Archive for March, 2009

Please visit the video series site “Married to the job: supply chain got you shackled?” for more information on the series, to sign up to get updates on the series, and more.

John Westerveld has a great point in his blog post The right supply chain management priorities during the downturn position you for future success. For companies that want to make improvements now to be in better competitive position when the market recovers, there are several decisions to be made about which processes and tools to improve.

It’s amazing to see how many large multi-billion dollar operations still find themselves caught in the vicious cycle of widely using Excel spreadsheets. Some of them, recognizing that Excel is not the right tool and was not developed to be used in place of ERP systems look for alternatives that will enable them to become mere spectators in the planning and execution process.

I wonder how much thought companies typically give on deciding the amount of automation they want in their decision making process and how much is appropriate for the types of decisions that will be impacted by the new system.

I came across this Map of Technologies for Decision-Making, used by Professors Dwight Gertz and Tom Davenport at Babson College in Massachusetts. The picture proposes 2 dimensions that companies can use to organize their thinking about decision-making automation: the chart shows complexity of work in one axes and level of collaboration required in the other. This map can be used to analyze whether an organization is using or selecting the right technology and the right process given the nature of the decision they expect to support.

I believe that even in cases where the conclusion is that the process can be fully automated, companies need to be careful when planning for radical switches from fully manual to fully automated, for two reasons. First, it may require considerable change management effort to make everyone comfortable with all the calculations running behind the scenes; in some cases, a phased approach allows for increased confidence and hence better support to the project and better tool adoption (if you are not careful everyone will go back to the spreadsheets!). Secondly, even when you do a good job in the planning stage you should still expect to have to accommodate changes to the tool design during implementation: you’ll most likely see things differently and identify improvements. In addition, you need to ensure internal knowledge and documentation of how the analytics work so that, over time, as the business environment changes you know where to go and which setting to tweak in order to keep your system running up to date. Ideally, you’ll build in a process that would sense and identify the need for process reviews.  And you need to make the reviews when alerted, otherwise you may experience a version of the subprime mortgage fiasco, if you ignore the signs.

In any case, deciding what and how to change is a highly collaborative and judgmental decision, so don’t expect to find a tool to automate that one!

On the lighter side…you know you have an inventory problem at work when:

1. Trucks with incoming material mysteriously get lost and don’t make it to the receiving dock until the day after the end of the month.
2. The inventory analysts go around with crowns on their head to remind them that Cash is King.
3. You have multiple ways to define an inventory turns metric.
4. You automatically calculate the carrying cost of your groceries when you go shopping
5. Product marked as ‘sold’ hasn’t quite made it out of your building or invoiced
6. You take a few liberties categorizing the inventory… expense, capital or sales??
7. You suddenly have an increase ‘in transit’ inventory and some of it is in the middle of the ocean
8. Your best customer is called ‘We Haul Your Junk’
9. You go to bed counting inventory bins instead of sheep
10. The Job description of your Buyers in the Procurement dept has changed to Sellers

A new article in IndustryWeek entitled “Customer demand seen as main financial obstacle in 2009 for industrial manufacturers” cites research from Prime Advantage that found a whopping “93% of CFOs say an inability to measure customer demand is among their top three external concerns.”  Interestingly, while the credit crunch is getting most of the headlines, it is only indirectly a primary threat for these companies.  It’s the impact of unpredictable demand patterns that is a much bigger direct issue.  In fact, 76% of the respondents cited demand uncertainty as their top concern.

The article mainly focuses on what the CFO’s perspective is and what actions they will be taking given these uncertainties.  But, what does this mean for supply chain management professionals?  Clearly, there is a linkage in that the CFO often defines the macro-conditions and key performance indicators (KPIs) for the entire company, including operations performance metrics managed by supply chain management.

As a result, most supply chain management professionals today are very focused on cost reductions, and these most directly tie to inventory reductions throughout the supply chain (by the way, if you’re interested, we just released a white paper on this topic entitled “Inventory rationalization and right sizing strategies“).  Fundamentally the challenge is one of regaining alignment between supply and demand in an environment where demand is very unpredictable and supply may be disrupted.

There  are some key things companies are doing to try to address these challenges, to name a few:

• Ensuring supply chain visibility into multi-enterprise, multi-tier supply chains since inventory control and responding to unplanned events is very much a function of knowing what is where and what state your supply chain is in at any moment (and making sure everyone has that same set of facts)
• Becoming exception-driven by ensuring that front line decision makers can define alerts and thresholds to proactively notify them of exceptions that could negatively impact the business.  Shortening the time to know about a problem drives faster response and reduces the magnitude of impact.
  
• Enhancing collaboration with both customers and suppliers to reduce latency of information and decision-making.  Co-planning and response management at both ends of the supply chain help to mitigate the ripple effect of unplanned events that are increasingly common.
• Knocking down silos internally to ensure that demand and supply are looked at together – by everyone.  For years organizations have been created with separate demand planning and supply chain planning teams with tools designed for each of their needs.  The new need is to integrate these efforts more closely together to ensure that everyone sees the immediate impact of demand on supply and vice versa.
• Aligning supply chain management decisions with the financial metrics of the company.  In the midst of constant change, decisions must be made “in the trenches” quickly throughout the day with insight into their impact on key performance indicators.
  

The CFO has an excellent overall view into the business.  They also inherently know what the impact of demand uncertainty will have on the business.  Where many companies struggle is to tie financial planning metrics down to the operational level, where day-to-day decisions are often made that impact these metrics but also must take into account a host of other issues (such as customer satisfaction, which finance doesn’t focus on).  The key challenge for organizations is to translate these financial metrics into their day-to-day supply chain management decision-making.

I can’t tell you how many times I have heard companies complain about the integrity of their supply chain data. They wonder “how can I ever benefit from a software solution when I can’t believe my data?”  My first response is “You are right. Garbage in…Garbage out.” What companies don’t seem to realize is that they are working with that bad supply chain data today!

Who remembers Oliver Wight and his book “Manufacturing Resource Planning: MRPII (1995)?” Yes, I am dating myself but it was our bible when we implemented MRPII principles at my company.  He recommended that companies should not even install MRP until they have met certain standards in data integrity. It seems that adherence to these principles has fallen by the way side.  Let’s face it – the world has changed since the inception of MRP. Demand and supply are more volatile, supply chains are more distributed, customers more demanding and there is fierce global competition. Those in supply chain management appear to be spending a significant portion of their day gathering the information they need to make decisions. The ability to deal with data integrity issues has unfortunately gone on the back burner.

It is therefore important that you have a supply chain management software solution that can help you manage both the challenge of consolidating disparate supply chain data for decision making as well as data integrity. If those responsible could be instantly alerted to a few data issues every day this is easily manageable and data corrections become an integral part of their job. I am sure that too many companies today are treating their data integrity issue as a monster in the closet that they need to deal with some day. Keep it simple – make it a part of a process and empower people with the right tools to manage it. As one of our clients said the other day “Consider data as an asset…not a liability.”

We’ve just published our latest white paper entitled “Inventory rationalization and right sizing strategies.”  We hope this paper is timely in that we continue to hear cost and inventory reductions are the number one priority for most supply chain management professionals today.

Here is the full abstract for the paper:

When examining the crucial factors that are influencing operations performance during these tough economic times, inventory exposure is a topic raised frequently.

Appropriately rationalizing your company’s inventory management strategies is of vital importance to business performance. Too much inventory, or inventory which is poorly positioned, can result in impacts on cost and cash flow that can be potentially fatal in the current business climate. The goal of an appropriate inventory strategy is to ensure that you can maximize your opportunities in the market place with as little inventory as possible. This takes a clear understanding of the various factors that should be considered including product positioning, demand volatility and supply chain disruption risks.

Download the whitepaper to learn more.

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Gary Lynch
Global Leader, Supply Chain Risk Management Practice
Marsh

Mr. Lynch is Global Leader of Marsh’s Risk Intelligence Strategies and Resiliency Solutions practice. He is responsible for developing the organization’s risk intelligence capabilities and offerings, as well as aligning and enhancing the firm’s various risk strategies, supply chain, and business continuity offerings. Additionally, he is responsible for developing thought leadership around emerging issues such as pandemics and terrorism.

Mr. Lynch has 28 years of experience in the IT & operational risk management profession. He served as the business continuity and information security executive-in-charge at The Prudential and Chase Manhattan Bank (now called JPMorgan Chase). As a partner at Booz Allen Hamilton, he was responsible for the operational resiliency and Information assurance practice. He also served as research director and industry analyst at the Gartner Group and was responsible for launching one of the firm’s most successful service offerings.

You can also listen to a podcast of this interview at “Getting supply chain risk management right.”

Kinaxis: Is there a supply chain risk management maturity model?  If so, can you describe it and explain how organizations have generally matured in this regard?

Gary: From my perspective, unlike some other disciplines — quality, even continuity as an example — there tends to be a lack of a mature or widely accepted maturity model.  Theoretically, there are different models — for example, some of the guides that are issued in the SCOR (Supply Chain Operations Reference) model are certainly gaining some acceptance—but by no means is there a globally accepted model.  To be globally recognized, the fourth element of any market – clients must reference one another – must be satisfied.

I think how we’ve seen the topic of supply chain risk management mature is interesting because there seems to be two schools of thoughts.  Those in the risk profession have seen an evolution with regards to low probability, high impact events: catastrophic recalls, catastrophic natural hazards – event-driven if you will.  That kind of risk management tends to try and tackle these events through extensive business continuity, emergency planning and crisis management.

And then you have the other camp at the transactional level —which is your operations, logistics, procurement, sourcing executives, even your operations finance executives and CEO for that matter—who are looking at the capital invested in the business, the return on that capital and the daily risk associated with managing the business and many suppliers.

So you have two schools that are maturing the discipline at a very accelerated rate. But it is only within the last three to five years where we have seen acceleration.

One area in particular where we have seen some great strides is greater risk management around the supply base and the suppliers themselves, both at the event and transactional levels. We’ve seen common criteria really coming forward for evaluating and setting expectations with suppliers, and insisting on greater transparency upstream the supply chain.  Unfortunately, the majority of the industry is still viewing supply chain risk management as management of just the suppliers and not of the entire value chain.

Another area where we have seen some maturing is around managing risks to the physical assets and the risk to those physical assets, such as a facility, inventory, and/or key pieces of equipment.

One of the gauges of maturity is if the discipline matures to the point where it can be measured. Then you have the financial markets interested in underwriting that risk, whether it is catastrophic bonds or whether it is contingent business interruption or business interruption insurance.  And we are seeing this today.

Kinaxis: At the day-to-day transactional level, how do you separate out risk management from day-to-day operations?  What is the elemental difference between managing your business and managing it from a risk perspective?

Gary: I think the short answer is – you don’t.  But that’s easier said than done.   Efficiency practices along the lines of lean thinking, or quality practices along the lines of a six sigma, became successful, or had some level of success, when they were fully integrated and began with the demand side of the equation.  I don’t think you can separate the two, nor should you, but at times you do need emphasis and isolation. You do need to create criteria to identify a specific issue, get to a point of concentration where many are looking at the problem, and a dedicated “temporary” organization is driving the initiative with the goal of getting it integrated into the workflow itself.

Kinaxis: So integration is a sign of the level of maturity—being able to integrate it into day-to-day practice, rather than having it as a stand-alone practice?

Gary: Absolutely, and I think some of the industries that have executed on that thinking and have integrated it, or have begun to integrate it well, are the high tech and auto industries.  Industries where we have not seen it as well integrated are the life sciences, retail, food services and construction as examples.

Kinaxis: In terms of the size of organizations, do you find that there is more emphasis on supply chain risk management in large organizations, less in little?  Or do you find that all sizes of organizations are fairly well focused on supply chain risk management at this point?

Gary: We find that there certainly is a lot of discussion and veneer around supply chain risk management and there is a tremendous amount of discussion around managing the risk of suppliers in particular, but from the execution side, I would say across the board it still seems to be a very light practice unless some other initiative is driving it.  So for example, in managing supply chain risks, whether it be from disruptions or environmental implications, we are seeing a lot done in that area, but a lot of it is driven by the opportunity to reduce costs; transportation costs, load costs, things like that.

In terms of a real focus on managing specific risks to the extended supply chain, all the way upstream and downstream —  there are few organizations that are applying that discipline as a whole and trying to overlay it on their supply chain management practices.

I think the organizations that have had the greatest interest and are making the greatest demands are those organizations that face the customers— the hospitals, the retailers — those that are actually on the front end that are touching the customers are the ones that are turning around and setting the demands and expectations of those that are providing them with the goods and services.

Again, I think very little is done in a concentrated way in this space.

Kinaxis: I was interested in your comment that retailers and healthcare are focusing more attention.  Do you think that that’s because of the immediacy of the demand?  In retail, if it’s not on the shelf, you don’t’ sell it. And in an emergency healthcare situation, if you don’t have the medication or the equipment you cannot serve that patient.

Gary: Absolutely, the competition is just absolutely too fierce.  I think it’s really about the pressures; it’s the pressures of added stock conditions, it’s the pressure of poor product quality as we’ve seen over and over again. At the end of the day, you have to look at who’s really taking the heat, not only from a brand perspective but from a financial perspective.  The retailers that have been more conscious and more active are certainly gaining some advantage in that space.

Kinaxis: You’ve mentioned that there’s a difference between dealing with long term or occasional risk and transactional level risk.  Do you find in this period of volatility there is more emphasis in one area rather than another?

Gary: It’s an excellent question and the answer is yes.  I believe there is certainly a lot more emphasis on the transactional level, and in many cases, one-off risk issues.  What I find amazing is that if we would have had this conversation a year or eighteen months ago, we would have been talking about rising commodity prices, rising availability to commodities, and are certain nations such as China capitalizing on that opportunity, and hording commodities?  Our conversation would have been about rising energy costs, transportation, do we move factories because transportation costs have risen so high.  What I find so interesting is that we seldom have those conversations now. The conversation is about the issues around credit, letters of credit, trade credit, trade disruption and to some degree, demand.

Kinaxis: Particularly in discrete manufacturing, people have used inventory as a way of mitigating risk, especially on the demand side. But lean practices have reduced inventory tremendously so they don’t necessarily have the alternative to use inventory as a way of to handle day-to-day disruptions.

Gary: In that case, I think that it puts more pressure on those in the risk profession to ensure that they are really focusing on the metrics and measurement.  If they are going to create the business case for additional inventory they are going to have to be precise as to whether that inventory should be work-in-progress, finished goods or raw materials and why.

Again, I think in all cases, the volatility forces greater measurement both from an impact and an investment standpoint.

Kinaxis: Where do you see technology playing a role in supply chain risk management?

Gary: I think the area most important right now where technology can play a key role is certainly in the visibility of the supply chain — providing some ability to have the correct information to make informed decisions about threats and vulnerabilities along the supply chain.  With technology that’s used to collect the data, understand impact and the implications of the parts, one can look at the whole of the supply chain.

I also think certainly the technology that’s already in use in many cases — whether it’s global positioning or RFID technology —  again, the data that’s collected provides some great inputs from a modelling perspective. Having information more quickly, knowing whether the impacts are large or small, knowing quantities, knowing sources, knowing alternatives; those kinds of issues can be critical but are absolutely worthless without the technology driving it.

We had a good discussion with the folks at Gartner the other day.  During the call, we were comparing notes on the current economy and the impact it’s having on manufacturing and supply chain management.  We were relating that to the current state of a typical supply chain and how increasingly complex they have become.

One of the analysts from Gartner then made the observation, and I’m paraphrasing, that you can never engineer out of a global supply chain all of the problems that could occur.  So, the real challenge is how do you ensure that your supply chain staff have the right tools to do the right thing when these unavoidable problems materialize?

I thought that was a great observation as it is precisely the challenge we see most manufacturers dealing with.  For instance, companies are working hard to improve their sales & operations planning (S&OP) process, yet once “the meeting” is done, they then have to deal with the reality that the assumptions that went into forming the plan often don’t play out the way they predicted.  This macro-trend plays out across the organization.  If you’re on the demand planning/demand management side, you inevitably find (more so now than ever) that your forecast isn’t accurate and you’re struggling to get finished goods to the right place at the right time.  If you’re on the supply management side, you too are finding that it’s increasingly hard to deliver to the supply plan you’ve created, especially when you’re fighting fires all the time because the actual demand you have to deliver to isn’t what was in the plan.

There’s a lot of investment that companies make in trying to engineer all of the problems out a global supply chain.  Strategies like lean six sigma, kaizen, etc. are all worthy investments and it clearly pays to reduce as much waste and engineer out as many problems as possible.  But, I think companies do themselves a dis-service when they don’t explicitly acknowledge that you can’t engineer all problems out a global supply chain and, thus, invest in solutions for this very different type of problem.

Engineering problems out is about process automation, where it actually is beneficial to remove people from the equation in many cases and have systems help automate these functions.  Where things are predictable and you have a static set of assumptions, this is a viable approach.  But, dealing with the problems that you can’t engineer out is a different type of problem.  To adequately manage these, you need to engage people – because it is people that truly understand the right course corrections to make.  Armed with the proper degree of supply chain visibility and tools for collective risk tradeoff and response, people must be actively engaged to collaboratively determine the right actions to take in these situations.

While many manufacturers today invest all of their energy in trying to engineer problems out of their global supply chains, there’s a differentiating opportunity in recognizing and dealing with the fact that you just can’t do this fully.

Jane Marshall’s recently released white paper “Structuring the Outsourced Supply Chain Data Model: 10 Critical Data Issues to Consider” should be used by any company considering outsourcing partnerships.

Jane covers extremely well the main data challenges faced by companies looking to have full supply chain visibility of highly sophisticated supply chains. In addition, to ensure a smooth integration I believe that another important challenge to consider is the soft side of the partnership fit: Do the brand owner and the contract manufacturer have similar goals? Do they speak the same “business language?”

The current economic turmoil requires companies to take a very integrated business model approach to succeed. Strong collaboration is a survival skill. Conventional outsourcing models promised management the possibility to transfer responsibility to a third party and focus on “core business activities.”  In reality, what companies are realizing now is that they are only trading one type of management challenge for a different one, and that new integration skills need to be developed. Traditional supplier-customer relationships will not produce the results expected, and as Jane states in her paper, brand owners “still remain accountable for their brand, quality, customer satisfaction, and answering to the stakeholders.”  Given the complexity of new supply chains, there is a need for more integrated planning, execution, and strategizing, instead of pure exchange of goods or services and money. Companies need to take a holistic approach and can’t afford to have partners that don’t share the same goals and aren’t willing to take accountability. It’s the idea of “whole business thinking,” where flexibility is also important: partners need to learn to get together and work through the pros and cons on both sides of the partnership in order to make the better decisions considering the whole business.

There are brand owners that don’t recognize that data gathering and maintenance can be expensive and continue to make requests for additional data that will never be used. On the other hand, some contract manufacturers see the request for detailed data as a way for the brand owner to micromanage their work. Companies with this mindset need to re-evaluate their positions and understand the impact on the outsourcing partnership they are considering. The integrated approach is absolutely required to succeed in the long run. A silos type of organized supply chain will not be agile enough to respond to demand changes in a volatile environment. Also, clear and concise communication has never been so crucial. Those who find the right partner who shares the same goals, speaks the same business language, is willing to take accountability  and work together in an integrated approach will develop strong and long lasting relationships. They will also be in a better position to succeed in this unforgiving business environment.

IndustryWeek has just published an article entitled “10 warnings signs of a supplier in peril“  that provides a list of warning signs to look for that indicate that your supplier may be in trouble (or at least that your relationship with that supplier could be at risk – see item 5).

1. The supplier has a large part of its businesses in depressed industries.
2. It has raw material shortages or cannot meet the agreed lead times because of late purchase order placements.
3. It has heavily cut investments in R&D, IT, equipment or resources.
4. The quality of supply is deteriorating.
5. The supplier has entered into significant contracts with new customers.
6. Staff is being laid off, with your salesperson nowhere to be found.
7. Additional discounts are offered for early payment or require cash in advance.
8. The supplier is restating earnings and outlooks.
9. It has high-labour content that requires a large weekly payroll.
10. The supplier has absorbed heavy, upfront R&D and manufacturing tooling investments on new products that are delayed — therefore extending the time to break even

These are all excellent pointers that, if followed, can increase the odds that you can respond BEFORE your supplier fails.

Of course, any supply chain risk management strategy must have a broader focus than this.

• You need to assess your purchased components, determining what end item parts they go into and the revenue for those parts
• Identify those components, and the suppliers of those components that are key to you revenue streams
• Then, you need to develop a mitigation approach should the supplier for those parts not be available, starting with the component or supplier that contributes most to revenue
• Finally, you need to ensure that the organization as a unit has the processes and tools to respond to a supply chain event that wasn’t anticipated.  Because no matter how good a job you do identifying risks or creating mitigation strategies, there will likely be an event, large or small, that you didn’t think about, or where the mitigation strategy didn’t work.  Those companies that can respond quickly will come out relatively unscathed.

What warning signs do you look for?