Archive for June, 2008

Dan Gilmore at Supply Chain Digest has a thought provoking article questioning if we’re in the midst of a supply chain perfect storm.  I sent a comment to Dan and have included it here as well.

** My comment **

I think your list is right on the mark.  I would also add to that list the reality that everyone is facing more global competition and buyers expectations continue to go up, while brand loyalty continues to go down.  I can speak from my own personal experience, which I have found to be consistent with the majority, in saying that I can do more research now before making a purchase, my expectations have gone up in terms of wanting what I want when I want it and, provided the research and referrals are positive, I’m willing to go with a variety of brands based on which one best meets my needs.  So, while the supply chain environment itself is getting tougher, so are the expectations of the end customer.

I do not believe the current situation is a passing storm.  I think this is the new reality.  Sure, each issue will have it’s high points and low points in terms of the pressures they exert on the supply chain as a whole, but when taken together, I believe the forces we’re seeing today are going to remain into the foreseeable future.  I think we’ve entered a new era of global competition that will continue to exert never before seen pressures on supply chain management.

I think these pressures are going to require supply chain professionals to rethink how they go about doing things.  The old model of supply chain planning and supply chain execution excellence wins the day has been replaced by an environment where these skills need to be integrated with the ability to respond to the unplanned events that are increasingly becoming the norm.  I think the market winners will plan now to deal with the unplanned.

Bob Ferrari over at Supply Chain Matters has a new post citing research from PRTM.  In his post, he states “Interestingly, PRTM concludes from the data that the COO agenda across industries and geographies is on improving supply chain flexibility and performance, and by 2010, the need for greater supply chain flexibility will overtake product quality and customer service as the major driver for improving supply chain strategy.  I respectfully disagree.”

I posted a comment on his site and have included it here as well.

** My comment **

Bob – I have not had a change to review the PRTM study yet, but I can see how they could draw that conclusion just based on the facts that I’m seeing.  I say this because I think companies are going to be extremely quick to jump on the quality issues given the huge impact it has on their brand in an increasingly competitive global market.

It is also precisely for these reasons – expectation that they will jump on and fix quality quickly and the increasing global competition – that I believe that their observation may be on the mark. 

What I continue to see is that globalization and outsourcing have opened up new markets critical to increasing growth but have simultaneously added significant complexities.  I’m seeing a growing awareness by executives about the strategic role a responsive supply chain can play in terms of market growth, customer service/satisfaction and operations performance.

Everyone I talk to agrees that things are moving at unprecedented speed, things are changing rapidly on all dimensions.  It used to be that you could win from a supply chain perspective by simply building a great plan and out executing the competition.  That is no longer sufficient.  While you still need a plan and excellent execution capabilities, you have to be able to out-respond your competitors.

This means your company must be prepared to deal with the unexpected every day – because increasingly things are going according to plan.  This could even include a product quality issue and a host of other unplanned events.  If the company isn’t able to excel at dealing with these unplanned events, the risk is a significant market and margin erosion problem as the market has demonstrated no patience for manufacturers that can’t turn on a dime to deal with quality issues, demand fluctuations, supply disruptions, etc.

I think in this context the PRTM conclusions may be on the mark.

With growing interest in sales and operations planning (S&OP), it seemed appropriate to discuss the tools required to support S&OP in the midst of today’s market dynamics.

Scenario Management
Tools to make it easy for users to create, evaluate, and compare multiple scenarios. In addition, these tools automatically identify essential participants and invite their input by asking them to either collaborate on the creation of the scenario or agree to the consequences of the proposed action. For example, a supplier may agree to ramp up production of a component for a new product early because the sales numbers are trending above plan, and the inventory manager may need to agree to holding increased inventory of the component even though it increases risk.

Financial Measures

The operational objectives set by executive management are almost always expressed in financial measures such as gross margin, cash-to-cash cycle, economic value-add, or similar categories. The best tools can readily convert the unit-based view of the users into financial measures that are relevant to executive management. If standardized measures do not suffice, the tool should also provide workbook capabilities that allow users to develop additional measures specific to their organizational needs.

In addition, solutions need to offer scorecarding features that enable users to rank financial measures and compare them across various scenarios. This provides an objective way of determining the best set of scenarios to include in the executive review during the S&OP process.

Alerting

The ability to track key performance indicators (KPIs) within the S&OP cycle is critical to effective S&OP adoption. Tools need to provide early warning that certain KPIs are projected to exceed tolerance levels, allowing the organization to take corrective action before problems arise.

In addition, while a supply order may arrive only one day late (which may be within tolerance from a supplier management perspective), the consequence could be that a major new order will be delivered late or, even worse, lost. This in turn might mean a downward trend for gross margin. Through these tools, such an occurrence would cause an alert to be sent to a senior manager, allowing him or her to take appropriate action.

More importantly, there could be several small changes at the operational level, each of which is within tolerance and therefore does not generate alerts. However, the cumulative effect of these changes could be, say, a 5 percent drop in revenue for the quarter—large enough to warrant executive attention. Alerts can help companies better track and effectively respond to such situations by eliciting attention before a crisis occurs.

Management by Exception

Closely related to alerting is the capability to drill down to the exceptions that cumulatively cause a particular KPI to trend out of tolerance. In the example above, the executive could identify all sales regions in which the projected sales revenue is below target. These could easily be ranked in order, allowing the executive to identify rapidly the regions on which to focus.

When contrasted to the common approach adopted by many companies in similar situations—i.e., ad hoc analysis and data extracts using spreadsheets—the increased productivity and effectiveness afforded by tools are readily apparent.

Summary

The diverse capabilities provided by best-in-class tools provide an ideal mechanism to enable far more effective sales and operations planning for virtually any organization.

Sean Murphy over at Supply Chain Management Review asks if we’re experiencing the “un-flattening of the world?”  He cites a Globe and Mail article that says that skyrocketing fuel prices will see a reversal of the globalization movement.

I posted a comment on the SCMR site and have pasted it below as well.

** My Comment **

It’s a valid question and one that is sure to get lot’s of attention.  We work with a lot of companies that outsource heavily.  I certainly think this is shifting people’s attention to the “full” cost of outsourcing and making some rethink their strategy. But I don’t see a wholesale shift and/or reversal of the globalization trend.

The main reason I say that is because Friedman was very correct in stating that the world is now flat from a global competition and global markets perspective.  Strategically, companies outsource/globalize for many reasons.  One of them is certainly cost and we’re seeing a realignment of the cost equation right now.  Nobody knows where that will end.  But another strategic reason for globalization is the ability to reach new markets and be able to have local presence (this actually argues for more globalization since you don’t want to be shipping in at exhorbitant costs when you’re entering in new markets either).

So, while I certainly think that some things will slow and ROI calculations will be redone, I think there’s still a fundamental shift underway and companies will require global scale to compete, will need to enter global markets and will increasingly want to tap a global talent pool, so globalization is not going away.

There’s increasing evidence that many large enterprises are going on-demand (or software-as-a-service/SaaS) for their supply chain management and other enterprise solutions.  Here is a new article talking about the growing trend and mounting evidence.  The article states that “Over the next 12 months, of the number of U.S. organizations initially implementing a business management application such as ERP or CRM, the percentage implementing a SaaS solution will approach the percentage of organizations deploying traditional licenses in that market. ”

The article also cites security concerns by larger companies as one inhibitor.  We’re seeing this change for two reasons: 1.) security technology is such that transmission of data can be done very securely today and best-in-class on-demand/SaaS services employ such tight security measures and 2.) the majority of large manufacturers are outsourcing a substantial and growing portion of their business.  This means that much of their sensitive data is already shared outside their four walls.  In an on-demand environment, it actually means that they can regain visibility into that critical data necessary for them to coordinate effective response to change, which is the main role that brand owners play in such a heavily outsourced supply network.