centered on the critical inflection point of manufacturing execution.

So that change works to the competitive advantage of an organization rather that against it. One such approach in use today is called Response Management, a what-if modeling technique allowing OEMs, and their EMS supplier, to quickly weigh resources and map alternatives to shifts in product demand or supply availability.”

The article and paper raise some interesting questions about inventory. I believe that the more volatile your business is, the more inventory should be treated as a liability instead of an asset.

IndustryWeek has a new article by AMR Research that outlines their views on key priorities for supply chains.

As you know, I feel strongly that the pace of change is creating a requirement for companies to excel in Response Management by empowering their people to respond to change quickly and accurately. So, I was especially intrigued by the articles opening, which says: “Global outsourcing, leaner supply chains and the frequency of new-product introductions require substantially tighter collaboration and coordination among complex networks of trading partners. In response, corporations are building business processes, organizations and technology portfolios that allow them to manage this complexity and the ever-present uncertainty of supply and demand.”

The traditional supply chain planning and supply chain execution focus is insufficient in today’s globally outsourced environment. Today, there are many problems you just can’t plan your way out of. As more than one customer has told us, “we build a good plan, then the phone rings.” You can have a great plan, but you can’t execute well unless you can respond to constant change.

Aberdeen has just released research that found poor supply chain visibility as a top concern of executives (see articles at IndustryWeek and Manufacturing Business Technology).

I’ve read the report and found it interesting, but very narrow and tactical in it’s focus. The overwhelming majority of the report was focused on providing better visibility of where end products were in terms of shipping - when it would arrive at the customer for example.

I certainly agree with the report’s statements that visibility alone is not enough and that you need to leverage visibility to drive sustainable improvements in customer service and operating performance. I also agree that there’s an increasing focus on “externally focused supply chain processes.” And, the report also says that “companies are foremost concerned with improving customer satisfaction and reducing cycle times and lead time variability to lower inventory and operational costs.”

The report lists top pressures for improving supply chain visibility and shows the leader (68%) as the “need to improve on-time delivery performance” and also lists “want to improve ability to make midcourse corrections” (46%). I would argue that these two are quite linked. The ability to make midcourse corrections is essential to improving on-time delivery performance and many other aspects of the business. What I see happening quite frequently is that a company builds a solid plan, then the phone rings. The ability to make midcourse corrections is essential to satisfying the customer on the other end of the phone - and the ability to make midcourse corrections is not simply a matter of visibility. They require collaboration and deep analytics that understand the impact of any proposed course correction.

The report lists a bunch of obstacles to achieving visibility. I agree with what’s there, but would also add that one of the biggest obstacles to day is that fact that much of the data resides at a third party, and external supplier for example. This is touched on a bit under the technology point they make, but there are other issues like a fear of being micro-managed by that supplier that are also real.

So, in net, I thought the report was useful, but it was narrowly focused in my mind. I think there are a lot of areas that require visibility and areas that are very strategic in nature. And, I believe, visibility is a pre-requisite but not an end-point to solving critical business problems.

Sherry Harris has written a piece entitled “Are Your Supply Chain Management Employees Thinking Domestic or Global?” over at CEOConsultant.com.

One of her comments regarding employees is “they should understand the following principles: a) competition is no longer among independent companies but instead about connected supply chains b) supply chain competition is global c) winners will be companies that best integrate and achieve commitment to supply chain excellence among diverse organizations.”

The article brought to mind two comments from high-tech companies over the past year or so. The first was a brand owner who acknowledged that when they did all manufacturing internally, it was relatively easy to figure out how to respond to an unexpected customer demand, they simply walked down the hall and told their people they had to put in a little extra effort to meet this important customers demands. They acknowledged that this was much tougher to do in a globally outsourced environment with multiple parties involved. The other comment was from an executive at a contract manufacturer who previously had worked at brand owners. He acknowledged that “once a company outsources, it’s amazing how they seem to forget what it’s like to manufacturer and how their expectations increase dramatically.”

Both of these comments and Sherry’s comments reflect the growing challenge of successfully manage a global supply network. Supply chain management today is a function of being able to respond to change across this complex, distributed environment. My sense is that although companies have been outsourcing for some time, they are just now fully coming to the realization of what it takes to succeed in this environment. It takes a hands-on approach to proactive communication and coordination for all parties to succeed and, as Sherry points out, it requires supply chain management staff to be thinking globally.