Archive for August, 2007

Market leaders are increasing moving from standard timing to as needed, exception-based processes. Scenario modeling capabilities empower front-line decision makers and executives to make decisions when the business requires it. Scenario modeling provides these decision makers with insights into alternate opportunities as they balance risk and reward. Leaders confront risk and opportunity with shorter cycle times between event, collective insight and action.

To achieve this, companies need to arm decision-makers with a holistic and single version of the truth and the collaborative, scenario modeling tools necessary to evaluate situations, propose and detail action alternatives and then score them against corporate metrics to ensure actions are aligned with objectives. With the pace of change accelerating, there are more unexpected events than ever that are both high in business complexity and risk. These decisions require rapid and accurate human judgment - facilitated by scenario modeling driven from real operational data.

Many systems claim to support scenario modeling but suffer from a couple of critical deficiencies in supporting the needs of companies to rapidly respond to change. First, most scenario modeling capabilities are complex, programmed optimization engines that work on a sophisticated and rigid set of assumptions at a given point in time. The end result is a “black box” output with no insight into why the answer is what it is. This is ok if the answer is right, but creates lots of problems when the answer that comes back isn’t good enough. In addition, these systems are usable by a limited number of highly trained operators and lack any collaborative capabilities where multiple people contribute to an action.

Second, most scenario modeling systems operate on a model of the supply chain, not on real supply chain data. As such, they lack to relevance, timeliness and accuracy required to drive rapid action. To drive a profitable demand response you must be able to quickly balance demand and supply and be able to model various situations and understand their impact on this balance. Without real data to drive the simulation and with so many things changing, you have no ability to get the needed insight and determine the right course of action.

Scenario modeling, or simulations, are increasing in importance to companies as they seek ways to increase their ability to balance risk and opportunity. But to really drive the needed outcomes, the scenario modeling capabilities need to come with the required functionality.

The latest edition of IDC’s Manufacturing Insights Theory & Practice newsletter (here) has a good article talking about the critical need to get timely information to supply chain decision makers. According to the article, “manufacturers that cannot effectively share data between functional groups and with outside partners will increasingly find themselves less flexible, less responsive to customer demand, and less productive than competitors with mature information sharing capabilities.”

I just talked about one aspect of this here. As companies increasingly outsource, they can’t outsource responsibility for the end result, and to be able to effectively coordinate response to unexpected events, requires they have visibility as a pre-requisite. This requires partnerships with suppliers to ensure that data is available. Too often we see information focused in silos - where the demand team focuses on demand related information and the supply team on supply related information. The speed and quantity of demand, supply and product change is requiring companies to move from sequential planning processes to more parallel, interactive response processes. This necessitates that all key decision-makers have a holistic and current view of demand and supply at once.

The ability to deliver greater responsiveness and flexibility is tied to your ability to empower people with not only visibility in a timely fashion, but ensuring that the visibility is holistic and that these decision makers have the tools to drive action in response to unexpected events.

Great post over at Solectron’s blog talking about putting supply chain risk management into perspective. When supply chain risk comes up, it’s usually the headline grabbing examples that get all the attention. Things like hurricanes, strikes, terrorist attack, etc. are always mentioned. There’s no doubt that these risks are potentially devastating, but I would define these as low frequency.

What about the high frequency risks? What about those unexpected customer demands that always pop up? While a natural disaster is automatically assumed to be devastating to the business, these higher frequency risks can be too. What happens when you’re company can’t effectively respond to that customer request, and they go to a competitor? The aggregate effect of hundreds of these events mis-managed over time can be equally devastating to the business.

I liked the Solectron post because it focuses the attention back to the more likely events and their true impact - lost sales.

In an effort to proactively manage risk, many companies have developed supply-continuity initiatives and plans. However, in doing so, few have factored in demand risk while doing so. The opposite is also true. One very common approach to supply risk mitigation is to establish (or increase) inventory and/or capacity buffers. Doing so comes at a significant cost in tied up capital and creates another risk - that of excess and obsolescence.

Failing to factor demand into these plans further complicates the problem. As everyone knows, demand is not static. Developing a supply-continuity plan that assumes demand is static (the de-facto reality when demand is ignored) is asking for trouble. The reality is that demand is constantly changing.

Today’s systems typically don’t help alleviate this problem. Most planning systems were designed around optimizing a specific area - demand or supply, for example. What’s missing are tools to support an integrated view of current demand and supply simultaneously. And, when it comes to simulating various scenarios, you need the ability to simultaneously simulate variations in both demand and supply to understand the inter-relationships between them and what impact changing multiple variables at once would have.

In the face of constant change, companies need to empower people with the right information and tools to respond quickly and accurately. One key aspect of that is leveraging scenario analysis or simulation tools, but to be effective, these tools need to be able to actually simultaneously accommodate the realities of ever-present changes in all key variables.

Just saw that Solectron has launched a new supply chain blog. Solectron is a Kinaxis customer and a company with a lot of great experience and expertise in contract manufacturing, so it will be interesting to see their perspective on things. You can check it out here.

Supply Chain Digest just published an article asking if happy days had returned for supply chain software. From our vantage point, we can certainly support the notion that things have improved - we’re seeing strong demand for our Response Management software. But why?

I truly believe it’s because companies are facing new challenges and feeling increasing pressure from old challenges that are magnified today. First, everyone is outsourcing. While this has huge potential benefits, it comes with complications as well - longer lead times, more partners, more opportunities for Murphy to strike. Second, global competition has increased dramatically. It’s never been easier than now to lose a customer - expectations are on the rise, loyalty is on the decline and the number of options that customers have continues to grow. The result - if you can’t deliver precisely what the customer wants, they will go elsewhere. Third, product lifecycles continue to shrink. No matter what business you’re in, you’re seeing this happen - in part because of some of the trends mentioned above. But the requirement to innovate rapidly is critical.

When you add this all together, you get an environment of constant and rapid change. While manufacturing companies - whether you’re a supplier or a brand owner - are always focused on cost reductions, there’s a new focus on top-line growth to capitalize on the opportunities that exist. Companies are trying to do so while simultaneously dealing with all of this volatility. And that brings them to the realization that they need to invest in technology innovations to respond to change to capitalize on the opportunities while managing the risks.

Supply chain software companies that deliver innovative solutions - solutions that provide supply chain visibility, supply chain agility and responsiveness - are in a good position today.

According to research by Aberdeen, in today’s consumer industries, 50% of companies they have surveyed have indicated it takes more than a month to sense changes in demand. This has resulted in an excess of downstream supply chain inventory closest to the consumer. Unfortunately, this inventory is the most expensive as well.

With such a lag in understanding true demand, companies are really in a bind to respond quickly and effectively to change. Inevitably, these companies are going to be faced with disconnects between demand and supply that require a profitable demand response in order to ensure both customer satisfaction and the achievement of operational performance metrics.

Companies need to focus on improving demand sensing and empowering their front-line decision makers with the tools they need to see the impact of changes and to solve problems that inherently come from unexpected changes not originally accounted for in the demand and supply plans. The ability to quickly respond to these unexpected events is proven to drive improvements in both top and bottom-line results.

Following on the most recent post and elaborated on in the latest Manufacturing Insights newsletter by IDC, there’s a good discussion there by Simon Ellis asking whether or not costs are mutually exclusive with service in the supply chain?

I think the biggest mistake companies make in this area is “assuming” they are trying to achieve both - yet set objectives that focus and emphasize just one. What I mean is that if you don’t set objectives and incentives around service and cost, you won’t work to thrive at both. I’m a big believer in the “genius of the and” as described in the book Built to Last by James Collins (at amazon.com). The basic premise is that visionary, successful companies set goals and incentivize people to achieve both (and).

By focusing explicitly on both service and cost, then aligning objectives and incentives accordingly, best in class companies can achieve both. Doing so requires empowerment of people with the information and tools to rapidly respond to change and ensure that their actions are continuously aligned with these objectives.