Archive for January, 2009

Deloitte Consulting has published a new report (you can access/download the report here) that outlines ten suggestions for squeezing more working capital from your supply chain.  The ten suggestions are (the report provides more detail on each of these):

1. Focus on the cash-to-cash conversion cycle
2. Think like a CFO
3. Focus on inventory reduction (a theme I’ve been hitting on here and here)
4. Extend payables, intelligently
5. Manage and expedite receivables
6. Audit payables and receivables transactions
7. Consider alternate supply chain financing options
8. Ensure you have a robust framework for managing supply chain risk (another frequented topic here and here)
9. Eliminate fixed costs
10. Think beyond your four walls

Worth checking out.

Today’s headlines are full of confusing statements about the true status of US gross domestic product (GDP) numbers.  Take these  examples:

• U.S. GDP: Less ugly than feared (Forbes)
• The worst is still ahead of us (MarketWatch)
• Economy: Sharpest decline in 26 years (CNNMoney)

But the interesting commentary is below the headlines:

• Though the GDP figure beat pessimistic expectations by a wide margin, excessive inventories levels may have distorted the reading. “Rising inventory levels are considered to be a business investment, so they add to GDP,” said Joe LaVorgna, chief U.S. economist at Deutsche Bank, on Thursday, in advance of the data. If consumption suddenly stalls, inventories pile up, and in such an environment, GDP will be pumped up deceptively.
• Inventory building, while it technically adds to growth, is the last thing we need right now. The more businesses overstock now, the more they’ll have to reduce the orders for new goods later, and the more manufacturers and others will have to cut production and employment. It’s extremely rare for the economy to contract as violently as it did in the fourth quarter without a large drawdown in inventories.
• Faucher and other economists noted that the biggest surprise in the report was the sharp growth in business inventories.

As I commented the other day in this post “Inventory cycle critical to economic recovery” inventory control is the thing to be watching right now.  It’s exceptionally hard to balance supply and demand in the midst of so much volatility and uncertainty.  As a manufacturer with likely outsourced operations (I say that because the majority of manufacturers outsource at least some manufacturing today), you need to start with supply chain visibility.  If you don’t have an accurate accounting of where all your inventory resides (raw materials, work in process and that most expensive finished goods inventory) you’re most likely exacerbating the problem by making “blind” decisions that compound the problem.

The conventional wisdom right now is that cost cutting is the imperative.  Of course this is important, but what’s happening to inventory can have broader implications (and, of course, contributes to cost).

PRTM has released new research talking about the fate of gloablization in light of the current economic turmoil (you can access the report here – free registration required).  One of the first things the paper talks about is how companies are building adaptable supply chains to reap benefits and manage supply chain risk.   According to their research, “Sixty percent of the study participants say the lack of supply chain flexibility is a major barrier to sustainable globalization.”

The paper also outlines PRTM’s views on the top 10 major global supply chain trends for 2009.

I think the current economy is forcing everyone to rethink their globalization strategy.  Long-term thinkers are going to cut costs while positioning themselves for the renewed growth that will eventually come (I still believe it will come!).  Short-term thinkers will just look to cut costs.

I’ve been a long-term believer that out of every crises like we’re in right now there are critical lessons to be learned.  Our systems had gotten out of balance and markets have a way of breaking under such imbalances – which is what we’re seeing now.  The key is to fix the structural imbalances to make the system stronger coming out of this than it was before.

The same is true for a company’s supply chain.  Manufacturers are no doubt finding new weaknesses in their supply network that are cracking or outright failing under the pressure of this economy.  It might be in the way your company was forecasting demand based on historical data that is no irrelevant.  It might be in your suppliers that you thought were strong and able to meet your needs but no longer can.  Whatever the situation, there are lessons to be learned.  Long-term thinkers are not just cutting costs at random, they are cutting back while learning and repositioning for the future.

What is your company’s perspective – short-term or long-term?

This morning we put out a press release announcing that Lockheed Martin is deploying Kinaxis RapidResponse to achieve superior supply management.  Lockheed Martin chose RapidResponse because the solution will help complement their highly complex supply chain infrastructure in dynamically aligning demand and supply.  Lockheed Martin is an SAP shop and they will use the initial deployment of RapidResponse to empower  supply chain participants across various functional groups with tools to model ERP/MRP data to instantly simulate, share and score countless “what-if” supply and demand scenarios.

Below is a picture of the F-35 (the full name is the F-35 stealth multi-role international coalition fighter), one of the jets that Lockheed Martin makes (you have to admit, that is one cool looking jet!).

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Lockheed Martin Corporation to Implement Kinaxis RapidResponse for Superior Supply Management

Ottawa, Canada, January 29, 2009 – Kinaxis™ Inc., provider of the on-demand RapidResponse service that empowers multi-enterprise manufacturers with the collaborative and integrated demand-supply planning, monitoring, and response capabilities required in today’s complex and dynamic world, today announced that Lockheed Martin Aeronautics Company, Ft. Worth, TX, a business unit of Lockheed Martin Corporation, an aerospace and defense (A&D) industry leader, will deploy the Kinaxis RapidResponse solution.

Lockheed Martin Aeronautics is engaged in the design, research and development, systems integration, production, sustainment, support and upgrade of advanced military aircraft, air vehicles and related technologies. Its customers include various government agencies and the military services of the United States and allied countries around the world. Major products and programs include the F-35 stealth multi-role international coalition fighter; the F-22 air dominance and multi-mission stealth fighter; the F-16 multirole fighter; the C-130J tactical transport aircraft; and the C¬5 strategic airlifter. Lockheed Martin is a major supplier of logistics systems and lifetime support and performance-based logistics services to military and civil government customers.  The corporation provides solutions for platform maintenance, modifications and repair, material readiness and distribution, and global supply chain command and control.

Lockheed Martin Aeronautics chose RapidResponse because the solution will help complement their highly complex supply chain infrastructure in dynamically aligning demand and supply. With RapidResponse, a broad base of users are able to access accurate and detailed supply chain information in an easy-to-use spreadsheet interface that is embedded with powerful MRP analytics and automatically populated with live data feeds from ERP and planning systems across the extended enterprise.  With the initial deployment of RapidResponse scheduled for early 2Q09, supply chain participants across various functional groups will be able to model ERP/MRP data to instantly simulate, share and score countless “what-if” supply and demand scenarios.

Bob Rearden, Aeronautics Vice President of Supply Chain Integration at Lockheed Martin offers that, ”In the near term, RapidResponse will aid us in prioritizing replenishments as we provision material consumption on the factory floor.  Long term, we envision using this tool to enhance our reporting and decision-making capabilities.”

“To compete in the extremely competitive global A&D market, companies must be able to use their inventory and engineering resources efficiently, deliver greater value and be more responsive to their customers’ needs than ever before,” said Randy Littleson, vice president of marketing at Kinaxis. “We are proud that RapidResponse has become a proven solution to a multitude of pressing supply chain management challenges in the A&D market, as it has in other industry verticals.”

About Kinaxis
Kinaxis™ RapidResponse is a single on-demand service that empowers multi-enterprise manufacturers with collaborative and integrated demand-supply planning, monitoring, and response capabilities. RapidResponse embraces human judgment to enable planners and front-line responders to handle unpredictable changes. Global leaders such as Casio, Honeywell, Jabil, Qualcomm, and Raytheon use RapidResponse to achieve breakthroughs in sales and operations planning (S&OP), demand management, supply management, and supply chain risk management. The results are superior customer service, improved operations performance, and a competitive market advantage. For more information, visit the Kinaxis web site at www.kinaxis.com or the company’s blog at www.21stcenturysupplychain.com.

At a recent Sales and Operations Planning (S&OP) conference, I was given an introduction into the planning challenges facing a company in a very dynamic market. Imagine a product where geographic boom and bust cycles regularly take place, you have to satisfy dozens of retail channels but one customer constitutes 40% of all North American volume, you need to come up with a completely new product incorporating new, green, high-tech materials every 12 months and you outsource all of your manufacturing and distribution.

So, what comes to mind? Cell phones? Nope. Running shoes? Think again. It’s actually the disposable diaper market. Like electronics, there is constant pressure to introduce new products that perform better and can be made more cheaply than their predecessors. Think that diapers are lightweight in terms of product complexity? The Huggies Ultratrim alone is protected by over two hundred patents. Introducing a new ‘chassis’ (the main body of the diaper that receives what those in the trade delicately refer to as ‘the insult’) that can perform properly and measure no more than seven by thirteen inches mean diapers are a modern engineering marvel. So, move over iPhone and Blackberry;  when thinking dynamic, think diapers!

We got asked via twitter about the article entitled Bankruptcy fears grip auto-parts suppliers (at the Wall Street Journal – registered required).  The question was, “what would you tell the auto industry suppliers?”

There are deep structural issues in the US  and European automotive industry that are beyond the capabilities of any software solution to address.  Without addressing these the industry is doomed to a slow death.  The additional stress of the current economic environment only exacerbates these structural issues and leads to the situation as described in the article.

As long ago as the mid-1990’s the return on working capital for the auto suppliers was the lowest for any industry.  The OEM’s were only slightly better.  Visteon has had a precarious existence ever since it was spun off from Ford, largely because Ford saddled it with very large retirement and healthcare obligations.  A search of OneSource shows that Visteon has not made a profit in any of the years since 2003, and likely for many years before that too.  Visteon’s operating margin was only positive in 2006.  Lear is slightly better off having returned a profit in 2007, 2004, and 2003.  A quick analysis of most of the auto suppliers will show a strong similarity.  Some data for Visteon is shown below. A key indicator is the Quick Ratio (QR) which is a measure of company’s short-term liquidity and therefore of keen interest to any lending institution.  As a quick comparison, Apple’s QR is 2.43, Google’s is 8.08,  and Cisco’s is 2.54. , meaning they are far more able to service short-term debt.  Admittedly these companies operate in different industries.  Nevertheless the QR difference shows why the auto suppliers are finding it difficult to raise cash and the systemic issues with the industry.

Kinaxis RapidResponse can, and does, assist companies in reducing their need for working capital, by reducing inventory, while maintaining or improving customer service.  While this may not be sufficient to overcome the industry’s structural issues, these capabilities are key to reducing a company’s reliance on borrowed capital, which in turn is the major obstacle to their survival.  It must be recognized that these companies are in dire financial circumstances and therefore it may be too late to prevent them from going bankrupt.  Deploying RapidResponse during Chapter 11 would be a key element in ensuring that they emerge from Chapter 11 quickly and in a sustainable manner, assuming that the structural issues have been reduced if not eliminated.

The key capabilities that RapidResponse provides are:

• Visibility – across multiple tiers of a multi-enterprise business network
• Alerting – to unexpected events, the consequences to these events throughout the supply chain, and the identification of the people responsible for the addressing the consequences
• Collaboration – between the relevant stack holders to discuss and agree to alternatives for addressing the issues
• Evaluation – of the alternative scenarios in a balanced scorecard that includes the financial and operational key performance indicators side-by-side
• Resolution – through a collaborative environment that allows all stake holders to understand the benefit to the organization of adopting a particular resolution

These capabilities speed up the transmission of demand or supply changes throughout the supply chain meaning that companies can not only reduce or eliminate the inventory that they are keeping “just in case”, but they can also capture what demand they are seeing in a rapid and effective manner.  Many companies in the High-Tech and Electronics arena, leaders in outsourcing and contract manufacturing, have deployed RapidResponse to maintain control of the supply chain even though they have outsourced their manufacturing.  With the continued adoption of off-shoring and outsourcing in the auto supplier space, these are key capabilities to reduce working capital requirements while maintaining operations performance, just what the auto suppliers need.

Over at the Infosys supply chain management blog, which is a very good blog by the way, they are conducting a poll asking what your organization’s top priority is for supply chain investment in these tough economic conditions.   If you register while taking the poll, you get a free AMR white paper on thriving in a recession.  Seems worth checking out.  The current results are below:

Given the incredible uncertainty around demand right now, I can’t say I’m surprised.  However, I hope the investments aren’t predominantly on statistical demand forecasting solutions that predict future demand based on an analysis of past demand patterns.  While this is certainly an appropriate input into the development of a consensus forecast, the past is very unlikely to help you understand today’s demand.  I wonder if the results would have been different if they had separated out demand planning from demand management – where the latter emphasizes the balancing of supply and demand.  I also noted the strong showing for supply chain risk management, another area that we’ve talked quite a bit about here.

I would encourage you to go and vote – it’s interesting to see what others are focusing on and I’m sure the AMR report is well worth the time as well.

A word you often hear following the term “risk” is “reward”. You know – when you compare the expected gain from an investment to the amount of risk undertake to capture that gain. So what’s the reward to having a risk management strategy? Early during my read of the “Essential Characteristics of Supply Chain Risk Management Strategy” whitepaper, I found myself remembering some of the more famous catastrophes in recent history. The Kobe, Japan, 1995 earthquake was devastating to those people in its path, killing more than 6,000. From a business perspective, it destroyed over 100,000 buildings, crippled Japan’s largest port for months, and sent many large corporations scrambling to respond and recover from what had happened. Toyota found themselves with over 20,000 automobiles unable to ship due to the damage. Hurricane Katrina compromised 5 major ports in the Mississippi River basin – effectively halting operations responsible for 450 million tons of annual cargo. Such epic events can destroy companies in a single instant!

I guess “to survive” is the reward.

This paper does a great job of describing where risk is introduced into the supply chain, and why it has become more topical in executive boardrooms of the manufacturing enterprise. Each contributing element, such as global outsourcing, pandemic, volatility and variability of demand, terrorism, tighter logistics capacity, etc, when combined with one another form a substantial risk profile. Come to think of it, I see two distinctly different categories of supply chain risk here – the deep cut that results in instant and massive impact to the business, such as a hurricane, or pandemic, or destruction of a sole source supplier of materials; and then there are the hundreds/thousands of seemingly minor unexpected events that occur each day that, by themselves, do little damage to a company, but when left untreated for weeks/months on end, can result in an equally massive impact. Both categories of supply chain risk require different mitigation approaches. In the latter case, having a formal detection system capable of alerting appropriate stakeholders in well-enough time to recover would limit the risk exposure, and such technologies are readily available for any sized company. Risks from epic catastrophes, however, also require significant thought to supply chain design, supplier selection, and, what is often overlooked, proper insurance policies guaranteeing companies will have the necessary working capital to recover.

As this paper suggests, companies are operating under significant and increasing risk profiles. Those enterprises that choose to operate without a safety harness may find themselves out-valued by those companies that adopt a thorough supply chain risk management strategy.

Just read a very interesting article at MarketWatch talking about the impact inventory has on any economic recovery.  The article states:

Every other time in the modern era that the U.S. economy has contracted more than 5% in a quarter, falling inventories have been a major reason, if not the single biggest factor. Usually, really bad recessions are worsened by the need for companies to get rid of all the stuff they made but nobody bought. Once the inventories are sold off, the economy can grow quickly again because idled workers are called back.

But so far in this recession, the inventory cycle hasn’t been a major factor, outside of the housing and auto sectors. That means that we can’t look forward to a quick reacceleration as the inventory cycle turns. This recession is rooted in a severe credit squeeze and a fundamental readjustment in consumer demand, not in the typical inventory cycle.

I fundamentally come down on the side that inventory is bad.  Despite the fact that accountants treat inventory as an asset, I believe in today’s heavily outsourced, global and rapidly changing supply chains (volatile demand, short product lifecycles, etc.) inventory is a net negative.  Yes, inventory is a part of your ability to deliver on customer satisfaction goals, but I find too many companies go well beyond this and end up with excess and obsolete inventory.  In essence, they often have the wrong thing in the wrong place at the wrong time.  And, too often, companies don’t even know where all the inventory is.

I believe these reasons are, in part, contributing to manufacturers’  inability to shed the inventory as quickly as they would like.  While the article talks about the root causes of this recession, at the end of the day demand is down in virtually all industries which will create an inventory glut unless capacity is ratcheted back and existing inventories are used up.  I’ve seen mixed reports on how quickly this is happening.  But, the implications are pretty straightfoward – the more inventories are burned off, the greater the prospect for a v-shaped recovery when things do start to come around (see more on this discussion here).

If you haven’t seen their list yet, Manufacturing Insights has published their list of supply chain predictions for 2009. You can find the full list here.  According to Manufacturing Insights, “given the challenging economic environment in 2009 and manufacturers’ intentions for austerity in IT investments, Manufacturing Insights offers the following supply chain predictions for 2009:”

• Prediction #1: Companies will exploit well-performing existing tangible and, especially, intangible supply chain assets to ride out the financial crisis and prepare for recovery.
• Prediction #2: Modern Supply Chain organizations will put expenditure budgets under greater scrutiny and new investments will be cost-savings focused, requiring shorter payback periods.  Expenditures will be made through the lens of cost/value.
• Prediction #3: Companies will “right size” their supply chains for profitable proximity and take a total-landed cost approach to product sourcing.  Standard corporate platforms will seek to configure, calibrate, and control increasingly complex scenarios.
• Prediction #4: Supply chain technology initiatives must support the standard business platform and focus on modernization and decision making
• Prediction #5: Economic uncertainty, particularly for smaller suppliers in emerging economies, causes manufacturer ‘brand owners’ to consider strategic investments at critical supply points and financial support for key suppliers.
• Prediction #6: CRM and consumer-centricity efforts continue to grow across the Modern Supply Chain as manufacturers attempt to provide the right kinds of innovation and new products.  The sale is just the start as services become an increasingly important part of the ‘product experience.’
• Prediction #7: The high 2008 year-end inventory levels will cause manufacturers to look at supply/demand rebalancing with a focus on strategic network optimization and multi-echelon inventory optimization tools, and where industry-relevant, price and trade promotion management/optimization.
• Prediction #8: Compliance-driven RFID initiatives continue to wane in favor of ROI-driven asset-tracking and security applications as manufacturers increasingly look at RFID as ‘just another tool in the toolkit.’  One consequence of this will be continued vendor consolidation in an effort to provide end-to-end applications and deeper industry-specific expertise.
• Prediction #9: As global economic pressures mount, outsourcing opportunities proliferate and global supply networks become more complex, risk management becomes both an increasingly significant capability and a key differentiator for the Modern Supply Chain
• Prediction #10: Sustainability discovers metrics.  No longer a “feel good” public relations proposition or even a regulatory compliance mandate.  Emerging standard measures and a desire to benchmark will impact sustainability initiatives and the associated investment in technology and services.

We’ve been talking about supply chain risk management quite a bit lately, in large part because we see supply chains growing increasingly complex and, when combined with the effects of the economy, we’re seeing supply chain risks on the rise.  This is certainly supported in the Manufacturing Insights predictions.