Archive for October, 2008

We had the opportunity to sit down with Larry Lapide, MIT demand management research director, after his keynote at the Kinaxis user conference (Kinexions) and get his thoughts on the future of supply chain management.  Larry talks about the effects of globalization, the impact of developed vs. developing nations and the implications to supply chain management.

Part I of our discussion:

Part II of our discussion:

If you have trouble with the above videos, try the following links: Future of suppy chain management, part I; Future of suppy chain management, part II.

Kinaxis has just released a new white paper entitled “Why you need to re-evaluate your approach to supply chain planning.”  I won’t restate the entire paper here, but below is an abstract:

The supply chain planning approach developed in the early 1990’s is failing under today’s market pressures. Today’s environment requires more collaboration than control; more coordination than optimization. Demand and supply chain planning, monitoring and response needs to be performed by many users, on an ad hoc basis, as events occur. A new supply chain planning paradigm is required.

We just completed the first day of our Kinexions user conference.  One of the speakers today was Shoshanah Cohen of PRTM.  I thought her presentation was great.  She outlined what she called the five disciplines for successful supply chain management.

One of the key takeaways for me was her focus on aligning business and supply chain strategies.  She gave examples of companies who were misaligned here and the huge ramifications that it causes.  In one example, she talked about a global leading clothing retailer.  This company had multiple brands that all had a different expectation with their customers.  For example, one brand was all about low cost and another was about higher end and more stylish products.

Several years ago they had a supply chain management initiative focused on driving costs out of the supply chain.  One aspect of this strategy was to centralize purchasing of materials across their various brands.  While this achieved the goal of driving down costs, it came with the negative consequence of commoditizing all of the products.  Customers were quick to figure out that the various brands were using the same materials and, thus, lacked differentiation.  Customers of the higher-end products weren’t getting what they wanted as a result.

This was a great example of a clear misalignment between the business strategy of clearly differentiated brands and the supply chain strategy that focused on driving out costs, but at the expense of the business strategy.  She shared other example as well and challenged the audience to think about their business and the implications of this critical misalignment.

Is your supply chain strategy consistently aligned with your business strategy and vice versa?

I wrote an earlier blog post titled “Supply chain lessons learned from the credit crisis” which looked at the importance of cash management and the need to understand the inventory liability in the channel in the context of cash management. The Wall Street Journal reports that Circuit City may be closing 150 stores and liquidating the inventory in an attempt to avoid bankruptcy. While the seeds of Circuit City’s lackluster performance are not rooted in the credit crisis, the Wall Street Journal does report that getting short term loans to pay for operations is proving difficult, hence their need to cut costs by closing 150 stores and liquidating up to $350M in inventory to pay for real-estate costs, such as abandoned leases.

While the fate of Circuit City is interesting, what does this mean for the Consumer Electronics companies which are Circuit City’s suppliers? How are they going to reduce their exposure not only to finished goods inventory liabilities but also to raw material purchase commitments made to satisfy anticipated demand from Circuit City? I think traditional forecasting and supply chain planning systems that rely on historical sales data are not the right solution. And speed is imperative. You can bet that all the other Circuit City suppliers are trying to solve the same problem, and many of them, especially the Consumer Electronics companies share common contract manufacturer’s and component suppliers. I suspect that customer relations principles and sound financial management, not to mention human behaviour, will mean that the first few brand owners that request a large change to supply commitments from the contact manufacturers may get a favourable response, but the ones last in line might get a different response.

What the brand owners need is a system that provides:

• multi-tier visibility to all inventory and commitments
• a collaborative environment that includes suppliers and customers
• rapid what-if capabilities, shared with their customers and suppliers, in which they can evaluate alternatives

An optimization engine run by the brand owner is not the solution. First of all the optimization engine will not be able to incorporate the compromises needed in such a situation. Second, a collaborative environment which allows all participants to understand their shared liability is likely to achieve a speedier and more widely accepted resolution than one in which only the brand owner’s needs are satisfied. They need a system in which any suggested changes can be evaluated immediately by other participants in the supply chain. Using a collaborative system as described above, the brand owner can also work with other retailers to understand how much of their finished goods they can divert from Circuit City, perhaps even running promotions to increase demand. Again speed in this context is imperative. Retailers will only be willing to run a few promotions at any one time, so being first to the table is very important in being able to shift the inventory.

Using RapidResponse, all parties along the supply chain can collaborate and immediately respond to the event and eliminate the unwanted inventory, thus cutting shipping costs, manufacturing costs, storage costs, etc.

Our annual user conference, Kinexions, starts a week from Monday.  I’m really excited about this year’s event.  Our goal for Kinexions is to help our customers realize a greater value from their investment in RapidResponse.  We want to be thought provoking so they walk away with their heads spinning on new ideas of how they could get more out of RapidResponse when they get home.

We do this by educating them, providing networking opportunities between customers and partners, building direct relationships between Kinaxis staff and our customers and partners, sharing best practices, throwing in some fun and much more.

We’ve got excellent third-party and customer presentations, a wealth of great Kinaxis workshops and a bunch of smart supply chain people attending – so we have the perfect recipe for an excellent event.  I’ll post about the event as it happens.

During my work with numerous brand owners and manufacturers, I have been amazed to see multi-billion dollar companies manage their business using spreadsheets.  Sure, they have state-of-the-art ERP systems for capturing transactions, but when they project revenue, decide whether to build up supply of one product line over another, or make capital investment decisions – out comes Excel!

Don’t get me wrong, Excel is a great tool.  It lets you create lots of models, lets you enter and edit any data you want, and lets you see the impact of changing the model and data.  However, it was not designed as an enterprise application!

I have seen companies struggle with formal, monthly, sales and operations planning (S&OP) processes.  Why did they struggle?  The process took six weeks to complete!  Hence when it came to making decisions, the primary input data, the level of customer demand, was six weeks out of date.  You may well ask, “how can that be?”.  The answer is that the collection, consolidation and analysis of the data, coupled with the mechanics of communicating and collaborating between Sales, Finance, and Operations required that amount of time. Within this process, it is extremely difficult to detect significant change, and certainly never time to respond to it.

Now, I am not proposing instant decisions.  Rather, I am proposing that the time required for data collection, consolidation and analysis, and the time for communicating with participants should be nearly zero.  If the entire S&OP process could be completed in a week, how would that change the process?  What if it could be done in a single day?  I suggest that weekly S&OP would improve customer response with lower inventory risk and investment.

Last week, I visited both Japan and Hong Kong. I’d been long looking forward to this visit, but dreading the 20+ hours of travel both ways. I finally figured out the best way to beat the jet lag…do not succumb to the urge to pull out the laptop during the first half of the flight – sleep, then work. I was surprisingly well adjusted upon arrival for a change.

Several things struck me during my week long voyage. The economic meltdown was front-page-top news story every single day. In Japan, there was talk of their own “lost decade” in the 90’s, largely caused by the same challenges being felt in the US – poor loan performance. One major difference between the challenges experienced by Japan in the 90’s, and the US today – The Japanese financial crisis was contained within the banking industry. The US induced challenges have spilled onto other financial industries and spread to other countries making it more difficult to contain.

I couldn’t help but wonder how “ready” the large and well known Japanese electronics manufacturers are given the lack of global economic stability.  How would companies like Hitachi, Pioneer, Sony, Sharp, or Nikon manage their pervasively outsourced supply chain given the lack of confidence in future demand? Surely their forecasting systems would not have predicted the current conditions, nor can they assist in determine what will happen in the coming weeks/months.

Some companies are responding by setting in place gross assumptions – such as an overall reduction in demand of 20%. I believe, however, the leaders (and winners) will not make such macro assumptions, and rather draw their attention to learning how to listen and respond quickly to what actually happens with demand. Time will tell as we watch these global electronics giants weather the storm.

Our recent white paper, “Four Capabilities Required for 21st Century Sales and Operations Planning“, does an excellent job of outlining both the current state of sales and operations planning (S&OP) and the benefits companies can derive from ensuring the tools being used to support the process include those key capabilities.   What the article fails to empathize is that the tools that have traditionally been used to support the process by even some of the best companies (primarily Excel but also Access and other point solutions) have failed to meet the challenges of the new business environment.

That new environment contains three dimensions of change which have changed the shape of most companies fundamentally.  The first dimension is outsourcing which makes key operational data that influences the S&OP decisions outside of the direct control of the brand owner, and is therefore more difficult to access, integrate and analyze.   The second dimension is the speed of product innovation that requires greater precision in the timing of new product release to gain market share while avoiding unnecessary excess and obsolete inventory on older products.   The third dimension is the change in demand volatility driven by the purchasing habits of today’s consumers who leverage the internet to gain product knowledge and access to the global marketplace.    The days of blind product loyalty and the exclusive purchase of goods from local retailers are forever gone.   The bottom line is that these dimensions of change have exposed serious limitations in the legacy tools’ ability to meet the needs of today’s S&OP activity.

Each of the new dimensions of change outlined above have increased the importance of the capabilities outlined in the white paper.  With the increase in demand volatility and shorter product life cycles, a more frequent S&OP cycle helps to drive smaller course corrections and, therefore, reduces risk along several financial dimensions.   The outsourcing dimension demands an effective strategy for data acquisition and collaboration so that liabilities and opportunities are identified accurately and evaluated as part of the process.  In addition, few of the legacy tools being used today provide an ongoing foundation for monitoring S&OP execution and alerting the organization to critical variations.

While a more frequent S&OP cycle reduces this risk, the very best companies will leverage alert and collaboration capabilities to respond immediately.   Lastly, in the area of creating multiple simulations and evaluating the results, the legacy tools have serious limitations in one or more of the following areas:

• The range of variables that can be considered in the simulation
• The ability to compare the results of the simulations along any performance dimension desired
• The number of simulations that can be evaluated simultaneously
• The depth of the data included in the simulation (does it include all of the supply chain partner data?)

So if companies want to achieve world class results in today’s business environment they must acquire a tool that includes the four key capabilities.

The latest edition of the IndustryWeek Manufacturing Business Challenge – entitled “Plan for a new (supply chain) plan” – is now available. 

This edition features a company struggling to keep up with the pace of change.  They are seeking ways to improve their supply chain planning processes.  Solutions are proposed by Kinaxis and PRTM.

You can find access to all of the prior Manufacturing Business Challenges here.

IndustryWeek recently published an article entitled “Demand Planning: A Game of Chance or Strategy?“  A couple of things jump out when reading this article.

1. Need for better customer collaboration – They key to getting better forecast accuracy is to really understand your customer. For vendors, it’s the customer who holds the trump card … they are the ones who control what ultimately is going to happen (i.e. they are the ones that are selling your product). As a vendor you have to get into their heads and understand their business – who they sell to; how much they sell to their customers; how much you sell to them; what forecasting bias do they have; etc. It’s only by collaborating with your customer will you be able to understand them. Granted the unexpected will always happen, so having a good process in place to respond effectively and efficiently is important as well.
2. Need to break down the silos – far too often things are flung over the wall for someone else to “deal with”. For example, forecasts are flung over to the master schedulers to make happen, inventory policies are set by the inventory management group … seems tough to figure out how this type of execution can ever work. Groups need to get together and coordinate their activities.
3. Need to measure – it’s well and good to drive to the best forecast while respecting inventory policies; you have to take various measurements. For example, measuring forecast accuracy for each customer on a continuous basis allows you to adjust their forecast. In other words, it will give you a sense of their forecast bias.

Is our e-mail centric world the cause of not communicating with one another? Are we now simply content to say “I sent you an email”? Email is a great collaboration tool … the ability to communicate globally 24×7 has really extended a vendors reach. But in the end this is about collaboration – the ability to get together and solve issues … it’s not about sending something over the wall. Applications that integrate demand data, supply data and product data into a single instance and provide views that are specific for each of the groups will allow for far better collaboration – resulting in better customer satisfaction.