Archive for the ‘Supply chain collaboration’ Category

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I recently read our new white paper entitled “Why you Need to Re-evaluate Your Approach to Supply Chain Planning”. The paper describes how the old supply chain paradigm is not well suited to today’s dynamic, outsourced environment. It got me thinking about how communication has changed since the early 90’s when i2 and Manugistics were the pioneers – e-mail finally took that first step out of the domain of researchers; the web was under development by Tim Berners-Lee at CERN. As the paper points out companies in the 90’s were much more locally based and fully integrated (outsourcing and off-shoring were barely a glint in someone’s eye). So to collaboratively create or update plans or to collaboratively solve problems was accomplished by verbal communication among relevant participants – usually in the conference room or on the shop floor, depending on what needed to be done.

Fast forward to 2008 … virtually all of the manufacturers I talk to have significantly outsourced their manufacturing. In fact supply chains have been dramatically extended around the globe. Customers, contract manufacturers, suppliers are now located throughout the world. Even within individual companies the actors are spread around the world – demand managers in North America, supply planners in Asia, buyers in each of the regions. Communication, in a word – email! My new smart phone has voice, email, web browsing, and text messaging all in one (as well as music and a camera), but by far and away email is my most used communication tool. Given how participants in the supply chain are in virtually every corner of the world, email is a fantastic tool.

But is email a good tool to collaborate with? Is email not just a mechanism for transmitting words? I contend that in order for you to have a supply chain that fits the current and future dynamic, outsourced, off-shored environment we live in; flinging a spreadsheet over the virtual wall is not an effective form of collaboration. Well what about collaboration hubs or portals? Excellent tools for passing information, but can you really have effective collaboration?

My point here is that collaboration is about understanding the other party. Does your customer have a bias towards over or under forecasting? Are they planning a promotion? Opening new stores? Closing some stores? Are you the major purchaser of your supplier?

So in order to have a supply chain suitable for today and the future, understand the other person or company. Humans get a lot out of verbal communication – the inflections in the tone, the words chosen, the response speed, etc. Encourage verbal communication amongst the internal stakeholders. Pick up the phone and call your customers … get to know their business. Call your suppliers … find out how their business is doing.

I read a very interesting paper by The Economist Intelligence Unit entitled “In search of clarity: Unravelling the complexities of executive decision-making.”

The article included a discussion on the virtues-and limitations-of scenario-building in the context of executive decision-making.  A couple of comments that I found very interesting:

• “Another benefit of using scenarios is that they combine human intuition and hard analysis, two elements which are the bedrock of all good decision-making”
• “Scenarios do not make the decisions; rather they provide a common intellectual background against which choices can be discussed, tested and agreed”
• “In turbulent times, people are looking for ‘flexibility and resilience’ in strategy to meet rapid change–something which scenario-building can be designed to address”

Great observations.  As I’ve commented in the past, every company needs a plan - it serves as the foundation of all actions and provides specific goals and objectives.  But the reality today is that the plan is a set of guidelines.  Increasingly, things are changing so rapidly that manufacturers need to combine demand-supply planning with monitoring and collaborative response capabilities to deal with the pace of change.

The collaborative response capabilities must embrace human judgment–using tools such as scenarios–to figure out how to deal with the realities as they unfold, since reality is increasingly not what was in the plan.

For years companies have  been conditioned to focus on supply chain planning and supply chain execution.  If you could do this better than anyone else, you won the supply chain management game.  But that’s no longer sufficient.  We’ve entered a new era of surprise and compromise that needs to be supported by a new set of tools designed specifically for this new reality.  Traditional demand planning and supply chain planning systems have failed us in this new reality.

The appropriate scenario management capabilities into the hands of the key people within the supply chain management function can provide breakthroughs in dealing with today’s new era of uncertainty.

With growing interest in sales and operations planning (S&OP), it seemed appropriate to discuss the tools required to support S&OP in the midst of today’s market dynamics.

Scenario Management

Tools to make it easy for users to create, evaluate, and compare multiple scenarios. In addition, these tools automatically identify essential participants and invite their input by asking them to either collaborate on the creation of the scenario or agree to the consequences of the proposed action. For example, a supplier may agree to ramp up production of a component for a new product early because the sales numbers are trending above plan, and the inventory manager may need to agree to holding increased inventory of the component even though it increases risk.

Financial Measures

The operational objectives set by executive management are almost always expressed in financial measures such as gross margin, cash-to-cash cycle, economic value-add, or similar categories. The best tools can readily convert the unit-based view of the users into financial measures that are relevant to executive management. If standardized measures do not suffice, the tool should also provide workbook capabilities that allow users to develop additional measures specific to their organizational needs.

In addition, solutions need to offer scorecarding features that enable users to rank financial measures and compare them across various scenarios. This provides an objective way of determining the best set of scenarios to include in the executive review during the S&OP process.

Alerting

The ability to track key performance indicators (KPIs) within the S&OP cycle is critical to effective S&OP adoption. Tools need to provide early warning that certain KPIs are projected to exceed tolerance levels, allowing the organization to take corrective action before problems arise.

In addition, while a supply order may arrive only one day late (which may be within tolerance from a supplier management perspective), the consequence could be that a major new order will be delivered late or, even worse, lost. This in turn might mean a downward trend for gross margin. Through these tools, such an occurrence would cause an alert to be sent to a senior manager, allowing him or her to take appropriate action.

More importantly, there could be several small changes at the operational level, each of which is within tolerance and therefore does not generate alerts. However, the cumulative effect of these changes could be, say, a 5 percent drop in revenue for the quarter—large enough to warrant executive attention. Alerts can help companies better track and effectively respond to such situations by eliciting attention before a crisis occurs.

Management by Exception

Closely related to alerting is the capability to drill down to the exceptions that cumulatively cause a particular KPI to trend out of tolerance. In the example above, the executive could identify all sales regions in which the projected sales revenue is below target. These could easily be ranked in order, allowing the executive to identify rapidly the regions on which to focus.

When contrasted to the common approach adopted by many companies in similar situations—i.e., ad hoc analysis and data extracts using spreadsheets—the increased productivity and effectiveness afforded by tools are readily apparent.

Summary

The diverse capabilities provided by best-in-class tools provide an ideal mechanism to enable far more effective sales and operations planning for virtually any organization.

SupplyChainDigest had a recent article talking about the key trends in sales and operations planning (S&OP).  They highlighted numerous trends, including more focus on inventory management, demand management, collaboration and the like.  I posted a comment to their site and have included it below as well.

** My comment **

I agree with the observations you’ve made regarding trends around sales and operations planning (S&OP).  We’re seeing increasing interest in S&OP as well.  What I’m seeing is a blurring of the lines between the traditional planning process and the operational or execution processes.  This is being driven by increasing demand volatility, growing global competitive pressures, shortening product lifecycles, increasing supply chain complexities and disruptions because of global outsourcing, etc.  As a result, more and more companies are focusing not just on how they can improve the planning process itself, but how they can execute to the plan in the midst of all these growing pressures.

The problem increasingly is the reality that the best laid plans are immediately challenged as soon as you leave the planning meeting.  The assumptions that go into the sales and operations plan are being stretched, pulled and threatened every day.  More and more companies are focusing on improving the planning process, but putting equal emphasis on how they enable the organization to deal with the fact that the plan will not play out “as planned” in reality.  So, the organization must be able to quickly sense and respond to changes and ensure that people are empowered to respond quickly and accurately to drive action that is aligned with the goals and objectives defined in the S&OP meeting.

I believe this is why you are seeing an increasing focus on demand management (the need to continuously align supply and demand), inventory (a buffer to try to provide better response to changing conditions) and collaboration (the requirement to get closer to the customer and their demand requirements).  All of these disciplines are at the heart of executing to an increasingly inaccurate plan.

Aberdeen has recently published new insights on the growing need for demand management (access the full report here - paid subscription required).  Among the many good insights is the graphic above that shows the pressures forcing companies to focus on demand management.

These pressures, if not adequately managed, can impact both the top and bottom line performance of a company.  This is increasingly the case, indicating the growing strategic nature of supply chain management and demand management capabilities within global manufacturers.

Customer expectations continue to increase while brand loyalty is weakening.  Customers have more globally available options, can do more comparison shopping and have heightened expectations from their vendors/suppliers.

These pressures collectively are having companies look at strategies to become more demand-driven.  For years manufacturers have focused their energies around building the best plans possible and then seeking execution efficiency.  This meant building optimal plans and automating processes to streamline execution and require little to no human intervention.  This made sense as the focus was a push-oriented model where there was greater control over supply management, capacity, production and the like.  But the new competitive requirement is to become demand-driven, and the old way of working is no longer sufficient.

In a demand-driven world, companies have to come to grip with the fact that you can’t plan the customer.  The processes, tools and expertise the company had around the push-model are ill-equipped for the pull-model required to become demand-driven.  Said another way, what got you to a market leadership position in the 20th century is likely not enough alone to keep you there in the 21st century.  In a demand-driven world, there are an increasing number of high visibility judgment calls that need to be made every day to deal with the deviations to the plan.  This could be an important customer calling with a request to increase their order and wanting to know, now, if you can do it or not.  It could be an unexpected supply disruption that requires an immediate reallocation to meet demand requirements.  These issues require people to act and react in a timely and accurate way.  The dynamics of the response process are, in many ways, completely the opposite of the traditional planning process.

Empowering people to act is paramount.  Front-line decision makers need visibility, tools to collaborate and figure out the impact of accepting the change, to see, analyze and simulate alternative resolutions before pulling the trigger on a major tradeoff.

The dynamics have changed - have you?

Bob Ferrari has some good observations over at his Supply Chain Matters blog about the impact of globalization on supply chain management.  His observations come from the Supply Chain World North America event.  He has three posts on it - here, here and here.

At one point, Bob states; “of greater and timelier interest is the finding that companies with extended global supply chains performed significantly worse than companies with a regional supply chain footprint, on customer-facing metrics such as perfect order performance, but slightly better on internal metrics such as cost-of-goods sold as a percentage of revenue, or total SCM costs.  As an example, globally based supply chains experienced 20% worse than their counterpart regional supply chains in on-time delivery, 28% worse in perfect order fulfillment.”

Most of our customers and prospects have outsourced a substantial and growing percentage of their business.  They’ve done so to gain focus, geographic presence/reach and cost advantages.  But, as Bob accurately notes, with globalization comes supply chain management challenges.  I’ve heard first hand and seen research that shows that the majority of companies that outsource also experience a loss of control over key processes that they are still accountable for - things like order promising, inventory liability, etc.

Because brand owners do remain accountable for quality, customer satisfaction and operating performance even when they outsource, they need to rethink their supply chain management practices.  They can not move to a passive mode.  They must continue to remain actively engaged and proactively coordinate effective response to change when it happens.  The key to competitive success today is very much a function of how you deal with the unexpected, and only the brand owner knows what the right course corrections and tradeoffs are to deal with these unplanned situations.  Front line decision makers must be armed with tools for risk tradeoff and response to act.

We’ve seen that when companies take this mindset and develop processes supported by tools to empower their front-line people to deal with these events, they can realize the benefits of globalization while delivering high customer satisfaction and strong operating performance.

I recently came across this article from Larry Lapide at MIT.  The basis of the article is discussing the need to balance demand and supply at all time intervals.

My experience has been that this is much easier for manufacturers to accomplish over the long-term than it is the short-term?  Why?  Volatility.  So many things are changing at once today that it makes it hard to maintain your balance (no pun intended).

The first challenge is supply chain visibility.  Most people struggle with this.  What is the actual state of demand - right now?  What is our current state of supply - at this moment?  Where do I have gaps and misalignments?

But visibility alone isn’t enough.  Once I’ve gotten a clear picture of things, I need to make sure everyone else has that same set of facts and that we’re armed with tools to develop a profitable response.  What happens if I change order priorities to meet the needs of a given, highly profitable customer?  What other options exist?  Which is the best option?

When things aren’t going according to plan, it becames a set of decisions that rely on human judgment.  In order to come up with the best action to take - the one that balances supply chain risk with rewards - these front-line decision makers need to have both visibility and tools to collaborate with their colleagues to come up with viable options, to analyze available options and to pick the one that appropriately balances all of the metrics critical to the company.  And all of this has to be done quickly, under intense pressures (especially as you near the end of the quarter).

Saw a post at The Performance Guys that caught my eye because it talked about “actionable” information and BI tools.  What exactly is actionable vs. un-actionable (is that a word?) information?  To a degree, all information is actionable, its just to what purpose.  Most BI information is historical and best suited as actionable in a planning context.  This is one of the reasons why BI has struggled in operations where operations performance is a function of real time action based on operational, not historical, data.

Actionable information in the context of supply chain management means current and detailed operational data (not a model of operations).  But, more importantly, for supply chain professionals to truly put this information to work, they need not only supply chain visibility, but tools to take action.  Action is required because supply chain professionals are inundanted with exceptions to the plan.  In supply chain management, there is no such thing as a perfect demand plan or a perfect supply plan.  There are plans and there are realities.  Increasingly, the two are not the same.

Action in response to constant volatility requires collective tradeoff and response, where people collaborate and leverage real time analytics and simulation capabilities to analyze the impact of a proposed change and to assess action alternatives.  And, the volume of change and response requires these actions be aligned with corporate objectives, so supply chain professionals need to be able to continuously see how their proposed actions would impact corporate objectives-before they commit to the action.

There’s a lot of talk in the market about actionable information and operational BI.  Before plowing ahead, I would encourage everyone to ask “why” they need access to information, what type of actions do they need to take and what tools do they need to enable these decisions.

AMR has produced its list of 2008 supply chain predictions, as reported here at SupplyChainDigest.  Included in the list are:

• Companies manage risk for business continuity and competitive advantage.  Response Management is all about supply chain risk management on a day-to-day basis.  I’ve written about this many times (see here, here and here) in the past.  The reality is that things are changing so fast today that companies need to be empowered to “manage at the moment” and to respond quickly and accurately to changing conditions as they happen.  If you can’t, someone else will and it’s going to impact both your top and bottom lines as they steal market share and/or your only response is one that is inefficient and costly.
• S&OP technologies – not just processes – take center stage.  This is very much a growth area that we’re seeing, but not in the way that you might expect.  S&OP is a planning process.  And, while companies are looking to improve their planning processes, the bigger challenge is at an operational level.  How exactly do you execute to the plan coming out of this process when everything (demand, supply and product) is changing at an increasing rate?  This is the challenge we see companies focused on.  This is very much an issue of empowering people with the tools for risk tradeoff and response so they can deal with the daily exceptions that are reality.
• What-if analysis and simulation-based tools see growing adoption.  Another area that I’ve written quite a bit about in the past (see here, here and here).  In an environment of constant change, people need to be able to understand the impact of a proposed change and to quickly create options for solving the unexpected problem.  They need to do this in an iterative and collaborative fashion - without impacting the real operations of the company before determining the best action to take.  This is where what-if analysis and simulations come in.  They provide the tools necessary to address these situations.  To work, they need to be multi-user to support the collaboration that the response process requires and they need to be easy enough to use that broad user communities can contribute.  Why?  Because when it comes to dealing with unexpected events, you need to tap into the human capital within the company to make the right tradeoffs and decisions to respond appropriately.

IDC’s Manufacturing Insights has just released their top 10 predictions for 2008 as documented here. Amongst the predictions, IDC notes:

• IT organizations will accelerate spending on collaborative decision environments and incubate multi-enterprise business networks
• IT spending in the supply chain area will focus on fulfillment execution

These are interesting insights. I continue to see that as companies have created ever more globally distributed fulfillment networks and supply chains, the need to collaborate on decisions has increased substantially. The drivers behind this is increasing demand volatility and global competition combined with ever shortening product lifecycles. These drivers are creating an environment of constant change, which is placing a premium on organizations ability to collaboratively respond.

The fulfillment execution insight is also right on the mark with what I’ve been seeing as I talk to large brand owners and manufacturers. At the end of the day, the battle is to ensure that you have the right product at the right place at the right time. Sounds easy, but given the drivers mentioned above, its increasingly challenging to do this. But as companies move to become more demand-driven in an effort to proactively manage these drivers, they come to realize that you need to build into your processes the flexibility and responsiveness to deal with the circumstances as they unfold. While efforts to improve demand planning and supply planning provide incremental improvements, breakthroughs are being realized by those companies that figure out how to respond when things aren’t going according to plan - which is increasingly the case.