Archive for the ‘Supply chain risk management’ Category

The Next Great Disruption Coming to Supply Chains

Published August 18th, 2014 by CJ Wehlage 2 Comments

Next great disruption coming to supply chainsWhat would you say is the next great disruption coming to our supply chain world?

I’ve heard some common themes, such as weather, political changes, even war.   Those are potential, and somewhat out of our control.  However, there’s one great disruption already occurring, which has yet to truly “touch” supply chain.  It’s the consumer.  And, WOW! how they ever already impacted retail and brand marketing.

I watched a TED Talk video by Philip Evans, from Boston Consulting Group and shuddered to think that all our traditional fulfillment and inventory models can be drastically transformed by the “consumer”.

Philip Evans shares how today’s consumer is sharing a colossal amount of data to come to a buying decision. Some people call this “Big Data”.  Others consider how this “data” is used, and use the term “Omni-Channel” or “Internet of Things”.  Google wrote a great book, ZMOT, or Zero Moment of Truth.

ZMOT the next great disruption coming to supply chainsThis is the point where a consumer looks across all the channels in the market, using multiple devices to search reviews, ratings, styles and prices.  That’s before the P&G First and Second Moments of Truth.  They trust other online reviews over the brand. This is how they’ve drawn the ZMOT challenge.

The shoppers multi journey - supply chain disruption

As a supply chain practitioner, do you notice something missing?

Where is the supply chain nodes? 3PL’s, Contract Manufacturing, Suppliers, Logistics providers…

Supply Chains have primarily stayed on the outside of this challenge.  Sure, we’re concerned, and in some cases stocking more inventory at local distribution centers.  But, we continue to see the trend as a sales and/or a demand planning issue; something where we need better visibility to real time demand or a finer cut of demand signals.  Supply Chain Insights has done research on the top trends:

Top 3 supply chain trends

However, I look at these trends as primarily a “consumer to sales” challenge.  Supply chains have yet to digest the impending disruption beyond retail fronts and sales.  The balance of power has shifted to the buyer, but supply chains still see it has a retail issue.

What if the next great supply chain disruption was…

Consumers used multiple devices, internet of things, etc, to check FGI (finished goods inventory) /sub-assembly and raw inventories, build plans, and sourcing options, as they are considering a purchase!

In the book ZMOT, the comment was made: , “We are officially living in a post-Akerlof world – any trace of information asymmetry tipping the balance in favor of the seller is officially gone.”  It’s happened in the consumer to marketing/brand arena.  I would expect it to come and impact supply chain very soon.

How has this happened?  Listen to Philip Evans’ TED Talk about the falling transaction costs. Not just processing time coming down, but communication time shrinking. The time he refers to is the customer’s time to search, analyze and purchase a product.  Mobile devices have not only brought transparency to the buying process, but also have brought down the communication time.  This falling transaction time is impacting the traditional vertical value chain.  In essence, allowing competitors to step into the value chain and disintermediate, ultimately, collapsing the economies of scale, and creating less need for the vertical integration.  He explains it as using the Encyclopedia product. But, it’s happening today with Google in the auto industry, Amazon in the grocery industry, and Apple in the music industry, and many others.

So, imagine a customer going to social media and online communities to consider a product.  Then, they go to the retail store, scan the barcode to check inventory, price, and promotions in their 10 mile radius.  Then, they check online for deals and shipping dates. Since they are brand agnostic, they look at inventories in the supply chain network; they want to customize their purchase. They want to assure the sourcing meets their “sustainable” expectations.  They are mobile, so they want to have it delivered to where they want it and when.  They understand what options make up the end product, so they demand “deals” on these options (such as memory on a PC).   In essence, the consumer is putting a postponement demand on the brand.  From the ZMOT book, they show today’s consumer is looking around for deals, reacting much faster to purchase and effortlessly willing to move from brand to brand.

My thoughts on what supply chain leaders need to do starting TODAY!

  1. Get a method to capture, and USE all this “Big-Data”.  Most of this big-data is demand centric, but supply chains need to capture, segment and analyze these demand patterns – Building a true planning system of record is core to this challenge.
  2. Take these core patterns and create supply chain models. Start with the as-is model supporting the pattern.
  3. Simulate what it would be like if a pattern had access to raw materials and inventory positions in the network.
  4. Test scenarios that would optimize inventory costs, postponement options, shipping costs, etc…
  5. Analyze what these new “costs” would do to COGS, SG&A, operating income and margin.

Yes, this is hard stuff.  But, the pay-off could position your supply chain as an innovative leader.  This isn’t about incremental change to the business strategy.  It’s about a new business strategy to address an impending disruption.  Philip Evans stated, “Technology is driving the natural scaling of the activity beyond the institutional boundaries used to thinking about business strategy.”

The starting point is having a planning system of record, which has fast access to your entire end-to-end supply chain network.  Then, and only then, can you simulate new business strategies.

Posted in Demand management, General News, Supply chain management, Supply chain risk management


Innovative Approaches to Supply Chain Risk

Published August 5th, 2014 by John Westerveld 0 Comments

Imagine yourself in this scenario; You wake up at the usual time, and over coffee, you review the news.  As you flip through the articles on your iPad, you see it.  A major earthquake in Taiwan.  Then you get the e-mail. One of your key suppliers uses a supplier that is in the area affected by the quake and is effectively shut down for the foreseeable future… Uh oh.  It’s going to be a crazy, busy day.

When you get to work, you get your team working on this issue.  You don’t panic because you are ready for this.  You have a supply chain risk management strategy in place.  This key supplier had been identified and sure enough, you have a second source primed and ready to go.  As you put things in place to switch over to the other supplier you mentally pat yourself on the back.  It looks like you should be able to ride this crisis out without missing a beat.  A few hours later, your procurement head walks in the office.  “We have a problem.”   The alternate source uses the same supplier in Taiwan.  We won’t be getting any of this key component for the next several weeks…maybe months.   Your heart sinks as you pick up the phone to call your boss…

Think this is a pretty unlikely scenario?  Think again.  This scenario played out for thousands of companies after the Japan earthquake, the Thailand floods and numerous other smaller scale disasters.

Many companies have accepted the need for Supply Chain Risk Management because they understand that just such a scenario could occur and if they are ready for it but their competitors are not, they have an opportunity to gain market share.  The problem is most companies are relatively immature when it comes to Supply Chain Risk Management.

Innovative approaches to Supply Chain Risk‘SCM World, Innovative Approaches to Supply Chain Risk, Geraint John, July 2014′.

SCM World has published a report (login required) ‘Innovative approaches to Supply Chain Risk’ authored by Geraint John, Senior Vice President, Research that outlines an approach to bring your supply chain risk management to the next level of maturity.

Supply chain risk management is not simple otherwise, given the potential impact to corporate revenues, I’m sure that more companies would have robust supply chain risk management processes in place.  The report outlines some of the key challenges as follows;

  1. A variety of physical and non-physical risks need to be considered including geographic factors (natural disasters, political unrest), supplier quality and labor issues, volatility in pricing, customer demand, shipping, IT security, regulatory changes, etc.
  2. Supply chains are complex; You must understand risks not only to your suppliers but their suppliers as well (tier 2, tier 3, tier n). Adding to this challenge is the reluctance of suppliers to share their sources with their customers for competitive reasons.
  3. There has been a huge increase in the amount of data available, both numeric and unstructured.  How do you cut through the noise and find data that is relevant?  No off the shelf tools exist.  Analytics and mapping is available but many companies are not at the level of maturity to leverage these. The temptation is to act on gut instinct in the face of too much data but this can lead you down the wrong path
  4. There is a natural conflict between risk mitigation and supply chain efficiency.  Efficiency programs like lean drove us to reduce suppliers and cut inventory.  Supply chain risk management practice advises us to source additional suppliers and plan additional strategic inventories as mitigation strategies. It can be a real challenge to get executive approval for these measures in today’s environment.

The report outlines 4 key action areas that companies developing a more systematic, focused and proactive supply chain risk management approach need to address;

  • Identifying and assessing risk – This includes visibility across the supply chain including a good understanding of the companies involved.  Leaders like Cisco and IBM utilize dialog with suppliers and customers as well as visual risk mapping and scenario planning techniques
  • Quantifying and prioritizing risk – Given that all companies operate on limited resources, focus on those areas that will deliver the biggest benefits. One way is to plot likelihood of occurrence against business impact. While this approach can work well for recurring operational risks like supplier performance, it doesn’t work as well for hard to predict incidents like natural disasters.  One approach suggested in the article is that supply chain managers assign financial impact and time to recover factors at a site and component level.  This tends to identify critical but low-spend suppliers that may otherwise be overlooked.
  • Mitigating Risk – inventory tracking and dual sourcing are considered to be the most effective risk mitigation strategies.  Also increasing use of standard components, segmented and regionalized supply chain strategies and business continuity plans
  • Speeding Recovery – Business continuity plans that have been developed and tested with suppliers are key to rapid recovery
Innovative Approaches to Supply Chain Management Risk‘SCM World, Innovative Approaches to Supply Chain Risk, Geraint John, July 2014′.

For me, the key takeaways from this report are that effective supply chain risk management needs to be all inclusive – it must include layers beyond just your suppliers. You need to evaluate your supply chain based on the impact each supplier, site, and component might have on your business.  (I wrote about a similar approach here.)  Your supply chain risk management process must be integrated into the broader enterprise processes. It shouldn’t be considered an isolated process but instead should be a consideration in each decision made by the company.  Those were my takeaways, but I encourage you to download the report and form your own conclusions.  You may look at your supply chain in a completely different way.

What supply chain risk mitigation processes are you using?   Comment back and let us know!

Posted in Inventory management, Supply chain risk management


Throwback Thursday: Competing against time. A concept worth re-exploring.

Published July 3rd, 2014 by Lori Smith 0 Comments

As the idea of “Throwback Thursday” grows in popularity, we couldn’t help ourselves but to jump on board!  Despite the temptation, we’ll refrain from posting pictures of women with teased hair and big shoulder pads; men with their bell bottoms; or adorable baby pictures from a time in our lives when we were all cute.  Instead, on this quiet holiday week, we’ll keep it professional and look back on a past blog post that covers a classic concept that remains as relevant as ever. This post certainly does not have to compete against time. Enjoy!

Originally published January 12, 2012 by Trevor Miles (@milesahead)

Every now and then a concept comes along that resonates very strongly with what I perceive to be key issues in operations in general, and supply chain in particular.  One of these is the seminal work by George Stalk of Boston Consulting Group titled Time—The Next Source of Competitive Advantage published in July 1988 in which he states that:

Today, time is on the cutting edge. The ways leading companies manage time – in production, in new product development and introduction, in sales and distribution – represent the most powerful new sources of competitive advantage.

Unfortunately Stalk decided to name the book he co-wrote on the topic as “Competing Against Time” which isn’t the point, although the subheading “How time-based competition is reshaping global markets” rescues the concept, which is really about competing against the competition with time.  It is all about being more agile, more responsive, to real conditions. Stalk sets out some Rules of Response very clearly:

  • The .05 to 5 Rule
    Across a spectrum of businesses, the amount of time required to execute a service or to order, manufacture, and deliver a product is far less than the actual time the service or product spends in the value-delivery system
  • The 3/3 Rule
    During the 95 to 99.95 percent of the time a product or service is not receiving value while in the value-delivery system, the product or service is waiting. (Stalk breaks this out into 3 components of waiting, hence the 3/3.) The amount of time lost is affected very little by working harder. But working smarter has tremendous impact.
  • The 1/4-2-20 Rule
    For every quartering of the time interval required to provide a service or product, the productivity of labor and of working capital can often double. These productivity gains result in as much as a 20 percent reduction in costs.
  • The 3 x 2 Rule
    Companies that cut the time consumption of their value-delivery systems turn the basis of competitive advantage to their favor. Growth rates of three times the industry average with two times the industry profit margins are exciting – and achievable – targets.

All too often though people get the impression that these rules are only applicable in the short term.  They are not.  The issue of responsiveness in operations is driven by the latency of the information and the time it takes to respond. In other words, the time to detect that something of significance has happened and the time to respond to the change, or correct the discrepancy. Reducing either of these will have a dramatic effect on a company’s competitiveness, whether this is a short term detection of demand change that requires rescheduling manufacturing or a longer term change in technology that requires the purchase of new manufacturing capacity.

Terms such as VUCA – Volatility, Uncertainty, Complexity, and Ambiguity – or PDCA – Plan, Do, Check, Act – don’t excite me because they are focused on removing volatility and complexity, usually promoting ‘stability’ at the cost of responsiveness, whereas Stalk’s concepts are all about being responsive, being agile. To me this is the correct emphasis. While of course there is an overlap in that a decision or manufacturing process that is overly complex will result in longer lead times, it is the overall sentiment of complexity and volatility being ‘bad’ expressed in VUCA and PDCA with which I disagree.  As I wrote in a previous blog from the 2011 Gartner Supply Chain Conference:

I say embrace VUCA. Accept that it is the new norm. Resistance is futile.

Similarly, Deming’s idea of PDCA is all about process improvement, it is about ‘managing’ complexity and ensuring ‘consistent’ processes. Again, I am not saying that these are bad approaches in and of themselves, only that they are insufficient.  Knowing that you are performing a process consistently doesn’t mean that you are performing it well.  It is like assuming that if you throw everyone in jail who has committed a crime that we will live in a crime-free environment.

Far more interesting to me is the OODA – Observe, Orient, Decide, Act – idea from the US military strategist Colonel John Boyd.

The steps of the OODA loop are:

  • Observation: the collection of data by means of the senses
  • Orientation: the analysis and synthesis of data to form one’s current mental perspective
  • Decision: the determination of a course of action based on one’s current mental perspective
  • Action: the physical playing-out of decisions

While at first this may seem to be very similar to VUCA and PDCA, the key point to the OODA loop is that:

 

Time is the dominant parameter. The pilot who goes through the OODA cycle in the shortest time prevails because his opponent is caught responding to situations that have already changed.

 

In other words reduce the time to detect and the time to respond.  To put this into supply chain speak, it is all about:

  • Visibility – having access to the state of the supply chain across a wide span of operations, especially in outsourced environments, in order to detect misalignments
  • Alerting – knowing or calculating the impact of misalignments on key financial and operational metrics in order to understand the severity of the issue
  • “What-If” – working with others in the supply chain to come up with alternatives and evaluating these quickly
  • Collaboration – to reach a consensus on the best course of action that reduces risk while increasing performance

Another absolutely key concept expressed by Boyd is the need for ‘human judgment’, for the system to act as an organic whole to adapt to situations as they unfold at the location at which they unfold.  Having long chains of command that force front line people to get approval from HQ is antithical to this idea:

… large organizations such as corporations, governments, or militaries possessed a hierarchy of OODA loops at tactical, grand-tactical (operational art), and strategic levels. In addition, he stated that most effective organizations have a highly decentralized chain of command that utilizes objective-driven orders, or directive control, rather than method-driven orders in order to harness the mental capacity and creative abilities of individual commanders at each level. In 2003, this power to the edge concept took the form of a DOD publication “Power to the Edge: Command…Control…in the Information Age” by Dr. David S. Alberts and Richard E. Hayes. Boyd argued that such a structure creates a flexible “organic whole” that is quicker to adapt to rapidly changing situations. He noted, however, that any such highly decentralized organization would necessitate a high degree of mutual trust and a common outlook that came from prior shared experiences. Headquarters needs to know that the troops are perfectly capable of forming a good plan for taking a specific objective, and the troops need to know that Headquarters does not direct them to achieve certain objectives without good reason.

These are key concepts we at Kinaxis have been promoting for a long time.  Every second that we waste in making a decision is a minute less that we have available to actually respond to situation.  In sports, reaction time is a well recognized competitive advantage.  Reaction time is coupled with the ability to ‘read the game’ and, for example, to call audibles at the line of scrimmage in American football. (I have always felt more comfortable with ‘European’ sports, such as soccer, that are a lot less structured and orchestrated precisely because the players have a lot more decision making power.) So in the end perhaps Stalk’s title “Competing Against Time” was correct, but this is a process efficiency perspective.  I still prefer the OODA concept of competing with time because this is about process effectiveness.

Posted in Best practices, Miscellanea, Supply chain management, Supply chain risk management


Speed as the true Innovation in Supply Chain

Published December 10th, 2013 by CJ Wehlage 2 Comments

Wow, I am recalling a great three days in Dallas, Texas this past week at the WTG Supply Chain and Logistics North American conference.  I went for a run in sunny 75 degree weather!

Now, I’m back in San Diego and just finished reading a post from a friend who is an American Airline attendant. She came to Dallas the day after I flew out, to do Airbus training.  Her blog described how she was stuck at the airport due to hundreds of canceled flights – freezing weather that went down to 20 degrees!

It looks like I left just at the right time. As the saying goes, “timing is everything…”.  This saying is much like my presentation at the conference: the topic of speed as the true innovation in supply chain. Not just speed to be fast, but velocity, which is speed moving in a specific direction.

That’s what I believe is the next innovation in supply chain. I grabbed some of my old AMR Research Top 25 data, and looked at the results of supply chain processes and tools.  It seemed like in a recession, supply chains focused on reducing costs. Lean was the top challenge.  In recovery periods, supply chains focused on improving efficiencies. Demand forecast accuracy was the top challenge. Supply chains responded in kind with functional lean efforts or functional demand forecasting projects. I love Lora Cecere’s (Supply Chain Insights) chart on “Progress in Inventory Turns and Operating Margin (2000-2012)”.  One of the best pieces of research data I’ve seen in a long while.

This shows pure “functional” focus from every industry.  Very limited “end-to-end” focus.  Consumer electronics shows a good 18% for consecutive improvement in turns and operating margin for two years.  But, for 3 consecutive years… 0%! For four consecutive years…another 0% !   Supply chains have been focusing on a few nodes of the network, and placing functional processes & tools in place to address the challenge.   If you ask a functional question to a bunch of functional systems, you will always get a functional result.   And functional results will never bring consecutive, sustaining improvements.

At Kinaxis, we have the motto: Know Sooner, Act Faster.  That’s the innovation.  Speed with direction.  Stop asking functional questions and ask end-to-end questions.  And that requires significantly faster analytics across the functional nodes.   Better said, significant velocity.  Yes, it does mean pure speed when a supply chain acts.  But, it also means speed in the right direction.  And speed comes from planning ahead, through simulating scenarios in advance of the challenge.  In fact, after reading the past seven years of Top 25 Supply Chain research, the one thing the best on this list do is: What-If planning. It is not a PhD in the corner working for days,but a core facet of their Planning.

I challenged the attendees on “Know Sooner, Act Faster”.  What do you truly “know” about your supply network.  One of the best ways to answer that question is “how much fire fighting do you do ?”.   If you are fire fighting, you are losing.  You haven’t planned ahead.  You are losing profit & margin to accomplish what an effective simulation could have prepared you for.   Tough words, sure, but great supply chain leadership should reward knowing sooner more, fire fighting less.

Then, we talked about “Acting Faster”.   I asked the audience what the first 10 minutes of every CPFR meeting was.  Answer =  Comparing Data!   That’s the best way to determine if you can act fast.  If you are checking which set of numbers each node is using, you will lose speed.  Every node has to be working off the same version of the plan.

The next great innovation in supply chain is Speed.  And, for the best supply chains, it’s quickly becoming table stakes to have your suppliers, distributors, shippers, etc, on the same plan, acting within minutes of a change, and simulating scenarios for end-to-end network turns and operating margin.  Why?  I say because the consumer is using technology to speed up their decision and purchase.  Every industry has seen their consumer build leverage, and demanding personalized attention.  Supply chain networks need to address this attention by knowing a lot sooner and acting a lot faster.

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Posted in Demand management, Response Management, Sales and operations planning (S&OP), Supply chain collaboration, Supply chain management, Supply chain risk management


Next generation supply chain planner: How the role is changing

Published August 14th, 2013 by Lori Smith 1 Comment

TriQuint Semiconductor supply chain plannerWe try to keep the self-promotion to a minimum, but we have a great customer, TriQuint Semiconductor, that recently allowed us to update their case study  and I think their story has merit in sharing again.

The case study has lots of good bits on how they are using RapidResponse and the benefits they see (like realizing inventory reductions a month after the solution even went live). But the jewel of the story is where they say that, with RapidResponse, they “are changing the role of the supply chain planner to be more analytical rather than just the data hunter.”  A simple statement… with enormous implications.

From the corporate perspective, this means higher productivity, more value-added activity, and results-oriented decisions…all leading to better business results.   But equally important, from the supply chain professional perspective, think of the satisfaction that happens when someone feels equipped and able to actively and effectively contribute to the business.  It becomes not just about getting things done, but about making a difference.

JP Swanson of TriQuint said it best…

“Previously we spent so much time gathering the information that we weren’t able to spend enough time analyzing the information, understanding it and doing something about it…Our team likes the fact that they can use their minds more and they are getting to touch a different skill level because they have more time to do it and more information in front of them to do it with.”

Another worthy quote…

“It’s a great solution for many of our everyday problems. It is now our default when faced with an issue…”how can we model it in RapidResponse?”

A big thank you to TriQuint for letting us tell their supply chain story. We love what you are doing with the product!

In addition, here’s a snap shot of the TriQuint story from our techvalidate survey.
TriQuint Semiconductor supply chain

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Posted in Best practices, Demand management, Response Management, Supply chain collaboration, Supply chain management, Supply chain risk management


Companies passionate about Integrated Business Planning. Supply chain risk management…not so much?

Published July 18th, 2013 by John Westerveld 3 Comments

Supply Chain Digest’s graphic of the week last week is from the 2013 Gartner Supply Chain Study.  It shows various initiatives that supply chain leaders feel passionate about like integrated business planning, government mandates, talent management, globalization initiatives, supply chain risk management and supply chain redesign.

Passion Index for the 2013 Supply Chain Top Priorities

Passion Index for the 2013 Gartner Supply Chain Top Priorities supply chain risk management

Two things really stood out to me: Integrated business planning is a very high priority and supply chain risk management is a relatively low priority.

Why does supply chain risk management score so low?

I can certainly understand why integrated business planning would score highly; it is the function within business that identifies strategic corporate objectives and aligns the company in achieving those goals.  What I (and the report author) found confusing is why supply chain risk management scored so low overall.

Perhaps, we have advanced far enough in supply chain risk management that it is no longer a concern (In my opinion, I don’t think so though…). Potentially, we think that there won’t be another Japanese tsunami or floods in Thailand or garment factory disasters in Bangladesh.  It seems to me that these types of disasters are getting more frequent, not less. Every time I turn on the news, it seems there is a story that has a global impact.
The only consolation I take from this is that any good integrated business planning process would include supply chain risk management as one of the factors considered in any decision made.    One can only hope so anyway.

What are your supply chain passions for 2013?

Why do you think supply chain risk management scored so low in this study?

Comment back and let us know!

 

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Posted in Supply chain management, Supply chain risk management


Voice of the Customer: 70% surveyed improved response rates by 60% or more!

Published June 14th, 2013 by Melissa Clow 0 Comments

techvalidate - response ratesAs described in our first blog of the series, we recently completed a customer survey project with TechValidate and are very pleased with the response rates over 150 survey responses and the many stories we can share. And so, every Friday for the next few weeks, we will feature different customer results.

In this series, we will explore the following topics:

Voice of the customer part 1: Supply Chain Flexibility
Voice of the customer part 2: Supply Chain Visibility
Voice of the customer part 3: Supply Chain Planning
Voice of the customer part 4: What-if Analysis
Voice of the customer Part 5: Response Management
Voice of the customer part 6: Alternative Technologies
Voice of the customer part 7: Competitive Advantage

If you are eager to check out all the results, simply go to our TechValidate page. If you wish to use or share any of the content we’ve published to-date, click on the asset you wish to use and then select the download button to save. You can also choose the share button to distribute through various social media channels.

Next up, response management. We asked our customers how response rates had improved since implementing RapidResponse. As you can see from some of the responses we’ve captured below, customers have seen “exceptional” improvements in their supply chain. RapidResponse powers rapid planning and responses in their organization. Customers know the impact of simulated changes in seconds without having to rely on custom applications and reports; the result is instant impact analysis and the ability to identify the full impact of supply chain management decisions prior to execution.

 

See more results on response management.

 

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Posted in Control tower, Demand management, Inventory management, Response Management, Sales and operations planning (S&OP), Supply chain collaboration, Supply chain management, Supply chain risk management


Statistical Modeling in Supply Chain Continued: When should we incorporate uncertainty into project schedule estimates?

Published June 10th, 2013 by Nazli Erdogus 0 Comments

A few weeks ago, Trevor Miles wrote a blog series entitled, “Truth, Lies, and Statistical Modeling in Supply Chain: Part 1, Part 2 and Part 3.

In it, he discusses how companies often model manufacturing and supply chain systems using deterministic models, when in fact everything around us is stochastic. I thought it’d be important to mention that we also model project management using deterministic models, such as the Critical Path Method (CPM). Yet, we are living in a world where projects and tasks might actually follow a stochastic trend.
An alternative to CPM is Program Evaluation and Review Technique (PERT), which is an effective method and gives you room to include as much variation into your projects as you want. It is used to analyze and evaluate the time needed to complete tasks in a given project, as well as to identify the minimum time needed for the completion of that project.

We know that a single task or project can be delayed for many reasons, such as unforeseen events, which force project managers to tie tasks to completely different predecessors or successors. This randomness forms a very important aspect for project management systems. We simply cannot assume any given project will be managed according to the targets set at the beginning of that project.

CPM was developed by Du Pont in 1960 and the emphasis was on the trade-off between the cost of the project and its overall completion time (e.g. for certain activities it may be possible to decrease their completion times by spending more money – how does this affect the overall completion time of the project?). CPM is used in production management for jobs that are repetitive in nature where the activity time estimates can be predicted with considerable certainty due to the existence of past experience.

When we look at the CPM being commonly used today, we see there’s something missing. This is due to the fact that CPM uses a deterministic model, which only incorporates a fixed time estimate for each activity. Although this is pretty easy to implement, it’s not sufficient for big-scale projects which can get complicated (and more variable) over time.

PERT was developed in 1958 by the US Navy for the planning and control of the Polaris missile program. The emphasis for this model was on completing the program in the shortest possible time. In addition, PERT had the ability to cope with uncertain activity completion times (e.g. for a particular activity the most likely completion time is 4 weeks, but it could be anywhere between 3 weeks and 8 weeks). PERT is often used in project management for non-repetitive jobs, for example, research and development work, where the time and cost estimates tends to vary.

PERT uses beta probability distribution, which in its essence, models the behavior of random variables and can be implemented by either using the statistical probability theory or discrete-event simulation. The way it is used in project management is through calculating the time allocated (Expected time) for the completion of a given activity. The way PERT deals with variation is its main differentiator. You determine the probability of any given activity to be successfully completed within three time estimates – optimistic (shortest), most likely and pessimistic (longest) times. These estimates (called random variables) represent the reasonable values you can give as the rate at which an activity can be possibly completed. Then, these time estimates are used in a weighted average assuming a beta probability distribution, and this weighted average forms the Expected time for a given task. Here`s how the Expected time is calculated:

Expected time = (Optimistic + 4 x Most likely + Pessimistic) / 6

 

Let’s dig into some background information now:

Pert Beta Distribution uses three parameters:

a: the optimistic time, which will be required if activity execution goes extremely well

m: the most likely time, which will be required if activity execution is normal

b: the pessimistic time, which will be required if everything goes badly

 

Depending on the values provided, the Pert Beta distribution can provide a close fit to the Normal or Lognormal distributions and it has:

Mean = (a + 4m + b) / 6

Standard Deviation = (b – a) / 6

 

Pert Beta distribution emphasizes the “most likely” value over the minimum and maximum estimates. It constructs a smooth curve which places progressively more emphasis on values around (near) the most likely value, in favor of values around the edges. In practice, this means that we “trust” the estimate for the most likely value, and we believe that even if it is not exactly accurate (as estimates seldom are), we have an expectation that the resulting value will be close to that estimate. Assuming that many real-world phenomena are normally (or log normally) distributed, the appeal of the Pert Beta distribution is that it produces a curve similar to the normal (lognormal) curve in shape, without knowing the precise parameters of the related normal (lognormal) curve.

The figure below shows three such distributions.

multi-tier statistical modeling supply chains

As I said, Pert Beta distribution emphasizes the “most likely” value over the minimum and maximum estimates. The figure below illustrates this effect and shows the various density function shapes that occur as m varies from 1 to 9 when a is 0 and b is 10.

multi-tier supply chainsLet’s now take a look at some characteristics:

CPM PERT
Deterministic Probabilistic
Estimates are based on historical data Estimates are uncertain, there`s a probability that an activity will fall into a certain range
Concentrates on Time/Cost trade off More suitable for planning
Scalable for smaller projects Suitable for R&D projects
Explicit estimates on time and cost Includes subjectivity, depends on judgment for optimistic/pessimistic time estimates

 

So knowing the characteristics of these two different models, which one do you really need to implement? This totally depends on what type of project you are dealing with. Since PERT concentrates on variation and thus gives you the ability to be more flexible time wise, an R&D project would be a good fit considering the uncertainties a development work could have in the earlier phases of the project.

The following decision tree model can help you answer this question.

Still undecided? Well, consider that PERT can answer questions not applicable in CPM such as:

  • What is the probability that my task will take longer than…?
  • What is the probability that my task will be finished by…?

And, PERT can also be used for risk analysis and to identify potential opportunities and difficulties for the activities, as well as for the calculation of the worst case scenario. Imagine a famous band going on a world tour. They are on their way to play another concert that day in a neighboring country, but production trucks cannot cross the border because there is a strike at the border of the country they are currently in. To make it in time to perform, the truck has to cross the border by a certain time. In such a case, it’s out of the organizer’s (or project manager’s) control to project how long it will take until the production truck makes it to the concert area. To avoid such a situation, it’s more realistic to have implemented PERT, allowing some buffers between ongoing tasks, much like transporting rock stars between concert venues.

If you are managing a more conventional project with more predictable durations that can be accurately calculated and there’s no need to factor a possibility of changing requirements, then CPM is a good fit. For all other cases (and there would be many!), I recommend going with PERT. After all, like the transportation algorithm is a special case of the regular simplex method, CPM is simply PERT where a = m = b.

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Posted in Control tower, Demand management, Inventory management, Response Management, Sales and operations planning (S&OP), Supply chain collaboration, Supply chain management, Supply chain risk management