Archive for the ‘Supply chain expert series’ Category

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.

Colleen “Coco” Crum
Managing Principal and Member of Board of Directors
Oliver Wight Americas

Colleen “Coco” Crum, a managing principal and member of the board of directors with Oliver Wight Americas, is considered a thought leader and innovator in demand management and sales and operations planning.  She has helped to develop methodologies for enabling companies to successfully implement sales and operations planning and demand management and achieve quick time to financial benefit. Through these efforts, she has helped companies to think and act beyond their individual enterprise and extend the benefits of demand planning and
sales and operations planning throughout their supply chains.

Coco has co-authored three books that have received excellent industry reviews. The book, Enterprise Sales and Operations Planning: Synchronizing Demand, Supply and Resources for Peak Performance, has been called one of the best books of 2003 by The CEO Refresher magazine. The book, Demand Management Best Practices: Process,
Principles and Collaboration, has been called, by Foresight magazine, a practical and allinclusive, how-to guide that most executives and managers will find invaluable. Coco also co-authored the book, Supply Chain Collaboration: How to Implement CPFR and Other Best Collaborative Practices.

Coco participated in a cross-grocery industry effort to develop a best practice model for supply chain replenishment. The effort resulted in the publication of ECR: Road Map to Continuous Replenishment by Canadian food industry trade groups. As a consultant and educator with Oliver Wight Americas since 1995, she has assisted companies across the manufacturing spectrum, including agricultural chemicals, consumer goods, electronics, entertainment, pharmaceutical, biotechnology, and aerospace and defense industries. In doing so, she has contributed to advancing the methodology of how to successfully integrate demand and supply processes both inside a business enterprise as well as throughout the supply chain.

Kinaxis:  We are experiencing a rapid and perhaps long-lasting downturn in the economy. 

• What lessons can be learned from the downturn that can be applied to supply chain management in the short term and in the long term?
• What specific supply chain initiatives can be applied in the short term that will have greatest effect on a company’s financial performance and sustainability?
• How can companies balance short-term cost cutting objectives with the need to strengthen their position for an eventual recovery?

Coco: Many companies were slow to respond to the changing economic conditions. Some executives describe the situation as “business was good, and then the bottom dropped out in October.” The warning signals were readily apparent, however.

Other companies with a robust Sales and Operations Planning process were creating models based on different scenarios. They documented the assumptions for each scenario. This gave these companies the advantage of already determining, at the senior executive level, how their companies would respond for each scenario, such as growth will remain steady, growth will stagnate, and growth will decline. The models were reviewed every month to determine which model should be used over what time period.

Sales and Operations planning is  formal decision-making process, led by executive management, which provides:
A common operating plan, with accountability for new products, customer demand, supply and the resulting financial plan. Done well, Sales and Operations Planning provides executives with a clear visibility of the current projections versus the company’s business strategy and objectives. Gaps between the latest projections and the business strategy and objectives are and actions are taken to close the gaps, leading to greater predictability. The Sales and Operations Planning process also ensures alignment of goals and key resources to most effectively meet customer needs and the company’s strategies and tactics.

The planning horizon for sales and operations planning is at least 24 months. This gives executives the short-, mid-, and longer-term projections of the business (product, demand, supply, and financial plans). These views enable making decisions on new product priorities, markets and marketing, supply chain tactics, customer service strategies, and optimal utilization of company resources (people and time; equipment, facilities, and suppliers; and financial).

Note: Some companies are starting to use the term Integrated Business Planning and Management in place of S&OP, particularly those companies that utilize the process as an executive management process to align all company plans, not just demand and supply.

During this recession, we have observed companies focus on reducing inventories and other improvement efforts that can be achieved quickly (in a few months) without a substantial financial investment. At Oliver Wight, we call these improvement initiatives a “Fast Track Approach.” We also see companies using a Fast Track Approach to implement Sales and Operations Planning, as they recognize the shortcomings of not having an integrated executive planning and decision making process in these times of economic turmoil. Companies that stay focused on improvement initiatives – and that utilize Sales and Operations Planning as an executive management process (not a mid-management balancing of demand and supply process sometimes called “Real-Time S&OP”) — will be best positioned to rebound quickly when the economy revives.

Kinaxis: Most governments in the developed and developing world have announced stimulus packages, some more ambitious than other.

• Will this prevent the failure of certain manufacturing sectors, such as the automotive sector in the US?
• Are there some existing manufacturing sectors that will not require stimulus?
• Will the stimulus packages spawn new industry sectors, and how soon will these have an effect on the economy?

Coco: Many people have different views on the stimulus package and the financial bailout of certain businesses. Companies that operate in certain manufacturing sectors will be the beneficiaries of the stimulus money – either directly or indirectly. These include companies involved in infrastructure development, such road and bridge construction. Some of the beneficiaries of infrastructure development, such as steel-producing companies, are actively lobbying for stimulus money to be directed to their industry segment.

One purpose of the stimulus package is to reduce unemployment. If it truly results in job stimulation, other companies, particularly in the consumer goods sector, will be better able to hold their own during this deep recession.

As for spawning new industries, it will all depend on how the stimulus money is spent as well as other local, state, and federal government programs. The development of a U.S. energy strategy has long been needed and long neglected. If a meaningful strategy could be developed that would create a new commitment to energy conservation, a multi-faceted green industry could be created that would survive beyond this economic crisis. It remains to be seen whether we will have the political and social will to address our long-term energy challenges.

Kinaxis: We have seen the globalization of demand, especially in the BRIC  (Brazil, Russia, India, China) countries.

• Notwithstanding the current economic downturn, will this trend continue?
• How will this impact the supply chain, especially with respect to outsourcing, which has tended to look at the BRIC countries as cheap(er) manufacturing centers?
• How will this impact product development, and by extension the products available in the developed countries?

Coco: Outsourcing will continue as long as it is economically viable to do so. The genesis of outsourcing was to take advantage of inexpensive labor. If energy prices continue to increase, the cost of transporting goods long distances will also increase significantly. This situation will cause companies to reconsider outsourcing the production of goods that require physical movement to go to market. For those products and services that are created and delivered digitally, outsourcing will continue to the countries with the skills and lower costs in delivering those skills.

Kinaxis: Ford a century ago used to have a fully integrated supply chain from steel manufacturing through to the sale of a car. Now other companies make the steel, most of the components are manufactured by other companies, and yet other companies sell the cars.

• Will this trend in supply chain specialization concomitant with outsourcing continue at the current pace?
• What will be the effect on the supply chain if this trend continues?
• Is there a “natural” number of actors in a supply chain which gives greatest flexibility while limiting complexity?
• What will this mean in terms of systems requirements to support supply chains with many actors?

Coco:  Whether the supply chain is fully integrated within one company or operated by multi-enterprise supply networks, supply chains are difficult to control and achieve flexibility without the following:

• Integrated planning and control processes
• Lean manufacturing
• A knowledgeable and skilled work force
• Effective executive decision making
• Supply chain collaboration
• The tools, including information technology, that enable the work force to operate the processes effectively.

Supply chains, both fully integrated within one company and multi-enterprise networks, need to return to the fundamentals (well designed processes that utilize best practices and are operated by knowledgeable people). They also need to leverage the advances of information technology in communicating information across a supply chain to aid in better decision making and collaboration.

Inefficiencies, poor customer service, and other waste in a supply chain are inevitably the result of: 1) poor decisions made by people,  and 2) poorly designed processes that lack integration (although many people incorrectly blame the information technology).

An excellent white paper on this subject has been written by a colleague, Rick Burris. The white paper titled, “Guiding and Improving Lean Manufacturing and Other Initiatives with Integrated Business Management,” is available at www.oliverwight.com.

Kinaxis: “Cloud” computing is the hot topic in the IT world, and is a superset of on-demand/SaaS.

• Will there be a wide adoption of “cloud” computing in the SCM world?
• What role will standards adoption play in the overall adoption of “cloud” concepts in SCM?
• Are the existing SCM application architected to take advantage of “cloud“ computing?
• What are the key technology innovations that will lead to a wide adoption of multi-enterprise business applications?

Coco: I will comment on cloud computing as a user rather than an information technology professional. I use Apple’s mobile.me cloud to save files from my MacBook Air. I use Amazon’s cloud to retrieve books that I have purchased using my Kindle. I have a need to retrieve files and books and always hold my breath when doing so. But there they are!

Cloud computing is upon us. For the business arena, it must be secure and reliable – that will be the big test. It has the ability to reduce the IT investment in hardware (servers and computers). The cloud should provide access to an amazing amount of data. The challenge will be in ensuring access to perform specific tasks in support of specific business processes. This means that business processes must be well defined and people need to be well educated and trained on the business processes and practices as well as their specific tasks in which they will perform utilizing the cloud.

The challenge for information technology businesses will be delaying as long as possible cloud computing from becoming a commodity and an expectation that is taken for granted by users. Commoditization occurs at an ever quickening pace.

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.

Larry Lapide, PhD
Director, Demand Management
MIT Center for Transportation & Logistics (CTL)
Research Director
Demand Management Solutions Group

Dr. Lapide managed the launch of MIT’s Supply Chain 2020 Project. He is currently an advisor to it, oversees CTL’s Demand Management initiatives, and is responsible for its Strategy Alignment training workshops. He is also directs the research supporting the Demand Management Solutions Group, a consortium of companies looking to advance DM strategies, principles and methods.

Dr. Lapide has extensive experience as a consultant, high-tech manager, software market analyst, and business researcher. He is a frequent presenter at supply chain events and has written numerous publications, including his co-authorship of a book on e-business and SCM. He has worked at AMR Research, Accenture, Data General and A.D. Little. Dr Lapide holds an SMEE from MIT and a Ph.D. in OR from the Wharton School.

Kinaxis: What is DMSG and when was it started?

Larry: The Demand Management Solution Group (DMSG) got started about 6 to 8 months before the initial kick off meeting.  In August 2006, I had a roundtable where we invited people to come in and talk about the concept of demand management — matching supply and demand.  It was an area that I had started focusing on from a research perspective. It is a very conceptual process, but I wanted to run a roundtable so we could start to get input from some of the practitioners and the thought leaders in the industry on the concept. At that initial roundtable, we announced, in consortium with Larstan Publishing, the DMSG initiative. We were going to assemble a group to do ongoing research in the area of demand management over a 2-year period.

We spent the next 6 months assembling that group of member companies and we officially launched the group in January of 2007.  We had our first meeting a couple of months later where we convened the group to define the research question we were trying to address, which is: What strategies, principles and methods can be leveraged to optimally match supply and demand over time?

The DMSG, which has since completed its initiative, was a group of representatives from thought-leading companies who would meet approximately quarterly.  The group did research around demand management – including running several market surveys and sponsoring theses work of MIT students. I in particular, wearing my MIT hat, also did some research inside of MIT with some of our sponsors, as well as worked with the members at each of the meetings we held.

All in all, it was a successful joint research effort.

Kinaxis: What are the business issues a company would be trying to solve or address by using a Demand Management solution?

Larry: The buzz word in early 2007 was ‘demand shaping’. Demand shaping is a concept that has to do with changing demand and creating it – but doing that in the context of aligning with the supply side. Demand shaping, in general, is done by sales and marketing organizations.  What we were seeing in industry is that frequently sales and marketing organizations put action plans in place, and executed against them, often regardless of whether the demand shaping plans lined up well with supply. So they could for example, line up sales for what they did not have, or not sell what they did have a lot of.

So demand shaping is really about demand creation and shaping demand with supply in mind. And I think that is the key thing.

There is usually what I call a chasm —sales and marketing on one side working up how they are going to shape and create demand, but their decisions are made independent of the supply side. What we are trying to do is bridge that chasm (in fact, this bridge image and story is the identifier we used for the whole group).  Demand management processes are bridging processes between the demand side of a company and the supply side, so the two organizations can make joint decisions.

Why this is so important comes down to the goals of the company.  In other words, the demand side typically has goals for revenue generation; the supply side typically has goals of inventory and cost reduction; and the demand management processes have profitability goals— which takes both sides into account.  So demand management processes are really processes that are put in place to ensure that corporate goals of profitability and other corporate strategic objectives have priority, while still measuring the demand side with revenue goals, and still measuring the supply side on reducing costs and inventories.

The DMSG looked at 3 different bridging processes:

The first is customer segmentation and service differentiation – which is aligning service programs to different customer segments. Companies develop specific offerings to different customers where they can get greater profitability and service them better.

The second piece is sales and operations planning processes. That is the linchpin process in the sense that it is a process that many companies embrace and it becomes the key process for matching supply and demand.

And the last piece is order promising and fulfillment – more of an executional or real-time process. Of course, this is where we promise a date to a customer based upon an order they plan to place.  Companies should not conduct order promising and fulfillment simply by a first-come, first-serve method, but do it in concert with customer priorities, where they are giving greater priority to customers who give them more profit than ones that don’t.

So the first one is strategic, the second one is a little more tactical and the third is executional, but all three processes link to profitability and must involve joint decision making between the supply side of the house and the demand side of the house.

Kinaxis: In that context, I have heard you refer to the efficient perfect order, could you elaborate on that?

Larry: The term ‘perfect order’ has been around for quite some time—it measures the percent of orders that we execute perfectly.  Usually it’s the way the customer would see it: did we give the customer exactly what they want?…was it on time?… with the quality they want?… with the right product mix?…and no split shipments? It’s all about delivery and what they get delivered.

That’s very good, but at a point that may be very expensive to do that at the 100% level. The issue becomes what if, to get a customer order filled, we had to expedite it? So we had to do something differently than we were planning to do. Now we start to bring in what we call the ‘efficient perfect order’. We may have gotten all of our orders to the customer correctly in the way the customers wants to see it, but we might have had to expedite half of them or we might have had to do something special to get the shipment done on time. That becomes a profitability story because we are incurring greater costs to make it happen.

The efficient perfect order is a much harsher, harder criteria but it is a criteria that ties better with the profitability story.  And so, for example, you don’t get credit for an order if you had to expedite it, and you don’t get credit for filling an order correctly if it was an online order that should have been done with no manual intervention but someone had to touch it and fix it before it went into the system – these are the types of things that impact profitability that wouldn’t have been captured in a perfect order, but do get captured in the efficient perfect order.

Kinaxis: Can you describe briefly the maturity model associated with the findings of the DMSG?

Larry: Well after the DMSG conducted extensive research, we came up with the ideal stage of Demand Management, and that is optimized demand management. In order to optimize the matching of supply and demand, your demand management processes have to be aligned to achieve strategic goals—that is the ultimate.

So we looked at that ideal stage and asked what kind of architecture, in terms of functionality and processes, needs to be put in place in companies to achieve that ideal stage. And we broke it down into what you have to do in each one of the three processes that are a part of demand management that we had defined, and then we looked at all the supporting processes –the information you need to do it, how would you align your processes, and the supporting tools and techniques needed.

Kinaxis: What are the anticipated benefits of achieving a high level of maturity in the DMSG model?

Larry: Again, it goes back to greater profitability. Most people say that they always focus on greater profitability, but if you are just reducing costs sometimes that impacts revenues detrimentally — in other words if I take one extreme, I might reduce my inventories down to a level where I have impacted demand.  Moreover, if I just tried to optimize the revenue side, without regard for profitability, I might be selling things I can’t make any money on, and I might be accommodating my very large customers to a point where my profitability on them is not very much, if anything.

And so we would say that with demand management the major benefit is profitability improvement. But whatever your strategic goal is — it might be something else – we would say that the benefits are all around better achieving your goals — whether that be maximizing share, maximizing revenue, maximizing margins. Whatever the goals are that you want to put in place for your demand management solutions, the major benefit is in improving those… with a lot of it doing with improving profitability of course.

Kinaxis: And the maturity model as described in the perfect state is, of course, linking the goals to the operations…

Larry: Exactly — and linking the goals to all the demand management processes, so that they are all in sync with each other. You don’t want a demand management process that is trying to reach some strategic goal that is different than, or not in harmony with another process that is trying to do something else. And so it really has to do with what are my strategic goals, and how do I align and maximize my processes to achieve those goals.

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.

Dave Blanchard
Editorial Director/Associate Publisher
Material Handling Management
Logistics Today

David Blanchard is the editorial director of Penton Media’s Supply Chain Group, which includes
Material Handling Management and Logistics Today. He previously served as editor-in-chief of IndustryWeek. He is also the author of Supply Chain Management Best Practices (John Wiley & Sons, 2007), with a second edition forthcoming in 2010.

Kinaxis: We are experiencing a rapid and perhaps long-lasting downturn in the economy.  What lessons can be learned from the downturn that can be applied to supply chain management in the short term and in the long term?

Dave: All business is cyclical, although based on some of the more hysterical reporting from the mainstream media, you would think we’ve never seen a downturn before. In the course of writing my book, Supply Chain Management Best Practices, I discovered that top-performing supply chains consistently do things differently than everybody else. They relentlessly attack their inventory problems, they commit resources to improving customer service, and they partner with their key supply chain partners to ensure they’ve got the best transactional data at all times.

Supply chain success requires commitment at the highest levels of a company. “Short-term supply chain management” is something of a misnomer since the whole idea of SCM involves the integration of processes and activities within your company and outside the four walls to your customers and suppliers. But when things aren’t going well, short-term reactive thinking tends to trump long-term proactive planning. For instance, a recent front page article in the Wall Street Journal points out that electronic component manufacturers probably overreacted when the downturn hit and cut inventories too close to the bone; as a result, they cost themselves sales by not being able to adequately respond to the demands of the marketplace. While nobody wants to be stuck with inventory that doesn’t move and has to be warehoused, cutting production and workforce simply for the sake of cutting is a bad idea, too. Hence, it all comes back to having as clear and accurate a picture of the total supply chain as possible.

Kinaxis: What specific supply chain initiatives can be applied in the short term that will have greatest effect on a company’s financial performance and sustainability?

Dave: Again, the goal of supply chain management isn’t necessarily focused on short-term quick-fixes, but that said, there are plenty of problem areas that you can address by taking a supply chain approach to them, rather than the more typical silo approach.

Supply chain people are always talking about the Perfect Order, getting the right product in the right quantity from the right source delivered to the right destination in the right condition at the right time at the right cost. So any company looking for some of that short-term “low-hanging fruit” can start by addressing whichever area of their supply chain is the least perfect.

Whenever one of these “rights” isn’t met, somebody in your supply chain is going to bill you for the discrepancy. Customers today are very, very picky. They don’t want a truck to pull into the dock five hours early, and they certainly don’t want it there five hours late. They’ll give you a window of opportunity, but if you don’t hit it just right, you’re going to pay more. Similarly, you’re going to pay more if you don’t deliver the right amount of widgets to your customer, and you’re going to pay more if some of those widgets are damaged in transit. So achieving the Perfect Order translates into “don’t spend a dime more than you have to, but make sure you do everything right”

Focus on where the most money is spent or where the most network disruptions occur. Inventory optimization seems to be where a lot of companies are focusing their attention, and rightly so since it can pay off both short- and long-term: carrying less inventory when the economy is down, and turning more inventory when the economy is up. In either situation, the ideal is to carry the “right amount” of inventory.

Kinaxis: Outsourcing has been widely adopted in the developed world over the past two decades. Will the trend of using off-shore contract manufacturing continue, or will near-shoring and even local sourcing become more dominant?

Dave: I’m sure U.S. companies would love to hear that near-shoring is the coming trend, but there are only isolated pockets of activity to suggest that might be the case. The reality is, manufacturers are going to continue seeking out the least expensive alternatives to produce their goods. If your competitor can make their widgets cheaper overseas and then sell them for a dollar less here in the United States – even after factoring in the transportation costs and the longer supply chain cycle – then unless you can find a competitively-priced domestic source, chances are you’ll be off-shoring some of your production, too. If the economy was more robust right now, the near-shoring trend might be more popular given all the negative reaction to tainted products overseas.

“Outsourcing” and “off-shoring” aren’t really the same thing, though. The idea of using a third-party to perform key logistics tasks, such as transportation and warehousing, is part-and-parcel of the 3PL movement, and that trend will continue to become more dominant. The reason for that is simple: There are some jobs that you’d rather not do yourself, such as maintaining a private fleet of trucks, so if you can outsource that activity to a third-party specialist, you can concentrate instead on your core competency. So 3PLs are here to stay.

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.

Clarence Chen
Principal
PRTM

Clarence is a Principal with PRTM Semiconductor and Electronics practice based out of Silicon Valley.  Clarence has over 19 years in supply chain management and operations across high tech and industrial manufacturing companies. His practice focuses on supply chain innovation and use of systems to enable strategic change.   Clarence is APICS  CPIM certified, and obtained his MBA from the University of California, Berkeley and a BSME from the University of Notre Dame.

Kinaxis: Most governments in the developed and developing world have announced stimulus packages, some more ambitious than other.

• Will this prevent the failure of certain manufacturing sectors, such as the automotive sector in the US?
• Are there some existing manufacturing sectors that will not require stimulus?
• Will the stimulus packages spawn new industry sectors, and how soon will these have an effect on the economy?

Clarence: The topic of stimulus packages is having a very real impact to the way global supply chains are operated.   In some countries such as China, the stimulus packages have been directed at spurring consumer purchases for white goods.    More often stimulus packages come in the shape of regulatory and compliance issues.   For example Country of Origin (COO) and Trade Agreements Act (TAA) represent real opportunities to enhance revenue streams.

TAA for examples limits federal purchases to US and other designated countries (DC) such as US Trade Free Agreement countries, or WTO Government Procurement Agreement countries.  For this to take into effect goods must be “substantially transformed” within these countries.  Often a key driver is country of origin.

What this means to the supply chain is a complex series of decisions of whether to locate local manufacturing in key countries to take advantage of these regulatory opportunities and capture revenue that would otherwise be lost.    Those companies with a global customer and manufacturing base are today analyzing the potential revenue enhancement opportunities, and the often higher cost of servicing this revenue.

Our clients at PRTM are now making capital investments to establish local manufacturing presence in key global markets.  In a regulatory environment that both seeks to promote trade and regulate, the impact to the supply chain will be additional complexity.  Making the right decisions at the right time will be key.

Kinaxis: Outsourcing has been widely adopted in the developed world over the past two decades.

• Will brand owners, in particular, continue to adopt contract manufacturing as a way to reduce overheads?
• Will the trend of using off-shore contract manufacturing continue, or will near-shoring and even local sourcing become more dominant?

Clarence: Outsourcing has matured in some industries more than others.   In electronics, outsourcing is the preferred model as it provides flexibility and removes the burden of capital investment and depreciation burdens.  The issue off-shore or near-shoring is becoming more nuanced as the economics of customer value chains converge.  When you couple several factors such as decreasing manufacturing conversion costs advantages in China, transportation costs, long lead times, against emerging trade stimulus drivers, the case for near-sourcing becomes more compelling.   Strategically located near-shoring can provide flexibility, tax advantages, and improved customer responsiveness which in turn enables revenue growth.

The question is not whether this is a trend or not.  The decision is very much dependent on which markets you serve, what product segments, manufacturing volume, and a careful analysis on the impact to margins.  The reality of today’s physical manufacturing footprint is that most of today’s supply chain still resides in Asia, at least in the electronics and high tech sector.    To near-shore such operations, there must be a compelling case for product postponement, in-region sourcing, couple with revenue capture opportunities you would otherwise not be able to capture.  If the margin equation does not deteriorate the overall company’s profitability performance, the case to near-shore must be investigated.

Kinaxis: As companies have outsourced, much to their consternation, their direct control of the supply chain has decreased.  They now need to participate in multi-enterprise supply networks.

• How do companies need to change their supply chain planning paradigm to compensate?
• With so little under the direct control of a company, of what relevance is a sales & operations planning ( S&OP) process?
• Are the advanced planning & scheduling (APS) and enterprise resource planning (ERP) solutions developed in the 1990’s still relevant?

Clarence: Operating multi-enterprise supply networks requires discipline in three key areas to ensure that the end-end supply chain performs.  The first is a focus by the brand owner or orchestrator of the supply chain to ensure the best demand signal quality possible.  Think of this as seeking to be a little less wrong with the forecast each cycle, and to understand the true nature of signal changes and inflection points.  To achieve this, the brand owner must assess multiple independent demand streams to develop its own opinion of the signal in order to effectively engage with those customers or channels that are providing the forecast.    Often a big mistake is for companies to be focused on a forecast sell-in signal versus the sell-through, which provides the better indicator of true consumption.

The second discipline is propagate that signal quickly and clearly across the supply chain and partners.  The signal quality often deteriorates as it passes from node to node, which each player in the supply chain adding or destroying value to the signal with their own interpretations.  The same collaboration with the customer is required with the supplier to ensure that right signals are transmitted quickly and that they are understood.  Companies can either generate an MPS signal across the supply chain, or have each node propagate the signal to the next.   In more innovative environments, we have helped clients with deep multi-enterprise supply chains develop pull signal mechanisms (Kanbans) to achieve Large-Scale Lean™.  This process removes signal noise, and maintains integrity towards true consumption.

The third discipline embodied in the earlier ones is to establish a collaborative relationship with all players across the supply chain, and put in place a set of performance metrics consistent with the brand owner’s objective and service level requirements.

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.

Doug Lada, PMP
Program Management Consultant
CSC

Doug Lada is a Program Management Consultant with over 25 years of experience in the development and implementation of Supply Chain and Warehouse Management solutions.  For the past three years. Doug has been working with CSC and is responsible for all support and training activities related to a Kinaxis RapidResponse implementation at a major Aerospace and Defense corporation.  He works closely with the Supply Chain and Production Control groups to ensure they have the information they need to make the right supply and demand decisions.  Doug’s background includes developing and managing multiple Program Management Offices (PMOs), management of large international multi-site software and hardware system implementations, and the management of software development, implementation services, and project management services at several Supply Chain Management and Warehouse Management System software providers.

Doug is a certified PMP with the PMI and he teaches at the local PMI chapters’ PMP Exam preparation courses.  Doug also has an Electrical Engineering degree from Tufts University in Medford, MA.  Doug can be reached at dlada@csc.com or doug@mseconsult.com.

Kinaxis:  We are experiencing a rapid and perhaps long-lasting downturn in the economy.

• What lessons can be learned from the downturn that can be applied to supply chain management in the short term and in the long term?
• What specific supply chain initiatives can be applied in the short term that will have greatest effect on a company’s financial performance and sustainability?
• How can companies balance short-term cost cutting objectives with the need to strengthen their position for an eventual recovery?

Doug: I believe that companies need to ensure that they maintain their long term objectives for growth, inventory reductions, use of common tools, on time delivery, etc. while they review their short term financial situations.  I see a trend towards cutting core system application development and support without a formal analysis of the long term consequences.  Companies need to ensure they keep their ROI analysis in mind as they look as ways to save on costs in the near term.  It will not help the bottom line if you are able to save X dollars by cutting back on application support if this is going to result in incomplete or wrong data being presented to the supply chain buyers, where they do not order the critical parts in time to support your customer deliveries, and you end up paying expedite fees and/or late delivery penalties that add up to 5X dollars.

A specific initiative that supply chain managers should always apply (and focus on even more in this economy) is inventory reduction.  Through the use of analytical tools, supply chain managers can quickly see what their excess inventory position is over time.  Identifying parts with current excess supply and no future demand should drive buyers to cancel any open purchase orders and look to find ways to use this excess to fulfill other existing demands (i.e. through the use of substitute or alternate parts, etc.).

Kinaxis: Most governments in the developed and developing world have announced stimulus packages, some more ambitious than other.

• Will this prevent the failure of certain manufacturing sectors, such as the automotive sector in the US?
• Are there some existing manufacturing sectors that will not require stimulus?
• Will the stimulus packages spawn new industry sectors, and how soon will these have an effect on the economy?

Doug:  I don’t think the stimulus package by itself will prevent the failure of the automotive sector here in the United States.  The fact that the government has now stepped in to run GM directly might have more of negative effect than a positive one.  What will be the effect of a US government controlled GM on sales in Europe, Asia, the Middle East, and Mexico/Latin America?  Will this end up hurting GM sales, which have historically been neck and neck with Nissan in Mexico?  Will GM lose any of their 9 to 10% share of the European market?

What I do see happening in the automotive sector is a new opportunity for small to medium size suppliers to step in and start providing parts to the automobile manufacturers.  Theses smaller companies might be willing to take a larger risk in delayed payments in order to create a significant percentage increase in their business.  Some of the larger suppliers might be willing to walk away from their losses during the upcoming restructuring and bankruptcies of GM and Chrysler and re-group to focus on industries outside of the automotive sector.

Kinaxis: Outsourcing has been widely adopted in the developed world over the past two decades

• Will brand owners, in particular, continue to adopt contract manufacturing as a way to reduce overheads?
• Will the trend of using off-shore contract manufacturing continue, or will near-shoring and even local sourcing become more dominant?

Doug:  I think that many companies are now realizing that the true cost savings from off-shoring of resources is not what they had planned for.  An example of this would be the use of off-shore call centers.  While the per call cost of handling a customer request may be less, how many customers have become frustrated with the service level and/or confused due to language difficulties and have then decided to cancel their service with the company?  With the economy in its current state, there is increased availability of qualified local resources to satisfy these needs.  I believe that more companies will increase the use of local or near shore resources as a risk reduction strategy.  What benefit do you get from a 50% cost savings on your call center operational costs if you lose a significant percentage of revenue as a result?

In February 2009, United announced that they were planning to move 165 call center jobs back to the United States.  Delta just followed suit in April, announcing that it was going to pull 2,000 jobs back as well, claiming customer dissatisfaction after six years of having their call services outsourced.  In these economic times, I think we can expect an increased trend of looking to local sourcing for contract manufacturing.

Kinaxis:  Ford a century ago used to have a fully integrated supply chain from steel manufacturing through to the sale of a car. Now other companies make the steel, most of the components are manufactured by other companies, and yet other companies sell the cars.

• Will this trend in supply chain specialization concomitant with outsourcing continue at the current pace?
• What will be the effect on the supply chain if this trend continues?
• Is there a “natural” number of actors in a supply chain which gives greatest flexibility while limiting complexity?
• What will this mean in terms of systems requirements to support supply chains with many actors?

Doug:  The issue of accurate communications must also be taken into consideration.  The number of communication channels is defined as n * (n-1) / 2, where n is the number of parties involved.  In Ford’s original model, there were no communication channels to deal with, everything was internal.  In a simple supply chain with 10 suppliers, one factory, 2 dealers, and one finance company, you have 91 possible ways to communicate the wrong information.  Add to this the fact that 23 -27 % of a message can be lost in upwards communications and it amazing that our car manufacturers are able to get the right parts at the right time to the assembly line from multiple suppliers in order to deliver the right car at the right time to the right dealer.

What these complex integrated supply chains need is a common communications vehicle to share information… accurately.  The right tool can provide this solution by allowing factories, suppliers, supply chain buyers, and management to all pull their information from a common source.   This mean that the supplier needs to be able to provide an updated delivery date for a critical part that then gets passed to the buyer and the factory, who will then re-plan the manufacturing schedule, which must then get rolled up into a business heath metric on a scorecard for management.  The entire infrastructure and data process to make this happen automatically is what industry needs to survive in the world of complex integrated supply chains.

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.

Nari Viswanathan
Vice President & Principal Analyst, Suppy Chain Management
Aberdeen Group

Nari Viswanathan heads up the supply chain planning practice and counsels enterprises on their supply chain planning strategies in areas such as sales and operations planning, demand management, inventory management, network design, and customer/ supplier collaboration with specific emphasis on financial performance.  Nari also covers the Software as a Service, B2B collaboration and process integration coverage areas. Nari is part of the SCM research team, and possesses a very strong understanding of adjacent supply chain areas like TMS, WMS and Distributed Order Management.

Nari is a well recognized industry expert with extensive experience across product management/marketing, consulting, solution design/development and presales. Nari recently gained industry recognition as a Pro to Know by Supply Demand Chain Executive Magazine.  Nari has also published extensively in magazines like SCMR, GLSCS, Supply Demand Chain Executive, Internet Retailer, Industry Week etc.

Kinaxis: We are experiencing a rapid and perhaps long-lasting downturn in the economy. 

• What lessons can be learned from the downturn that can be applied to supply chain management in the short term and in the long term?
• What specific supply chain initiatives can be applied in the short term that will have greatest effect on a company’s financial performance and sustainability?
• How can companies balance short-term cost cutting objectives with the need to strengthen their position for an eventual recovery?

Nari: In order to understand the primary concerns companies are facing with respect to their supply chains, it is critical to understand the key events that happened in 2008 which resulted in the need to redesign supply chains (Figure 1). There has been extreme fluctuations in customer demands based on market conditions as well as due to other macro-economic conditions (54%) as well as the volatility in fuel prices that was experienced in the second half of 2008 (51%). In addition the impact of the rise in fuel prices was a sharp increase in raw material prices. The shortage of food commodities also resulted in a cascading increase in raw material prices (45%). Finally there were shipment delays and other execution related issues that resulted in companies looking to redesign their supply chains.

Figure  1: Key Supply Chain Events that Necessitated Redesign of Supply Chains

Source Aberdeen Report Survey 2009

Given these critical challenges that companies are facing, it is important that there is a focus on short term ROI initiatives.

One of the key areas where companies need to focus on in the current economy is working capital. In these times of economic uncertainty and global credit crunch, companies need to actively seek out best practices in how to move from working capital optimization theory to practical initiatives that will improve corporate financial performance while maintaining customer satisfaction. Supply chain, procurement and financial professionals have an opportunity to use working capital innovations to create a market advantage for their companies. Cash velocity can be a competitive differentiator and companies need to assess a variety of breakthroughs in working capital management to keep pace with their peers.

Kinaxis: As companies have outsourced, much to their consternation, their direct control of the supply chain has decreased.  They now need to participate in multi-enterprise supply networks.

• How do companies need to change their supply chain planning paradigm to compensate?
• With so little under the direct control of a company, of what relevance is an sales & operations planning (S&OP) process?
• Are the advanced planning & scheduling (APS) and enterprise resource planning (ERP) solutions developed in the 1990’s still relevant?

Nari: Seventy-one percent (71%) of the participants in a recent Aberdeen study indicated that they were removed from their end customers by at least two levels of the supplier chain (tiers). In addition, rising supply chain costs, escalating customer service demands, an increasingly global operation and increasing number of value chain partners have resulted in increased complexity. This complexity has resulted in companies gradually losing visibility and control over their network-wide supply chain operations and performance metrics.

Visibility in such a multi-enterprise environment cannot be enabled fully through a traditional ERP or APS approach. There is a need for a comprehensive business process layer that ties existing investments in ERP and APS systems with add-on business components that can fill gaps in capabilities. In other words a key ingredient for enabling multi-party SCM is a Business Process Management layer that can support multi-party business processes.

A true multi-tenant on-demand application is an example of a multi-party SCM solution. Many on-demand providers also come to the table with networks of pre-connected suppliers and carriers, which helps to further reduce rollout times and increase trading partner acceptance.

Enabling support for unique business processes by customer, product line, or channel, an on-demand technology platform can lay a foundation for richer data exchange and more flexible process collaboration.

Kinaxis: We have seen the globalization of demand, especially in the BRIC (Brazil, Russia, India, China)  countries.

• Notwithstanding the current economic downturn, will this trend continue?
• How will this impact the supply chain, especially with respect to outsourcing, which has tended to look at the BRIC countries as cheap(er) manufacturing centers?
• How will this impact product development, and by extension the products available in the developed countries?

Nari: Today’s economy is a global one in the true sense of the term in that companies both source and compete for customers on a global stage.  This has been made possible due to the lowering of tariff barriers and the improvement in communications mechanisms. Earlier approaches to global markets, followed primarily by large manufacturers, included vertical integration – operating plants in every country to serve customers in these countries.

Today’s focus, however, is creating more collaborative relationships with channel partners like distributors, wholesalers, retailers, etc. This has resulted in the need for improved demand management practices as lead-times across the value chain have increased. In addition, it is important to analyze channel sell through data to better predict end customer demand. In other words, globalization has resulted in increased customer-centricity for companies that were hitherto removed from end customers.

This increase in the need for customer-centricity has, in turn, dramatically increased the need for improved demand management.

Best-in-Class companies are ahead of their peers in being able to recognize a problem that is only emerging within the marketplace, namely the globalization effect. Fifty percent (50%) of Best-in-Class companies indicate that many of their supply chains do not have normal demand distributions, making traditional forecast modeling difficult, whereas among other companies only 15% indicate the same. Traditional forecast modeling was designed around the premise that there are a few critical customers who determined the forecast volumes whereas the rest were not so critical and hence the normal distribution. With elongation of the supply chain on both the customer and supply sides, the long tail effect associated with a larger number of customers sharing a smaller piece of the revenue pie has become a critical issue. In addition, these customers are demanding differentiated products faster and at a lower price. One approach by which Best-in-Class companies are working around this issue is to become more market responsive by reducing overall lead-times.

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.

Professor Corey Billington , PhD
IMD, a Leading Global Business School

Corey Billington is Professor of Operations Management and Procurement at IMD. A pioneer and leader in supply chain innovation and procurement practices, Professor Billington was also vice president of supply chain services at Hewlett-Packard (HP) where he managed procurement and central engineering.  Among his previous roles at HP, he was executive director of strategic planning and modelling, serving as a key pioneer of HP’s approach to supply chain management. In addition, Corey Billington also managed a design company with clients in consumer goods, high tech and services. He was a consulting Associate Professor at Stanford University’s School of Engineering in the department of Management and Engineering.

Kinaxis: We are experiencing a rapid and perhaps long-lasting downturn in the economy. 

• What lessons can be learned from the downturn that can be applied to supply chain management in the short term and in the long term?
• What specific supply chain initiatives can be applied in the short term that will have greatest effect on a company’s financial performance and sustainability?
• How can companies balance short-term cost cutting objectives with the need to strengthen their position for an eventual recovery?

Corey: The time to prepare for the next upturn is now.  A significant portion of supply chain costs result from the misalignment within supply chains.  Programs that better align supply chains can yield large results.  While demand is down can be a good time to work with suppliers and channel partners to streamline your supply chain.

A Procurement Risk Management program is an excellent way to reduce waste in the supply chain by more efficiently balancing risk between buyer and seller.  Forming “sourcing portfolios” can often significantly reduce cost by allowing suppliers to assign and schedule their resources more effectively.  

Kinaxis: Most governments in the developed and developing world have announced stimulus packages, some more ambitious than other.

• Will this prevent the failure of certain manufacturing sectors, such as the automotive sector in the US?
• Are there some existing manufacturing sectors that will not require stimulus?
• Will the stimulus packages spawn new industry sectors, and how soon will these have an effect on the economy?

Corey: Until the US automotive sector changes its procurement methods to be more effective at collaboration I see little chance of their long term viability. 

I expect that there will be a new type of financial services organization.  In a similar fashion to how the Toyota production methods and Japanese sourcing processes have created a new breed of automobile company (process and collaboration focused), I feel that “the machine that changed the world”— the automobile, and more precisely, Lean Manufacturing practices developed by Toyota—will also change the “production systems” of financial services companies.

Kinaxis: We have seen the globalization of demand, especially in the BRIC countries

• Notwithstanding the current economic downturn, will this trend continue?
• How will this impact the supply chain, especially with respect to outsourcing, which has tended to look at the BRIC countries as cheap(er) manufacturing centers?
• How will this impact product development, and by extension the products available in the developed countries?

Corey: I feel that globalization will continue, but the underlying motivation will be different.  Offshoring is often done to access lower cost of production.  Offshore outsourcing is often done to transfer the risks of holding unusable production capacity (If I have capacity that I can’t use, I have to write it off but my outsource partner can sell it).  However, because of the development of variable assortment stores and the internet channel, OEMs may not need to engage outsourcing partners to provide this service to the same degree as in the past.

Kinaxis: Ford a century ago used to have a fully integrated supply chain from steel manufacturing through to the sale of a car. Now other companies make the steel, most of the components are manufactured by other companies, and yet other companies sell the cars.

• Will this trend in supply chain specialization concomitant with outsourcing continue at the current pace?
• What will be the effect on the supply chain if this trend continues?
• Is there a “natural” number of actors in a supply chain which gives greatest flexibility while limiting complexity?
• What will this mean in terms of systems requirements to support supply chains with many actors?

Corey: Interesting question.  As a demand signal moves through the supply chain, the information distortion at each node in the chain increases about 50%.  As such, I think that a 4 node supply chain should be the limit.

Kinaxis:  Some companies, such as HP have developed different supply chain strategies for each of their product segments.  Others, such as Apple, have completely outsourced manufacturing.

• What will be the effect on procurement practices as brand owners continue to adopt contract manufacturing
• Will this level of contract manufacturing be adopted by “heavier” industries?  For example by Caterpillar?
• The pharmaceuticals industry still has a fairly integrated supply chain, when compared with High-Tech/Electronics.  Is this sustainable?

Corey: Procurement will need to adopt different measures of success.  Price take down causes a short term focus and drives an emphasis on the suppler margin, rather than on removing coordination waste in the supply chain, which is usually a greater cost, but one that is more difficult to measure accurately.  Creating competitive advantage with your contract manufacturing partners is a much better performance indicator, even though it is hard to measure.  In my mind, it is better to measure the right thing imprecisely than to measure the wrong thing precisely. 

Procurement organizations will have to become careful about how to share risk (supply-demand mismatch risk) between their company and their suppliers.  I foresee procurement risk management programs and “real options” programs having a great impact on procurement groups.

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.

Tom Wallace
Writer & Educator
T.F. Wallace & Company

Tom Wallace is a writer and educator specializing in Sales & Operations Planning, Sales Forecasting, Demand Management and Resource Planning.  He is currently a Distinguished Fellow of The Ohio State University’s Center for Operational Excellence.

Kinaxis: Sales and Operations Planning (S&OP) is a process that has existed for 30+ years.  Why has it taken this long for S&OP to be widely adopted?

Tom: There’s a phenomenon that some call the “Adoption Curve,”  which says that a roughly 25 year lag exists between the invention of a  process and its widespread adoption. Examples: Statistical Process Control to become Six Sigma/TQM, Just-in-Time to Lean Manufacturing, and MRP to MRPII/ERP. S&OP is no different. I suppose it takes that long for the word to get around widely.

Kinaxis: What is the stimulus to the current level of interest in S&OP?

Tom: One stimulus is the adoption curve. S&OP started to get hot about 5 years ago, and the word has definitely got around. Example: the executive in charge of Division D, a successful user of S&OP, gets promoted to head up Division A. She takes S&OP with her; she’s seen it in action and knows that it’s too good not to use. Or the president moves to another corporation; same thing.

Another stimulus is based on the nature of S&OP; it’s a tool to help people cope with change and complexity. As businesses grow more complex, and as the rate of change continues to increase, there is more need to acquire a robust process for decision-making and change management.

Kinaxis: What is the difference between Integrated Business Planning and Sales and Operations Planning, especially with the adoption of the term Executive S&OP?

Tom: I’m not completely certain just what Integrated Business Planning is, so I can’t comment there. I might say that Sales & Operations Planning is highly integrative: it integrates financial planning and operational planning, enabling the business to be run internally with one set of numbers; it integrates strategic planning with detailed day-to-day operational planning; and it has a highly integrative effect on the various departments: sales, marketing, finance, operations, supply chain, new product development and, of course, top management up to and including the leader of the business (president, CEO, COO, general manager, managing director, etc.). It’s very cross functional

I can speak about Executive S&OP, because I, along with my partner Bob Stahl, developed that term. It was a totally defensive move and has absolutely nothing to do with Bob’s and my books, videos etc.  We hope everyone will use it, so of course it’s not copyrighted.

Why did we do this? Because the term Sales & Operations Planning has morphed enormously over the past 10 or so  years. It used to mean an executive-centric process that balances demand and supply at the aggregate volume level — product families and the like. It was never meant to deal with mix — individual SKUs, customer orders, etc. That’s the job of Master Scheduling, Plant Scheduling, Supplier Scheduling, Distribution Scheduling, Kanban, and so forth.

But over the years, the term Sales & Operations Planning came to include all of that. This has resulted in much confusion, to the point that today, when someone says Sales & Operations Planning, you really don’t know what they’re talking about. Is it the high-level, semi-strategic process that it started out as, or is it all of the mix elements as well? The term Executive S&OP takes the confusion away; it refers very clearly to that executive-centric process mentioned above.

This is very important for one simple reason: top management. One, they have a low tolerance  for confusion and ambiguity. The second and more important issue concerns the fact that top management — up to and including the leader of the business — must be involved hands-on with the process. (Some call it “top management’s handle on the business.”)

Well, let’s take the president of a company who has the impression that S&OP involves detailed mix stuff, which is what the morphed terminology communicates. Next he hears that he needs to be hands-on with the process. How willing and enthusiastic will he be to do that? Not at all; that stuff is not his job. And if you don’t have the president on board and hands-on, the process won’t be successful.

Is there a maturity model to describe the adoption of S&OP best practice? Yes.  We don’t call it that, but rather have labeled it “The  Executive S&OP Effectiveness Checklist.”  The issues raised don’t really address measures such as customer service levels, inventory turns, plant productivity and so forth. These are resulting metrics. Rather we focus on enabling measures; they get at the essential process elements within Executive S&OP. If these are done well, the resulting measures will normally be in very good shape, or improving nicely. This checklist is available no-charge at http://www.tfwallace.com/pages/content/free_downloads.html.

Kinaxis: Are the barriers to the adoption of Sales and  Operations Planning best practices organizational or technological? What is the role of technology in S&OP?

Tom: The barriers are almost always organizational. The challenge in making Executive S&OP work is for people to change the way they do some aspects of their jobs. Note the word “change.” Change almost always comes hard, and it frequently comes hardest to the people who have been the most successful. Who are these folks? Well, it’s the people in executive row, most particularly the guy or gal in the corner office.

I was teaching up at Ohio State a few years ago and met a gentleman named Peter Tassi, from the Ford Motor Company’s Lean Supplier Institute. Talking about making major improvements in organizations, Peter said “The hard stuff is the soft stuff.” What he was saying is that the really difficult elements are not in technology; they’re in people’s heads.

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.

Bob Ferrari
Managing Director
The Ferrari Group

Bob Ferrari is the Managing Director for The Ferrari Group, a consulting, facilitation, and custom research firm. Bob is a highly visible supply chain technology executive and noted industry analyst, with demonstrated experience in business planning, process, and information technology transformation.

Bob is a longstanding member of the Council of Supply Chain Management Professionals (CSCMP). He holds APICS (The Association for Operations Management) certification as Certified Supply Chain Professional (CSCP), as well as Production and Inventory Management (CPIM), and was chosen by APICS as a member of the Certified Supply Chain Professional (CSCP) Exam Review Committee. Bob also serves as a board member of the North American Leadership Team for the Supply-Chain Council, Inc. (SCOR). He served as a previous board member for the MIT Forum for Supply Chain Innovation.

Kinaxis: What do you see as the major changes happening in supply chain management today? How has the supply chain management paradigm changed?

Bob: In my blog, Supply Chain Matters, I will occasionally make some predictions regarding changes underway or changes to come. More and more, I believe that a new wave of structural change is underway in the overall structure and flow of global value-chains.

At the turn of this current decade, major structural change occurred across industry supply chains, and supply chains truly became global and more complex. The motivations were many:

• Continuing business and product cost pressures and the emergence of lower-cost manufacturing capabilities in countries such as China.
• Viewing these new emerging economies as a vast future market, and beginning to build in-country business partnerships and supply chain infrastructure.
• Economic acceleration due to the post 9-11 recession in the U.S.

The economics for contract manufacturing became much more attractive for manufacturers, and many contract manufacturers in-turn shifted capacity toward lower-cost regions leading to explosive expansion in production capacity in China, Eastern Europe and other regions. Transportation and logistics capabilities have followed, with ports in Asia now leading the world in ocean container and bulk shipping volumes along with massive investments within in-country logistics and distribution capabilities.

I believe that new and different structural changes are now underway, or will continue to evolve as various countries attempt to recover from this severe global economic downturn. Certain significant trends will drive this pending change.

Kinaxis: Can you outline the effects on the supply chain and the trends you see going forward as companies face, and eventually recover, from the current economic crisis?

Bob: Sure, all in all I believe there will be significant demand side effects, supply side instability and increased supply chain risk – these will be the key influencers for the evolving structural changes of global supply chains.

Demand Side Effects:
The effects of this global recession are many, and potentially long-lasting. Financial net worth in the U.S. and other countries has dropped dramatically. When recovery eventually occurs, consumers may well have different buying patterns. Some economists, authors and forecasters collectively predict that consumers may have reached a significant life-changing event that will change the paradigm for future buying patterns. In a Harvard Business Review article titled Value-for-Money Strategies for Recessionary Times, (purchase required) authors Peter J. Williamson and Ming Zeng predict companies that historically sold premium product offerings to drive profits can no longer rely on this tactic. The new more cost-conscious and value-oriented consumer will no longer be willing to pay a hefty premium for product innovation, when other more cost-affordable alternatives exist in the market. These authors argue that the new source of product innovation will therefore be current product innovation teams residing in the low-cost regions.

Another concerning trend is the massive amount of retailer failure that continues to occur. Retail industry observers have dire predictions on the amount of retailers who will survive this current global recession. This trend could ultimately lead to a small group of large global-based or geographic retailers with even more buying leverage. Similar to the Wal-Mart effect, huge price and shelf-space leverage will become even more pronounced among these surviving retail giants unless manufacturers can find alternative channels to get their products to markets. On the other hand, in the developing regions, a large and complex network of local and micro retailers is the primary mechanism to get products to markets.

Supply Side Instability:
As demand for products fell at a very rapid rate, supply chains reacted with rapid speed, resulting in what I termed the great global inventory backflush. Prior to this pronounced global recession, manufacturers built high levels of productive capacity to meet anticipated demand for both existing and new emerging markets. This was especially evident in China where manufacturing capacity for basic commodities, toys, apparel and other markets existed to serve both worldwide markets, as well as China’s domestic market. A painful downsizing of this capacity is now occurring with the closing of thousands of factories. Similar overcapacity exists in global chemical, automotive, semiconductor, and consumer electronics areas, in-turn forcing decisions on temporary or permanent cutbacks. With the real likelihood of the structural changes in the demand noted above, and depending on the overall timing of the recovery, global overcapacity will exist in many industry sectors and in contract manufacturing.

Overall Supply Chain Risk Has Increased:
These past two years have seen a period of non-stop supply chain disruption, driven from a combination of major factors. Natural disasters brought on by the effects of global warming increased. Headlines of product contamination in the most regulated of supply chains have shaken consumer confidence, and driven manufacturers to call for self-regulation. Political instability and the threat of terrorism in the post 9-11 era continues to escalate, with a new threat of social unrest in certain countries brought on by the economic severity and loss of jobs brought about by the effects of this global recession. The magnitude of this recession has added the real possibility of major supplier failures across many industries.

Running-up to this collapse of worldwide demand, many global manufacturers began to feel the true impacts of rising labor costs within China. When oil spiked to near $140 per barrel in the summer of 2008, these same companies began to understand the risks of transportation cost spikes impacting the entire landed-cost sourcing equation for moving sourced products from the far east to markets in North America and Europe.

Kinaxis: What do you see as the implications of these trends? What supply chain strategies may need to be revisited?

Bob: While I do not portend to be a sole visionary or prognosticator, my gut tells me that a new wave of structural changes to global supply chains is underway. The extent of these changes remains to be seen, but in my view, certain areas will need to be reviewed or re-considered.

The effects of the emerging value-conscious consumer and customer will obviously lead to more structural change in the manner and regions where products are developed and mass distributed to global markets. Manufacturers now operate over 700 development centers in China and India, which could well be the new force for the next decade of product innovation. As authors Williamson and Zeng suggest, we could see entire value-chains established within a geographic region.

In terms of value-chain structure, the notion of the most cost-efficient supply chain will most likely trump the more costly product innovation value-chain. There is some opinion that contract manufacturers themselves, who have no choice but to maintain the most cost competitive and productive capacity, will dis-intermediate their brand-owner customers by establishing their own brands and global product distribution, as pointed out by Randy Littleson and Trevor Miles.

Increasing structural and political risk across global supply chains will also lead to some forms of structural change. High unemployment, a rising voice from consumers for buying local, as well as other political forces in China, Europe and the U.S. have caused manufacturers to revisit their outsourcing or near-shoring strategies. Politicians are under the gun to protect domestic jobs and insure their country’s competitiveness in tomorrow’s products and technologies. Consumers demand safety for the products they purchase, and demand that manufacturers have transparency in quality control and consistency. The existence of the brand itself hangs in the balance.

Your takeaway is that supply chain structural change is underway and strategy remains in high flux. Companies will need to double their efforts in deploying the most cost efficient and risk-balanced supply chain. The needs for highly collaborative and tech-savvy supply chain management are even more important enablers to navigate within this next era of change.

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.

Mary Hayes Weier
Editor at Large

InformationWeek.com

Mary Hayes Weier joined InformationWeek in 1994. Prior to that she had reporting stints with Metro newspaper in San Jose, Calif., the Contra Costa Times, and the San Jose Business Journal. Mary enjoys both writing and editing, and has moved back and forth between those roles in recent years. She’s covered (or has managed reporters covering) nearly every key area of IT, and is the recipient of several editorial awards. She’s now back to writing, covering enterprise software, business intelligence, and RFID.

Kinaxis:  We are experiencing a rapid and perhaps long-lasting downturn in the economy.  How is the slow economy impacting software spending behaviors?  Where is the pressure being felt most?

Mary: We’re hearing of software projects that are getting canceled, and of software vendors having problems drumming up new business. Vendors that have strong, established customer bases from which they can pull a continuing stream of maintenance fees will best weather this economy.

Interestingly, the tightened IT budgets, combined with the emergence of new software and delivery models (SaaS, open source, Web 2.0 computing, etc.) have more CIOs questioning those maintenance fees. Several years ago fees were typically 17%-19%, but more vendors now charge around 22%. That means for a $1 million software license, a customer pays a yearly maintenance fee of $220,000 for the life of the license.

Software vendors are largely unapologetic about their maintenance fee structures, saying they need those fees to invest in better, more innovative software, attract great developer talent with great salaries, reward shareholders for their investments, support increasingly complex IT environments, and of course, keep the upgrades coming and pay the support staff. Vendors also say the software industry works as it is because there’s a good balance between what customers pay and what software vendors provide in return. That’s a difficult argument to poke holes in. And as a result, I think the burden of proof lies on the vendors of SaaS and other disruptive approaches to show customers that there’s a better, cheaper way.

I would like to see more evidence that the SaaS industry can thrive long term. It concerns me that so many SaaS vendors are still not reporting positive net incomes for their quarterly earnings. It may indeed take time to reach the point of profitability, but with some SaaS vendors it seems to be taking a very long time. Choices and alternatives are good, but the model must be sustainable.

Kinaxis: What lessons can be learned from the downturn that can be applied to enterprise technology adoption in the short term and in the long term?

Mary: I think it’s great that tight budgets are prompting CIOs to question, and sometimes investigate, whether there are better, cheaper, faster, and easier answers to enterprise software. When things are cozy there’s little incentive to change. But when the CEO demands, “Figure out a way to do it better and cheaper,” there’s little choice but to spend some time and effort exploring alternative options.

Kinaxis:  The adoption of software as a service (SaaS) increased dramatically in 2008 for non-core processes, and even for some core processes such as CRM and, to a lesser extent, Procurement.  What are the drivers for this adoption?

Mary: Certain types of applications lend themselves to a SaaS model. In some instances, business divisions initiate these deals and IT isn’t even called into the negotiations. It’s a pretty attractive concept to hand over the management and upgrades of software to the vendor and bypass the hefty license and maintenance fees, too. SaaS may also start to look more attractive to IT shops that are forced to cut their workforces as a result of the economy.

Kinaxis: What are the barriers to wider adoption of SaaS for core business processes, such as ERP and supply chain management?

Mary: I think there are considerable barriers to ERP adoption, particularly for large companies. Many companies view their ERP platform as the heartbeat of their business, and every new application, capability and process that they develop may, in some way, tie back to that platform, particularly in this era of Web services. So what company wants to hand over management of all that to a SaaS vendor, and is there a SaaS vendor even capable of doing that yet? That’s akin to a massive outsourcing engagement. That’s why it’s more typical to see SaaS for specific, departmental implementations.

It’s so tempting to pose the question of what’s better, on-premise software or SaaS. But I don’t think the answer is black and white; there are lots of shades of grey here, no matter what the vendors on either side of the fence would like you think. I believe SaaS will continue to grow, but on-premise software will not go away. The on-premise vendors, however, will learn from the SaaS approaches and implement the best stuff into their own offerings, or risk losing customers and market share.