Archive for September, 2008

I read the white paper ‘Enabling Sales and Operations Planning with RapidResponse’ with interest. Organizational thinking is often inherently bound by the dimensions of the ‘box’ it is currently in because people don’t question working assumptions strongly enough. It takes a lot of energy and political skills to overcome ‘process inertia’ built up over the years within companies especially when the processes involve cross-functional teams and individuals at different levels of the organization. Popular business press and sales and operations planning (S&OP) consultants will tend to advocate what has worked in the past (i.e. conventional tools and processes). Taken together, this results in organizations likely short-changing themselves when investing in S&OP.

Personally, I’ve found that investment in S&OP is intermittent in many organizations. Interest in S&OP gets hot when a crisis occurs (e.g. the recent housing market collapse) because the organization understands that fundamental changes are occurring and S&OP is a tool to help them ‘get out of this mess’. The result of this is that companies often don’t move cleanly from one stage in the maturity model to another.  They can attain different levels of maturity in different areas and may even fall back because of a change in technology (i.e. the new demand planning system does not talk to the supply planning application) or personnel (i.e. ‘our new CEO doesn’t like to work that way’). S&OP, like any other strategic and tactical planning, takes constant investment and buy-in from senior levels.

I don’t believe that all organizations need to plan more often than monthly. A monthly cycle might be fine for organizations that have slow product turnover and a mature market. I think the key requirement is to be able plan when, and as often as needed; this is, S&OP ‘on-demand’. Recently, I talked to a company that manufactures residential light fixtures. Historically, a monthly S&OP cycle has served them quite well. However, the recent housing market downturn required that they re-evaluate their S&OP five times in two months. Also, many companies are ‘big-deal’ driven. So, what happens when one of those big deals comes in the day after the end of the last S&OP cycle?  They key is that the S&OP process shouldn’t be held back by the technology and this is where many organizations need to make sure they do their homework.

FYI – for those interested, we just published a new white paper entitled “Enabling sales and operations planning with RapidResponse.”  Here’s an abstract:

Sales and Operations Planning organizations that leverage demand-supply planning, monitoring, and collaborative response solutions are finding themselves better equipped to power a world class S&OP process. Key capabilities include; scenario management, expressing the results of scenarios as financial measures, early alerting to consequences of decisions made elsewhere in the supply chain, and focusing users on the exceptions that require their attention.

Reading about recent events like Hurricane Ike and the current Boeing strike has served as a great reminder of the human toll –  and for those of us that work in supply chain management– the supply chain and financial hardships these contingencies are capable of causing. Once a contingency like the Boeing strike hits, the cascade effect begins  and all business partners who aren’t prepared to quickly assess the impact of such an event,  and consequently, develop appropriate action plans, are at great risk.

I’ve witnessed firsthand the dichotomy that can exist between groups that are armed with tools to respond…and those who aren’t.   For example, when the partner of a major industrial supplies manufacturer went out of business, each of the manufacturer’s strategic business units (SBUs) were asked for an immediate risk assessment and to take action to limit the company’s financial exposure – this essentially meant the immediate reduction or cancellation of purchase commitments linked to the company.  The exercise to determine the risk was accomplished in a matter of hours with the use of RapidResponse (it was just a matter of creating a scenario simulation where the demands for that partner were eliminated and then subsequently assigning stranded inventory and purchase commitments to those changes).  For divisions without RapidResponse, the very same task took nearly two weeks – and during that period the financial exposure actually increased due to the delays.

In another instance, the same divisions at the same company were asked to proactively assess the impact of a potential strike at a major partner company and to develop contingency plans to minimize the company’s financial exposure.  Once again, this was a simple effort with RapidResponse, but for those without it, it was a very long and painful process with lots of risk that their analysis was flawed.

Short of a crystal ball, it’s impossible to adequately plan for a wide range of unexpected events like strikes, natural disasters and contingencies with major suppliers/customers.  And as supply chains become more globally distributed and more complex with the integration of multiple outsourcing partners, a company’s ability to respond quickly and effectively can be seriously hindered without the right tools for integrated planning, monitoring and response.  Recent events provide a valuable reminder of the importance of proactively planning for contingencies before they occur – and equally important, being able to quickly address unplanned events after the fact.  Ultimately, a company’s financial health can depend on it.

I recently found this article in InfoWorld talking about supply chain risk management. It’s based on research from Aberdeen that talks about how most companies are lagging in supply chain risk management.  According to Aberdeen “Of 138 companies surveyed, 58% suffered financial loss as a result of supply chain disruptions”  Aberdeen goes on to say that less than 1/3 of companies polled are managing key supply chain risks..   The key question is why?

From my experience, there are two key reasons why companies are lagging in supply chain risk management;

1. Lack of visibility / priority at the executive level.  The focus up to this point has been on growing the global footprint of the company, taking advantage of lower labor costs offshore to improve profits. As we can see from the numerous articles in the press and analyst reports, companies now are starting to look at supply chain risk management.  This is often being integrated into the Sales and Operations processes as Sales and Ops is typically the right level to be looking at this.
2. Another key reason why adoption has been slow is because of a dearth of tools to facilitate the identification and management of supply chain risks.  If I were to ask you to use your current systems to identify your top 5 suppliers in terms of what they contribute to revenue, could you?  Maybe.  If I were to ask you to quantify what the impact would be if one of those suppliers failed, could you tell me?  Not easily. Why?  Because the typical tools are just not able to cope with these types of questions.  ERP systems don’t handle simulations well and the reporting capabilities are not flexible enough to allow you to determine actual impact at various levels of the company.  Also, while companies are consolidating to a single ERP system, there is still are still many cases where companies deal with multiple disparate ERP systems.  Because of this, many companies try to simulate supply chain events in Excel.  Unfortunately, Excel doesn’t have the business logic of your ERP system, so any analysis will be a rough estimation at best.

So what is needed? Supply chain risk management needs to become a part of the sales and operations planning process.  The top risks to the need to be identified and quantified and mitigation strategies need to be put in place. These need to be reviewed on a regular basis because as the business changes overtime, so do the risks.  Don’t just focus on the risks to supply – also look to the risks due to changes in demand.  According to Aberdeen, , “More than 1/3 of companies polled reported unexpected customer demands and shipment demands in the last year” It’s important to remember that supply chain risk includes unexpected changes in demand as well as supply.  While a new large forecast increase is great, if it causes you to  exceed the capacity of your supply chain it can become a liability.

The other key factor needed to move companies forward is a tool that inherently supports supply chain risk management.

• Visibility to supply, demand and inventory across all parts of the enterprise
• The ability to fully model your entire supply chain and emulate your business logic
• The ability to quickly and easily simulate major supply chain events.  “What is the impact to revenue if this supplier can’t deliver parts for 2 months?”
• The ability to report results and impacts of these events.  This includes the impact to the key business metrics and the ability to drill into the details where desired.

Where are you on the road to understanding the risk to your supply chain?  What tools are you using to simulate events and understand potential impacts?  Where do you discuss supply chain risk management issues?  Post back and let us know!

If you follow a number of supply chain management blogs you’ve probably seen that there are a series of posts going out regarding the seven grand challenges for spend and supply chain management.  This was initiated by Michael Lamoureux at Sourcing Innovation.  Michael has a listing of all the posts there.  The idea was inspired by Gartner’s Seven Grand Challenges for IT over the next twenty-five years.

I’ve given this lofty idea some thought, solicited input from others here at Kinaxis, and came up with the following grand challenges (not a list of seven, but a list nonetheless of critical challenges).

1. The struggle to connect outsourcing and lean.  Lean manufacturing requires a “synchronized” value chain.  Outsourcing makes that extremely challenging, especially if the goal is to maintain the lean state throughout that value chain.  Often companies only attempt to achieve a lean state internally and drive buffer inventory strategies at their sub-contractors (non-lean) to make sure they are positioned to support course corrections.  The benefits of both are seemingly clear, but how do the two interact?  Companies are plowing ahead with initiatives in each area, but do they have plans to make them work harmoniously?
2. Being in control when you’re not in control.  Over the last several years, we’ve seen the pendulum swing for brand owners, from complete control of an integrated manufacturing function to a heavily (and in many cases, completely) outsourced model with globally distributed partners.  The initial driver for outsourcing was cost.  The problem of course is that with outsourcing came less control.  Their brand and reputation is on the line, but they don’t directly control the key aspects that impact quality, compliance, etc.  We’ve recently seen numerous high profile examples of where this has posed major problems.  On top of this, we’re seeing major changes in the cost structures that are impacting labor, transportation and other product and manufacturing costs.  A huge challenge for brand owners will continue to be balancing the issues of being in control when they are not directly in control of all aspects and to continually adjust to changing conditions “on the ground” that impact costs.  The ability to quickly take apart and rebuild supply chains to factor in these changing conditions will be key, while simultaneously building in the visibility, processes, controls and relationships to make it all work.
3. Sustainability.  I do not believe, as some have argued, that this is the latest “hot topic” or fad, nor is it simply timely because of the political timeline.  I think these are real and serious issues that will only increase in priority on a global basis.  The challenges of designing sustainability into products is one thing, but one aspect that I think is a huge, huge issue hanging over this important topic is the lack of global standardization.  It’s tough enough to meet the needs of, say the EU, but when their standards are different than those in China which are different than those in the US and so on, you have a major issue.  I think we’re going to need some better global standardization to make huge breakthroughs here or the costs and overhead associated with these initiatives will prevent full adoption.
4. The role of supply chain in a company.  I continue to believe that far too many companies are taking far too tactical a view on their supply chains.  Supply chain excellence is NOT a priority to most CEOs.  They are focused on revenue, profitability and compliance and view the supply chain as a tactical and operational necessity.  The reality is that as companies become more globalized both in terms of their operations and their revenue potential, the supply chain continues to take on a growing strategic role.  Supply chain risk management is a hugely important topic that needs to be led from the top down.  Failure to elevate the important and signifance of the role supply chain plays will continue to place companies at risk.
5. Increasing volatility.  If you compare the environment/world you live in today vs. that of, say 5-10 years ago, I think most would agree that things are moving at a faster pace and customer expectations continue to climb while their loyalty is less.  Volatility is on the rise.  I see nothing on the horizon that will change this.  Think of how easy it is today for a startup in China, India, or you name it to compete with you on a global basis – in your backyard, with your previously most loyal customers.  It can happen to anyone seemingly overnight.  This means that customers are in the driver’s seat and are calling the shorts.  My sense is that most companies are not wired to win in this environment.  For years companies have been built around the mindset that we plan, then we execute.  If we can do this better than anyone else – strictly speaking from a supply chain perspective (not all other aspects of competitive differentiation) – then we will win.  That’s just no longer enough and I think the trend here will continue to accelerate and place even greater pressures on companies to rethink the way they approach supply chain management.  Dealing with increasing volatility is a very substantial challenge.

I hope some of these grand challenges are thought provoking.  Would welcome your thoughts as well.

The supply chain software market has gone through some tumultuous times.  The promise of advanced planning and scheduling (APS), “push the button and your problems go away”, turned out to be empty.  As appealing as it sounded, and as excellent as the underlying optimizing technology is, it does not actually solve the problems in most supply chains.

Why doesn’t it work?

• Traditional planning and execution need to merge, execution needs to be based on frequent, virtually instantaneous, re-planning. The data needs to be updated frequently so systems can see the current supply/demand picture.
• Not only does the system need to include data from the entire supply chain – from distribution through to contract manufacturers, it needs to understand the supply/demand relationship between all the locations.  This entire supply chain “model” can then change supply/demand and corresponding availability relationships dynamically as inevitable and frequent changes occur.
• Business processes (presumably including their supporting systems) need to be connected so that decisions are not made in operational silos.

But there’s one other key aspect of every supply chain:  people.  Automated systems and processes are great for handling routine events.  They can even be pretty good at handling anticipated changes.  They do not work well when something totally unexpected happens.  This is where people come in!

People need to understand what has happened, how it impacts the operational plan, and what to do about it.  Invariably, people must look at data in ways that are different from those used for routine operations.  Ideally, the people need to simulate potential solutions to see if they are likely to solve the problem or to create new, worse ones. Furthermore, supply chain decisions are almost never made by a single person.  People throughout the supply chain need to understand what has happened, what might happen, and what might be done about it. Given the frequency of change, it is not enough to run a bunch of reports.  An infinite number or reports would be required to cover all the different ways people might want to see information.  Rather, the participants need to choose and tailor the data they see as they look at it.  Then, they want to change data to create one or more possible solutions. Once a course of action has been decided upon, then those actions need to be communicated throughout the supply chain so that all the parties can execute the ever-changing plan.

I found a very good article at CFO.com discussing the supply chain management challenges companies are facing today in light of the rising logistics and commodity prices.  I posted a comment, entitled “integrating financial metrics into day-to-day supply chain management processes“ at the site and have included it here as well.

** My comment **

Great article covering the challenges that manufacturers in all verticals face today.  The increase in shipping and commodity prices is hitting everyone and forcing them to re-evaluate all aspects of their supply chain management strategies – from network design, to logistics, to sourcing, etc.

At the heart of the challenge is the reality that volatility is on the rise.  Whether it be customer demand expectations changing rapidly, supply disruptions or volatile costs, the fact is that things are changing at a faster pace.  And, the implications of not being able to adapt are significant.

Too many manufacturers have a disconnect between their business and sales and operations planning (S&OP) processes and day-to-day supply chain management processes.  Plans are put into place, metrics are passed down, but then people have to do their day jobs.

Given the rise in complexity and volatility, there are more and more high impact decisions that need to be made on the spot by your front-line responders.  Taken individually, these decisions may not have a material impact on your financial metrics, but in aggregate, it can be very material.

What manufacturers need are to develop supply chain management processes, supported by the right tools, that integrate financial metrics directly into the supply chain management processes.  The key is to ensure that the necessary high impact judgment calls are always aligned with the financial metrics of the company.  Without clear and immediate visibility to the impact a proposed action would have on these metrics at the point of action, your risk saying yes to the customer and dealing with the ramifications later.  The only way to ensure a profitable response to change, is by integrating financial metrics directly into the realities of today’s supply chain management processes.

In the latest edition of Manufacturing Insights, Bob Parker has a good piece discussing how high-tech/electronics can realize benefits through lean manufacturing.  Bob uses the publicly reported results on revenue and profit to draw a reasonable conclusion that the companies that have actively adopted Lean methodologies are out-performing those that have not.   He further elaborates on some of the challenges that the adoption process must address as the complexity and breadth of the supply chain grows.  In fact, I don’t think the article emphasize this enough.   The goal of lean manufacturing is to essentially connect the entire value stream and eliminate all forms of unnecessary waste.   The bottom line promises many things including; reduced lead times, less inventory, improved quality, and ultimately the ability to be much more responsive to customer needs.   With the continuing outsourcing trend, and both customers and suppliers more geographically dispersed, the ability to connect and synchronize that value chain has become dramatically more challenging than the days of the vertically integrated factory.

Many of our most sophisticated customers are still struggling with approaches to ensure that as demand changes occur, the entire supply chain is correspondingly adjusted.   To make the point clear, imagine a string of cars on the highway that are only 10 feet apart but all traveling at 60 mph.  If the first car suddenly slows down, only the second car in that string knows that anything has happened and even a minor delay in response will increase the risk of crashing.     With each successive car the opportunity for safely adjusting their speed diminishes, until at last you have one enormous pile of wreckage.    Instead, imagine if all the cars had radios so that the first car could broadcast the fact that he was hitting his breaks.   All the cars would slow together, and thereby avoid the resulting accident and rising insurance costs.

The challenge of connecting the supply chain is no small task as many of the players are using different ERP systems and lack the sophistication to properly establish or adjust ROP (reorder points) values based on the changing variables (demand, yields, etc..).   This is an area where RapidResponse with its ease of integration to disparate ERP systems and  exceptionally powerful analysis and reporting tools can be an instrumental part of the Lean value chain synchronization process.   As demand changes at the brand owner location, and assessment of the risk and need for Lean related adjustments across the entire supply chain can be made.    If adjustments are needed, they can then be communicated simultaneously.

There’s an interesting article called “Supply chains worry CEOs” at the Financial Post.  That’s not a headline you see everyday.  The article references new research from McKinsey (available here with free registration).

I think the next couple of years are going to be interesting to see how they unfold.  The last several years have been characterized by substantial globalization and supply chain complexity.  Most large companies, and many smaller, have worked hard the last several years to take advantage of global cost advantages and high-growth opportunities in markets outside of North America.  This has been a win-win in that you gain cost savings while simultaneously opening new markets.

But the dynamics are changing.  The cost advantages are less (relatively speaking) and for many products/components they are virtually gone while transportation and other costs have gone up substantially.  Instead of articles and case studies about increasing globalization, I’m seeing more and more talk of rethinking these strategies as supply chain complexity, supply chain risk management, costs, slowing growth, etc. become greater concerns.

I do not anticipate a pendulum swing here away from globalization.  I think we’re going to see companies re-evaluate some of the conventional strategies that have become de facto over the last few years (like automatically moving manufacturing to China) and make some adjustments.  I think some adjustments are going to be necessary – some potentially major – to deal with some of the risks and challenges, but the fundamental benefits of globalization are just too positive to see a massive shift away from it.

What do you think?

By the way, if you’re in the electronics industry, you might want to check out what Charlie Barnhart & Associates has to say on these topics and the research they have to support their recommendations (disclaimer: we don’t have a formal relationship with them, but we’ve done some joint things in the past and I’ve been impressed with their deep insights on the industry).

I wanted to make readers of this blog aware of something we’ve been working on with IndustryWeek for a couple of months now. It’s called the IndustryWeek Manufacturing Business Challenge.  It’s a pretty neat idea that IndustryWeek came up with and we are now sponsoring.

Anyone can subscribe at the link above to receive a monthly email containing the latest challenge.  The challenge depicts a typical manufacturer and a critical business challenge they are facing.  There are then two proposed solutions – one by an industry expert and one by me!   There are also opportunities to continue the dialog about that particular challenge in forums and there’s even a place to submit your own idea for a challenge to be discussed.

Here are quick links to the challenges that have been published to date.  Follow this link to subscribe and ensure that you get future challenges sent directly to you.  Enjoy.

• Eroding virtual enterpise (May, 2008)
• From supply to demand (June, 2008)
• Faded, jaded forecasts (July, 2008)
• Winning new business (August, 2008)
• Fast but inefficient (September, 2008)