Archive for November, 2008

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I was intrigued by the cover page story in The Economist this week, titled “All you need is cash”.  While fleetingly wondering if The Economist had to pay royalties to the Beatles, I was more interested in their analysis of the changes occurring currently in our attitude toward cash management, particularly the attitude toward leveraging debt. 

Over the past decade the attitude of the markets, and consequently that of Finance, has been that cash is bad.  Right now the companies most leveraged are in serious trouble to finance their operations let alone refinance their debt.  The Economist relates this attitude to cash loosely to lean manufacturing and lean supply chains, where cash is the equivalent of inventory and must be reduced to a minimum.  While from an accounting perspective inventory and cash are viewed as assets, and therefore roughly equivalent, any operations person will tell you that inventory is a liability, especially finished goods.  As I have expressed in a previous article, a negative cash-to-cash cycle is the equivalent to debt:  Finance loves it, but it increases the risk enormously, especially when it is a financial instrument rather than an operational instrument.

I posted a response to The Economist article, the text of which is below.

## My Comment ##

While there is a lot of good analysis in the article, and some in the commentary, I do want to comment on the one sentence devoted to Lean manufacturing.  There is no doubt that Lean increases the risk of shortages in times of uncertainty.  The whole point of Lean is to have a repeatable and smooth process, especially when coupled with Six Sigma.  There are well recognized ways to “right-size” inventory to accommodate variability and uncertainty, both of which have increased because of the credit crisis. 

Too often in the West we have taken Lean to mean zero inventory.  This behaviour started with the US car manufacturers forcing their suppliers to adopt VMI without ever improving processes, the result being that the suppliers had to finance large inventories while the overall system inventory did not go down.

At the same time it must be noted that buffer inventory is there to buffer against demand and supply uncertainty.  Too often inventory targets were set on a “just in case” basis.  Applying Lean principles well and across tiers of the supply chain has reduced inventory.  What better way to free up cash for operations.

However, all too often Finance has forced Operations to set inventory targets that are too low, greatly increasing the risk of supply disruptions.”

My colleague, Randy Littleson, posted an article recently about a Fortune article on Tim Cook, the COO at Apple.  While the article, in my opinion, places too much emphasis on improved financial performance based upon the reduction of inventory, it also emphasises how much operational improvement has gone hand-in-hand with the reduction in inventory, including both opening the Apple stores, thereby getting a better view of “true” demand, and of outsourcing manufacturing, thereby gaining more supply flexibility.  In the process Apple has been able to “right-size” their investment in inventories.  Without the operational improvements, the financial improvements would have been difficult to sustain.

I do still worry about the manner in which Apple uses their market presence to force payment terms on their customers and suppliers which results in a negative cash-to-cash cycle.  This is a financial instrument which forces an extra burden of cash financing on the Apple suppliers.  Not only have they had to take on more inventory liability and carrying costs, but they have to finance long payments terms.  I do not believe this to be in the long term benefit of Apple, let alone their suppliers.

Ventana Research recently published a white paper entitled “Beyond the supply chain plan” that is available for free at our website here.  Below is an abstract for the paper:

The high degree of volatility in the world economy over the past several years has undercut companies’ expectation that their demand and supply chain plans will remain intact. Supply Chain Planning does not stop with creating a plan; it also requires being ready to change it. Since the only constant in business is change, your organization must be able to adapt quickly to the dynamic environment. Ventana Research proposes nine key questions to ask yourself to get a sense of the opportunity your company has for improving its supply chain planning process.

I then had the opportunity to interview Robert Kugel, senior vice president and research director at Ventana Research, the author of the paper to discuss why they wrote the paper and some of the key insights from the paper.  You can listen to the podcast here.

Came across this good post entitled “Companies don’t compete; supply chains compete” which attributes this quote to the CIO of Nortel.  I’m not sure you’d get everyone to fully agree with this given how many other pieces there are to the puzzle, but I think it’s more true than not.  Worse yet, I think there are way too many important people that wouldn’t believe this at all.

I think in many companies supply chain management is that essential component of the machinery that makes a company function that is frequently overlooked.  A case in point is Apple.  Apple is justifiably renowned for it’s product innovation/design and marketing prowess.  But, Apple wouldn’t be Apple without excelling at supply chain management.  Yet, nobody talks about that…unless something goes wrong.  In a rare behind-the-scenes look, there was just recently an article published talking about the “operations wonk” that is second in command at Apple and responsible for their supply chain excellence (see Supply chain excellence at Apple).  I’m sure nobody outside of Apple and his direct family knows that Tim Cook is that person.

As more and more companies compete on a global basis and have supply chains that span the globe, your competitive position in the market increasingly does depend on your supply chain management prowess.  Excellence in supply chain management dictates significant aspect of customer satisfaction, operating performance (margin, inventory, etc.) and many other key performance indicators (KPIs) that determine the health of your company.  And these are critically important because they determine the amount of available cash and investments you can make in launching new products, opening new markets, etc.

It’s unfortunate that supply chain management too frequently gets viewed in a tactical way at the most senior levels of many companies.  I think the key to raising the awareness level of the contribution that excellence in supply chain management can deliver is to tie the impact directly to the key performance indicators that the top executives monitor and care about the most.  This is actually a part of the methodology AMR Research uses in determining their annual Supply Chain Top 25 list and they’ve been able to demonstrate the direct correlation between supply chain excellence and these KPIs in both good times and bad.

In case you didn’t see this…

Gartner is conducting a supply chain management survey to understand supply chain dynamics within end-user organizations and, specifically, technology decision making.  Participants that qualify and complete the survey will receive one of five Gartner research reports:

• Evolving to Transportation as a Global Shared Service
• Cost Cutting in Supply Chain Management Applications
• Supply Chain Analytics: Driving Toward Product Performance Management
• Where to Source Technology for Enterprise Planning
• 2007 Supply Chain Management Survey Results

The survey should take between 10 and 15 minutes to complete.  You can access the survey here.

There’s a good post here at Supply Excellence entitled “How clear is your visibility program?“   I found myself nodding my head in agreement as I read through it. Justin makes a lot of points that, if you are a regular reader here, you know I too am a big proponent of as well.  In particular he says:  “In times of uncertainty and rapid change, whether in sales, operations or spend management, fortune favors those who are positioned to confidently take decisive action and efficiently execute decisions.”   He goes on to talk about how data is the currency in this regard, but aptly points out that “Even if you have the data, isn’t it what you do with it that makes all the difference?”  Success is about getting the right information, to the right people at the right time.

Justin writes about this in the context of spend management, but this rings true for all areas and functions of the supply chain, and in fact I would argue that individual programs or solutions for specific silos of the organization makes little sense.  These capabilities (supply chain visibility, data analysis and reporting, decision support) are integral not only to spend management but also to the broader functions of demand management, supply management, supply chain risk management, sales and operations planning (S&OP), etc.   

An integrated system that can provide a holistic view and balance decisions based on multiple dimensions is critical to success in today’s marketplace.  To optimize a decision based on the specific objectives of one area of the business, may negatively affect others to the detriment of corporate-wide KPIs.  So while I whole-heartedly agree with the notion of unlocking data and leveraging analysis for strategic decision making, I believe companies need to take a broader and more integrated view of how to empower their organization with these necessary capabilities.

Kerry Zuber and I were talking the other night and he mentioned how funny Jim Carrey was in Ace Ventura - Pet Detective.  Everyone in supply chain will appreciate this clip as Jim Carrey takes a humorous look at supply chain risk management.  And you didn’t think supply chain management could be funny!

What is your funniest supply chain story?  Post a comment with your favorites.

If you can’t see the above video, try this link.

There’s a good article by Fortune entitled “The genius behind Steve” that profiles Apple Chief Operating Officer Tim Cook.  If you’re an Apple fan as I am, you’ll like the behind the scenes look at one of Apple’s key executives.  If you’re a supply chain professional, you’ll appreciate the prominence that supply chain excellence at Apple gets in the story.

It seems that far too often supply chain excellence is overlooked.  Supply chains are about cost cutting and a necessary evil seems to be the conventional wisdom.  What I found interesting about this story is that it took a much bigger picture view and recognized the strategic value of supply chain excellence at Apple.

Below is an exerpt from the article that illustrates the point:

Almost from the time he showed up at Apple, Cook knew he had to pull the company out of manufacturing. He closed factories and warehouses around the world and instead established relationships with contract manufacturers. As a result, Apple’s inventory, measured by the amount of time it sat on the company’s balance sheet, quickly fell from months to days. Inventory, Cook has said, is “fundamentally evil,” and he has been known to observe that it declines in value by 1% to 2% a week in normal times, faster in tough times like the present.

“You kind of want to manage it like you’re in the dairy business,” he has said. “If it gets past its freshness date, you have a problem.” This logistical discipline has given Apple inventory management comparable with Dell’s, then as now the gold standard for computer-manufacturing efficiency.

We know what you’re thinking: Why dwell on the backroom aspects of such a sexy company? Because that seemingly dull stuff is as important to Apple’s success as the gorgeous designs and ultracool marketing. Forecasting demand, for example, and executing against that forecast, are critical in the computer industry, especially when new products quickly cannibalize the old.

It’s great to see the strategic importance of supply chain excellence getting the recognition it deserves, especially at a company like Apple who is clearly renowned for its products more than it’s operations performance excellence.

AMR Research also recognized Apple’s supply chain excellence this year by naming them the top supply chain in their annual Supply Chain Top 25 ranking.  But it’s not everyday a Fortune magazine focuses on these issues.

I came across an article entitled “A plan to fix the U.S. auto industry” that I found interesting in large part because it spoke to supply chain management’s role in solving the critical problems the industry faces.  I added a comment to the site and have copied it here as well.

## My Comment ##

I like the fact that you focus on some of the supply chain challenges.  Clearly, the first goal is building products consumers want - high quality, fuel efficient, the right styling, etc.  The Big Three have a long way to go there.  But, as you accurately pointed out, the supply chain is an integral part of the system that can’t be overlooked.

Toyota has revolutionized the automotive industry with their adoption of lean manufacturing practices that reverse the conventional flow and focuses on eliminating waste in the process.  Reversing the flow means that instead of “pushing” products out (you build them and push them out to dealers), you build based on customer “pull” (a customer buys a car and that sends a signal back up the supply chain to build another one, which signals to buy the parts, etc.). 

By “leaning out” their processes they can dramatically reduce inventory throughout the supply chain.  The other thing Toyota (and most Japanese/foreign automakers) has led in is its relationship with suppliers.  Like many industries, automotive manufacturing has become an exceptionally outsourced process with parts coming from many suppliers (years ago, Ford, for example, would make all the parts and do the final assembly.  This has changed radically) that span the globe.  Toyota treats their supply chain partners as just that, partners.  Toyota invests substantially in training their partners on their lean techniques and ensuring that they are fully aligned.  At the end of the day, Toyota knows that their supply chain is only as strong as the weakest link and that, despite heavily outsourcing the manufacturing of key components, it is the Toyota name on the end product and, thus, they are fully accountable for the end result.

The Detroit automakers, on the other hand, have taken a very different approach.  They generally treat suppliers as commodity providers of services and focus first and foremost on the supplier that can provide the part(s) at the lowest cost.  It’s not as much as a partnership as it is a “buyer-seller” relationship at arms length.  The resulting differences are profound.

As your article accurately points out, one aspect of reinvention that the Big Three need to face is how the supply chain fits into their overall strategy.

You can see more on this discussion here: “What’s your relationship with your suppliers?“

I found this article today and thought it deserved comment (we’ve commented on this before here - “Not-so-perfect order performance management metric“).  In it, Justin identifies the idea that “Hero Culture” is no way to approach supply chain risk management.  What’s a hero culture?  It’s relying on someone to save the company from disaster in the nick of time. 

• It’s the buyer sourcing a replacement vendor when your primary supplier is on strike in time to make the quarter revenue targets
• It’s the production engineer that figures out how to leverage another piece of equipment to get the product out the door when the primary equipment has broken down
• It’s the marketing guy that figures out how to increase sales on a failed product release

There’s a number of reasons why given today’s environment this approach won’t work;

• The supply chain is global today.  You can’t call the vendor across town to make parts for you, instead you’ll be dealing with some company in China
• Customers just won’t wait. People expect to get what they want when they want it.  If you don’t have the product, they’ll go to the competition
• Shareholder expectations and fiduciary responsibilities dictate that you continue to grow the value of the business while not taking risks

While having smart, innovative people in your organization is always important, we can’t rely on them to save us from supply chain risks.  Instead every organization needs to have a structured supply chain risk management program in place that;

• Identifies and quantifies supply chain risk
• Develops and simulates mitigation strategies
• Continuously re-evaluates risk as product, market position and supply base changes

In case you didn’t see this…

AMR Research is planning a December feature to provide insight regarding steps to create a demand driven supply chain organization. Several of the questions they want to answer include:

1. How have leading supply chain organizations evolved and developed?
2. What are the key phases of organizational maturity?
3. What opportunities exist that tie demonstrated performance to effective organizational design?
4. Guidance on best practies in the construction, development and implementation of a demand driven supply chain organization

They have launched a 10 minute survey in order to collect survey information.  You can access the survey here if you’d like to complete it.  If you have questions, you can send an email to David Acquino.