Archive for March, 2007

The always insightful Charlie Barnhart has a post on the Technology Forecasters Inc. (TFI) blog talking about where OEMs are going to find future cost savings. Charlie states that “after a five-year blitz to outsource as much electronics manufacturing as possible, many OEMs have wrung out all the external costs they can from this model – they’ve harvested most of the low-hanging fruit.” Interestingly, AMR Research has conducted studies that show many OEMs actually see costs increase when they outsource even though cost reductions were a primary motivation behind their outsourcing in the first place.

Our customers that focus on improving their ability to respond to change always see cost reductions as a result. They typically come in two forms: productivity gains and reductions in operating costs. Productivity gains come because their current approach to responding to change is incredibly inefficient (frequently relying on a lot of people who only have their personal productivity tools, like spreadsheets and email, at their disposal when trying to respond to changes across their supply chains). Reductions in operating costs come from the fact that a company’s inability to respond effectively to change inevitably leads to “institutionalizing” costly just-in-case measures like inventory buffers, expediting, rework, etc.

Charlie lists several great options for OEMs to reduce costs by looking internally at how they operate. Response Management should be one of the items on their list. Change is one of the biggest drivers effecting business today. You should challenge yourself to see how effectively you’re responding to change. Improvements here can improve customer satisfaction (and your competitiveness) while simultaneously reducing costs.

It’s been well documented that the manufacturing world is becoming more complex and changing rapidly. Increasingly volatile demand brought on by more global competition and increasingly demanding customer buying behavior combined with globally distributed supply chains and ever shorter product lifecycles are placing incredible demands on brand owners and manufacturers alike.

I’m noticing a change in terminology associated with these trends as well.

As many probably know, several years ago AMR Research started to change the dialog through their focus on Demand-driven Supply Networks (DDSN). This alone represented a change in terminology on multiple levels. It started to place the emphasis on demand whereas historically supply chain management, as the term implies, was very supply centric. The other thing it did was acknowledge that supply chains had become supply networks that have evolved from more linear chains to a much more complex set of interconnected relationships amongst a network of partners (case in point: according to AMR, Cisco, the $28.5B virtual network equipment manufacturer, must coordinate a 331-partner supply network consisting of 43,000 non-employees).

Consistent with this is an evolution in thinking about what it takes to be successful in today’s more challenging environment. 20th century supply chains emphasized a plan and execute mentality because things were more linear in fashion and crisp execution to the plan was the way to compete and win. The added complexities have forced a re-evaluation of what it takes to win in the 21st century and places increasing emphasis on sense and respond capabilities that empower people and leverage human judgment to deal with the large number of unexpected events that occur in between planning cycles and can have a profound impact on a company’s ability to execute.

Lately, AMR has started to elevate the discussion further by challenging the term supply chain itself. Their point is that this term is too limiting and companies really need to start thinking about the entire value chain to be successful. It will be interesting to see how this plays out and what type of traction this shift gets in the marketplace. I’m guessing that people will gravitate to this as it broadens the dialog to a more strategic, comprehensive discussion about what truly impacts a company’s success.

IndustryWeek is reporting on new research that shows a direct correlation between IT investments and productivity gains here.

The report says that Information technology is worth $2 trillion annually to U.S. economy. If you’ve been following the economic news lately you’ve probably seen concerns being raised about the drop-off in productivity gains the last couple of quarters. The impact of productivity gains on the economy is profound.

I’ve actually seen our customers realize productivity gains through the use of our software and by developing competencies in Response Management. How? Well, if you look at what most companies do today to respond to changes throughout their supply chain, you’ll find incredibly inefficient processes consisting of a lot of people, paper and tools (most frequently the tools of choice are email and spreadsheets). I’ve heard numerous stories of how many people-hours were wasted trying to scramble to respond to a last minute customer order change or an unexpected supply disruption.

The numbers add up quickly when you think about the number of people that need to get involved to figure out the right course correction to make to respond to these situations. It may require key front-line people in customer service, planning, scheduling, materials, outsource management, demand planning, etc. to bring their unique knowledge and domain expertise to the situation to understand what options are available and what the impact of proposed actions would be.

Through the proper use of technology, companies can increase productivity in responding to these unexpected changes and provide significant top and bottom-line performance improvements at the same time. Technology can empower these front-line decision makers with the information and tools they need to collaborate on action alternatives and analyze their impact to pick the right course correction to make.

Dan Gilmore has a good article over at SupplyChainDigest detailing all of the pitfalls that lead to inventory problems. His list includes most of the main sources of problem. But, I think there’s another that’s only hinted at here.

Most companies account for uncertainty by increasing inventory throughout the supply network so it can serve as a buffer against the unexpected. However, that’s a strategy that treats inventory as an asset (which makes sense for financial accounting) when it’s really a liability.

Charlie Barnhart of Technology Forecasters, Inc. (TFI) (TFI blog) has written a good paper talking about this issue. With the pace of change – volatile demand, short product lifecycles, etc. – inventory is a liability. What companies really need to do is attack the root cause of inventory buildup, which is their inability to respond quickly and decisively to constant change. If you empower people with the information and tools to respond to change when it happens, you’ll see a dramatic reduction in the need to create costly inventory buffers.

Came across this article talking about how innovation goes back to the top of the list of IT priorities at Computerworld.

Last week I attended AMR’s Supply Chain Management Exchange in Boston. This same theme was seen in their research. They are seeing that companies are shifting from a purely cost reduction mentality to now focusing on driving top-line revenue growth and realize that technology innovation is critical to making this happen.

This is certainly great to see, not just because I work for a software vendor selling an innovation that helps companies reduce costs and improve the top-line, but because I personally find it depressing every time I hear the stats that says companies are spending in excess of 90% of their IT budgets just to “keep the lights on” (AMR commented that the typical retailer spends only 4-6% of their IT budget on innovation).

IDC’s latest Theory & Practice newsletter includes a summary of early results of a global supply chain survey they are conducting. IDC indicates they have received over 800 responses.

According to the report, the survey has found that “the top priority for supply chain strategies is reducing costs, but responsiveness and collaboration remain key.” It goes on to say “global competitiveness is pushing manufacturers to become more agile to better handle demand variability.”

If you’ve read anything on this blog you know that the focus is on enabling increased responsiveness within global supply networks. To be more responsive, companies need to empower their people with the information and tools to enable them to act quickly and decisively. It’s been my experience that doing so requires collaboration. But this collaboration is people-to-people. When most people write and talk about collaborating with suppliers they are referring about system-to-system collaboration. That certainly has it’s place and value in automating the execution of transactions across a global supply network. However, when things go wrong, people need to step in. It’s people that need to analyze the situation, collaborate with other people and figure out the course corrections and tradeoffs that will get things back on track and meet the goals of the company.

There’s a really good summary of new Accenture research on supply chain disruptions over at BLOGONLOG.

The summary lists some really good statistics and insights into how pervasive disruptions are. This particularly caught my eye: “the vast majority of respondents (94 percent) say disruptions — which are most often caused by problems associated with supply chain partners, raw materials, and natural disasters — impact profitability and the ability to meet customer expectations.”

Disruptions come in all shapes and sizes. Given that the survey was done with executives, I’m guessing their focus was mainly on the “big” disruptions that catch everyone’s attention and make headlines. However, there are literally hundreds of smaller disruptions happening everyday as a result of the incredible pace of change that have a profound impact on profitability and a company’s ability to meet customer expectations. These typically don’t get on the radar unless they result in a major issue (e.g., a lost customer) or add up to a major impact to a KPI that is very visible throughout the organization. The problem is that they increasingly are having such impact because most organizations are ill-equipped to deal with these changes as they occur.