Archive for April, 2008

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

Aberdeen has recently published new insights on the growing need for demand management (access the full report here - paid subscription required).  Among the many good insights is the graphic above that shows the pressures forcing companies to focus on demand management.

These pressures, if not adequately managed, can impact both the top and bottom line performance of a company.  This is increasingly the case, indicating the growing strategic nature of supply chain management and demand management capabilities within global manufacturers.

Customer expectations continue to increase while brand loyalty is weakening.  Customers have more globally available options, can do more comparison shopping and have heightened expectations from their vendors/suppliers.

These pressures collectively are having companies look at strategies to become more demand-driven.  For years manufacturers have focused their energies around building the best plans possible and then seeking execution efficiency.  This meant building optimal plans and automating processes to streamline execution and require little to no human intervention.  This made sense as the focus was a push-oriented model where there was greater control over supply management, capacity, production and the like.  But the new competitive requirement is to become demand-driven, and the old way of working is no longer sufficient.

In a demand-driven world, companies have to come to grip with the fact that you can’t plan the customer.  The processes, tools and expertise the company had around the push-model are ill-equipped for the pull-model required to become demand-driven.  Said another way, what got you to a market leadership position in the 20th century is likely not enough alone to keep you there in the 21st century.  In a demand-driven world, there are an increasing number of high visibility judgment calls that need to be made every day to deal with the deviations to the plan.  This could be an important customer calling with a request to increase their order and wanting to know, now, if you can do it or not.  It could be an unexpected supply disruption that requires an immediate reallocation to meet demand requirements.  These issues require people to act and react in a timely and accurate way.  The dynamics of the response process are, in many ways, completely the opposite of the traditional planning process.

Empowering people to act is paramount.  Front-line decision makers need visibility, tools to collaborate and figure out the impact of accepting the change, to see, analyze and simulate alternative resolutions before pulling the trigger on a major tradeoff.

The dynamics have changed - have you?

Aberdeen recently published their Supply Chain Innovator’s Technology Footprint 2008 report.  One Fast Fact in the report caught my eye:

• 78% of Best-in-Class companies indicate that they have the ability to find (within a reasonable time) and access supply chain data needed for decision making versus 50% of all others.

This is interesting for at least two reasons.  First, if you can’t get your hands on the supply chain information you need to make decisions in a timely manner, then by definition you are not able to respond to supply chain events in a timely manner (well, I suppose you can guess or make something up).  With the growing volatility across global supply chains, your ability to respond quickly and accurately is increasingly critical to your competitive position in the market.  This data suggests a significant number of companies are unable to do this.

The second reason this is interesting is actually not stated here.  I’ve found time and time again that supply chain visibility alone is not enough.  There are two other aspects to this problem that are not discussed here.  First, you have to be sure that you put the right supply chain information into the hands of the right people.  Increasingly, these are your front line decision makers that need to take action in the face of constantly changing circumstances.  If the people “in the trenches” don’t have this critical supply chain visibility, they won’t be able to act and react.  Second, supply chain visibility alone is not enough.  Front line decisions makers need tools for risk tradeoff and response.  It’s not enough to have visibility into an historical perspective on the supply chain.  They need tools to collaborate, simulate various action alternatives and compare them before pulling the trigger on a high impact judgement call.

As the research states, it starts with supply chain visibility - and there’s a lot of work to do there.  But it doesn’t end there - ensuring that the right people are empowered with visibility and tools to respond to constant change is critical in today’s market.

According to new research from Aberdeen, most companies (56%) regard SCM as a market strategy differentiator, a customer service differentiator or a profit center, rather than simply a cost of doing business. Nearly half (49%) indicate that escalating customer service demands are driving their supply chain transformations.

This is certainly a positive trend.  For too long supply chain management (SCM) has been viewed strictly for it’s cost reduction capabilities - a necessary evil where you try to squeeze every last drop of margin out that you can.  While cost pressures continue to be front and center, I do see an increasingly “top line” mentality reflecting the increasing strategic impact solid supply chain management can have.

Aberdeen goes on to identify four key actions companies should take:

I’m seeing strong activity in all of these areas.  In particular, sales and operations planning (S&OP) is getting a lot of attention - but maybe not in the way you would first think about it.  The word planning implies that everyone is strictly focused on building a better plan.  That certainly is a key part of it, but increasingly we’re finding that market leaders are really focused on how they deliver to the plan - how do they meet the objectives defined in the S&OP process.  This is an even more strategic way of looking at the process and factors in today’s reality that volatility is on the rise, making the perfect plan even less likely.

Given this reality, companies are trying to figure out how to respond when the assumptions that went into the plan are no longer valid, which is increasingly the case.  Interestingly, the other actions that Aberdeen identifies support this.  In order to respond effectively to unexpected events that threaten the ability to execute to the plan, you need supply chain visibility and you must have processes to excel at order fulfillment when the orders aren’t coming in consistent with the forecast.

If your busines is static and predictable, focusing on supply chain planning and supply chain execution are the right things to do.  But, if your business is dynamic and increasingly unpredictable, you need to complement these initiatives with capabilities to respond to unexpected events quickly and profitably.

Here are new insights on the rising threat of supply chain risks as found in a new study by Marsh, Inc (you can get a copy of the report here - free registration required). There are some interesting findings in the report:

• Nearly three-quarters of companies (73 percent) believe their supply chain risk has risen since 2005; nearly the same number (71 percent) believe the financial impact of disruptions to their supply chain has also grown.
• No risk managers in the Marsh study considered their companies to be ‘highly effective’ at supply chain risk management. Only 35 percent considered their companies to be ‘moderately effective’ at managing supply chain risk. Meanwhile, nearly two-thirds (65 percent) characterized their supply chain risk programs as having ‘low’ or ‘unknown’ effectiveness, or said they lacked any formal supply chain risk program.

Supply chain risks come in all shapes and sizes.  Most people think of floods, hurricanes, geopolitical issues and other “major” events when they think of supply chain risks.  But the increasing complexity of today’s supply chains mean that there are literally hundreds of risks popping up every day that you better be equipped to deal with in a timely and profitable way, or you risk losing your competitiveness in the market.  The inability to deal with these issues can mean the difference between profit and loss in many cases.

Consistent with the research findings, we find that most companies don’t have effective processes and tools in place to proactively manage day-to-day risks.  Most companies have spent years putting in place systems, processes and staff to run the business like clockwork, but find themselves caught off-guard as the business increasingly does not run like clockwork.  The warning signs are declining operations performance and poor customer satisfaction that can lead to market share erosion.

Ask yourself what role volatility is playing in your company’s inability to consistently beat the competition and hit your objectives.  Chances are you’ll find that it’s playing a major role in all aspects of the business.  Then evaluate how your company responds to change today and see if you’ve effectively armed your front-line decision makers that have to manage these situations with the tools they need.

Gartner recently released a new set of findings on supply chain management issues based on research they’ve done with end customers (you can purchase the research here).  Among the many good insights is this: about 93% expect the pace of change will increase through 2010 (the specific question was: “Between now and 2010 do you expect the pace of change in your supply chain market to decrease, stay the same or increase?”).  Based on this, Gartner concludes that “the pace of change will force enterprises to move away from their myopic emphasis on tactical issues, currently driven by economic conditions and an overly conservative business climate.”

If you’ve read anything on this blog you know that I’m in strong agreement about the pace of change.  I see this every day in the companies that we speak to.  I also tend to agree with their conclusions.  I sense that companies view the pace of change as a negative right now, something they need to find a way to deal with.  I think the truly visionary companies are seeing it as a huge opportunity.  The companies that figure out how to thrive in an environment of fast paced changes are the ones that are going to differentiate themselves with greater customer service and better operations performance.

Customer expectations are not likely to reverse course and decline.  They are only going to continue to expect more, faster, cheaper.  And, with more global competitors to choose from, there are more options for customers to find someone that can meet these needs.  A huge opportunity awaits those that can harness the pace of change for competitive advantage.

Bob Ferrari has some good observations over at his Supply Chain Matters blog about the impact of globalization on supply chain management.  His observations come from the Supply Chain World North America event.  He has three posts on it - here, here and here.

At one point, Bob states; “of greater and timelier interest is the finding that companies with extended global supply chains performed significantly worse than companies with a regional supply chain footprint, on customer-facing metrics such as perfect order performance, but slightly better on internal metrics such as cost-of-goods sold as a percentage of revenue, or total SCM costs.  As an example, globally based supply chains experienced 20% worse than their counterpart regional supply chains in on-time delivery, 28% worse in perfect order fulfillment.”

Most of our customers and prospects have outsourced a substantial and growing percentage of their business.  They’ve done so to gain focus, geographic presence/reach and cost advantages.  But, as Bob accurately notes, with globalization comes supply chain management challenges.  I’ve heard first hand and seen research that shows that the majority of companies that outsource also experience a loss of control over key processes that they are still accountable for - things like order promising, inventory liability, etc.

Because brand owners do remain accountable for quality, customer satisfaction and operating performance even when they outsource, they need to rethink their supply chain management practices.  They can not move to a passive mode.  They must continue to remain actively engaged and proactively coordinate effective response to change when it happens.  The key to competitive success today is very much a function of how you deal with the unexpected, and only the brand owner knows what the right course corrections and tradeoffs are to deal with these unplanned situations.  Front line decision makers must be armed with tools for risk tradeoff and response to act.

We’ve seen that when companies take this mindset and develop processes supported by tools to empower their front-line people to deal with these events, they can realize the benefits of globalization while delivering high customer satisfaction and strong operating performance.

Dr. Larry Lapide of MIT has written a piece here about the order promising process and some best practices for making it work better.  Larry talks about the fact that order promising is where demand and supply balancing really intersect.

This is a key challenge we talk to customers about all the time.  We’re increasingly hearing that customer expectations are on the rise while loyalty is on the decline.  The reality is that customers expect to make last minute changes now, and they expect you to commit to their changes - or they’ll go elsewhere.

Front-line decision makers throughout the supply chain need to be armed with tools to help them in these decisions.  Increasingly they are being asked to make promises to deal with the rising number of unexpected changes that are becoming the norm.  They need to be able to quickly determine if it’s possible to do what the customer is asking or not.  And, increasingly, if the immediate answer is no (after all, increasingly what the customer is asking for was not in the original plan), what is possible?  What tradeoffs could be made that would make it possible to satisfy the request of this important customer and what would be the implications of doing that?

If you can’t answer these questions quickly and accurately, then you aren’t in a position to satisfy your customers.  You risk not only losing your best customers, but you may be incurring significant costs trying to scramble to meet their needs.

If unexpected changes due to increasingly volatility are becoming the norm, the key is to acknowledge this and put processes and systems in place to arm your front-line decision makers to act quickly and decisively.

I found an interesting article here at supplychainstandard.com.  Chris outlines a key trend in the market, namely that more and more companies are focused on creating more customer driven supply chains in response to increasing market pressures.  He also does a nice job of outlining several actions companies can take to compete in this environment by creating a more customer driven supply chain.

I wanted to add another point.  What I continue to find is that the first problem companies face as they work to become more customer driven is the realization that you can’t plan the customer.  When manufacturers were more push oriented in their model, the focus was more supply than demand/customer centric.  This model works best in a low volatility environment where you can much more effectively plan your supply, capacity and production.  In this environment, your focus is on how to plan and execute to run the business like clockwork.

In today’s increasingly volatile environment, as Chris points out, you need to become more customer driven to compete and deal with the market forces.  But because you can’t plan the customer, you have to re-orient your focus for this situation.  In particular, it’s about how to thrive when the business doesn’t run like clockwork.  Doing so requires you to push more decision making out to the front lines.  When things don’t go according to plan, the centralized planning model isn’t the answer – you can’t escalate to senior management all of the decisions that need to be made in the trenches to deal with unexpected supply disruptions, last minute order changes, unexpected forecast changes, etc.  There are literally hundreds of these decisions being made every day.

The problem is that most companies don’t have tools to deal with this.  The tools they have were to support the central planning process with a focus on running the business like clockwork.  To respond to changes when the business doesn’t run like clockwork, you need to empower your front-line decision makers with tools for risk tradeoff and response.  They need to be able to act quickly and decisively with actions that are aligned with your corporate objectives as defined in your sales and operations planning (S&OP) process.

Re-orienting the business from a supply to customer/demand driven approach means ensuring that the organization is armed to deal with the fact that you can’t plan the customer.