Archive for the ‘Supply chain risk management’ Category

As described in our first blog of the series, we recently completed a customer survey project with TechValidate and are very pleased with the 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.

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.

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.

Let’s now take a look at some characteristics:

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.

I know, I know.  Do I really want to open up the debate on what is IBP?  I understand that it has been discussed ad nauseum, but I have to say that Michael Uskert’s presentation (Deconstructing Integrated Business Planning) the other week at the Gartner Supply Chain Executive Conference did a good job with making some clear distinctions between S&OP and IBP and breaking down the process. For me, it all boiled down to a very evident analogy. IBP results when the supply chain has been a successful parent.

Consider this…

The supply chain gives life to new supply chain processes, grow it into S&OP, and help it mature.  In this stage, they are the owners of the process (the parents of the child).  They make most of the decisions and bring other people into fold as and when needed/desired. They are largely in control of the process and the outcome. And the network and circle of influence of S&OP for the most part is the supply chain (the parents) with specific involvement from neighboring functions (close family and friends).

But at some point, it’s time to fly the nest.  The process that the supply chain gave life to becomes bigger than them.  S&OP evolves into a business process (IBP), not just a supply chain process. The supply chain (the parents) remains a critical piece of the equation as an integral contributor and supporter, but it is no longer in the driver seat.  The process (the child) has grown and now has the foundation to mature beyond the home.  The original child, now an adult, makes decisions and takes actions that not only have a greater magnitude but they also impact and are influenced by a larger network of people. IBP spans multiple functions (including supply chain, marketing, sales and finance) across all time horizons, and is ever closely aligned with business strategy.  Its goals are broader and more strategic in nature.

A mature sales and operations planning is a foundational prerequisite for achieving IBP.  Eventually an adult will leave the nest, but they had to first be the child.  And as with parenthood, IBP is not a project, it’s a journey.  And given the state of S&OP right now, it would appear there is a lot of parenting for the supply chain left to do.

What a week we had at the Gartner Supply Chain Executive Conference in the wonderful venue of the JW Marriott Desert Ridge! I missed the event at Palm Springs last year, so it was great to catch up with many old friends from my AMR Research days—from analysts to account leads to supply chain leaders.

After the event, I drove back from Arizona to San Diego. Six hours in the desert brings clarity … or insanity … well, there’s a fine line between them.

So, I’ll take the heat up front. I challenge you as a reader to respond…

“There needs to be a structural change to the Top 25 method”

Why? Well, six hours of staring at the desert made me reflect on my “Bold Predictions for the 2013 Top 25” blog post from a few weeks ago.

I had Amazon at #1, Coca-Cola at #2 and Intel at #3. I had Dell falling out of the Top 10. At least I got the Dell pick correct J

Intel did move up, but not to #3. They got #5. I was directionally correct. Intel has been out there speaking about their supply chain success, as well as creating end-to-end supply chain strategies with their partners. I’ll put some of the blame on my good friend Stan Aronow. Stan took the High Tech role I left at AMR, and my one piece of advice was to push his old company’s supply chain. I did that with Apple, and Stan is doing a bang up good job with Intel – he got them to #3 in the Gartner opinion vote.

Coca-Cola was off. They came in at #9. Aside from Samsung, Apple, and Amazon, Coca-Cola had the highest 3-year weighted revenue growth for those above them, and the 4^th highest peer opinion vote. I do think their strategy on the bottling model will improve their margins & ROA, so I expect them to finish above #9 in 2014.

I would like to say something on Unilever at #4 and P&G at #6, but will leave that up to my buddy Roddy Martin’s blog J. Plus, while Roddy gave me a ton of insight, I forgot to bring a pen & notepad to the après Top 25 dinner gathering at the outside patio.

Then comes Amazon. I had them at #1, but Amazon came in at #3. However, since they got 3,315 in peer opinion vs. McDonald’s 1,197, I think I’ll give a nod to my Amazon #1 pick.

Wait you say … what about Apple at #1?

Apple at #1 is exactly why I think the structure of the Top 25 Supply Chain model has to change. Apple received the highest peer opinion vote and the 6^th highest Gartner opinion vote. I love Apple. Apple was one of the best companies I’ve ever worked for. I love their products – my wife and kids are addicts to the next release. But, supply chain knowledge of Apple? What did Foxconn say as a key supplier? I’d love to hear what the channels say. Have you been to the AT&T store a month after a release? They can’t tell you when they will have product available. Outside of a few suppliers, who has talked in depth with Apple executives —Jeff, Ber, Dierdre, Rita, Sabih— about their supply chain strategies? Ok, Ok, I’ll stop venting … all this dry heat from the desert….

Ultimately, the Top 25 model should change because the purpose has changed. AMR started the Top 25 to “raise the awareness” of supply chain in the company. Well, we got it. Most supply chains are part of the corporate discussion. Thanks, in part to the recession for shining the light on cost controls.

There’s a new purpose I believe. And it came from Steve Steutermanns’ opening theme – FAST. Not in our Plan/Buy/Make/Deliver functional silos, but rather in the END-TO-END. Top 25 supply chains should be measured on their speed to control end-to-end processes. And in this measurement, there needs to be a unique set of people to validate this end-to-end speed.

A side vent: leveraging one’s cash and market share position to force your suppliers and channels to jump should not be considered successful collaboration J

The Voters Need to Change:

I give great props to my friend Lora Cecere. She advocates doing a top supply chain by Industry. I think that’s a great concept. It would even make the Top 25 Dinner more interesting: something like a Top 10 by Industry. It would open up the possibility of having smaller companies be recognized. And, the most important part of this change would be to identify those key leaders in the Industry to vote. These leaders are more likely to know the inner workings of the companies for whom they are voting. Jake Barr is a great example for CPG. Roddy Martin is a great example for Food and Beverage. Dave Aquino is a great example for Apparel. Hussain Mooraj is a great example for Life Sciences. Angel Mendez is a great example for High Tech. They could come from any area: supply chain leader, vendor, analyst, etc.., but they would fit unbiased criteria, for example:

• they know the end-to-end supply chain network in the respective industry;
• they’ve “talked” with at least 25 companies in that industry in the past year;
• they can speak to the talent and leadership of each company, and
• can validate their end-to-end focus.

The Metrics Need to Change:

I understand the need to have “readily available, audited” numbers, and that’s why there is revenue growth, ROA and inventory turns. But, there’s got to be some better metrics to reflect Stage 4 & 5 (end-to-end success!). Otherwise, iTunes and french fries will keep crushing the “turns” competition….

If things were done by Industry, then ROA could be acceptable. Companies in Chemical, Semiconductor, and Life Sciences would be compared equally. I do agree with Lora that ROIC would be a better metric than ROA, as some companies are building assets to enable future growth. Look at Amazon’s ROA – 1.9%. That got them slotted behind McDonald’s, but that investment in Services and Cloud infrastructure is the right strategy. As well, depending on the life cycle of a drug, some Life Science supply chains may be great, but get low votes on ROA and revenue growth. Just wait until that drug hits the market ….

My Solution:

Make it a Top 10 by Industry. Have the #1 from each industry come up on stage at the Top Supply Chain Dinner and accept the award, and let them make a pitch for their supply chain success. Then, put all the #1’s from each industry on stage. Have everyone sitting at the dinner get on their mobile devices and have a live vote for the overall #1. It would make for a fun evening and an exciting conclusion.

Make Four Key Metrics

1. End-to-End Focus:

• Do they have an integrated end-to-end business planning process?
• Can their outcomes be measured against value?
• What is their speed in responding to change, and how many nodes can they accurately assess the impact?

2. Ability to Translate Demand into a Profitable Response

• Measure of their marginal profitability – e.g.: what is their ability to achieve and maintain profit levels?
• Market share – are they #1 or #2 in their market?

3. Leadership and Talent

• This is a soft measure, but can be seen in a supply chain’s ability to reach out and learn. Do they engage externally with the academic world? Do they share their supply chain successes and strategies?

4. Agility in the Supply Chain Network

• Ask their top 2 Suppliers to rate them on flexibility
• Ask their top 2 Customers to rate them on flexibility

I’ve tested some parts of this model. One company that has nailed the end-to-end focus gets praises from their suppliers, engineering team & customers/install partners, and has one of the top leadership teams country is NCR. There’s been some papers written about NCR, but this is the classic example of a top tier supply chain that didn’t make the 2013 Top 25 and seriously should have. (I think it is because they are under $5B in revenue, and those “small” companies are not considered.)

So, this is it. My new Top 25 Supply Chain Model. It’s going to take some adjustments and elbow grease, but let me know your thoughts, and I will take it to Oz and see what can be achieved!

In Closing:

We are past the challenge of making the CEO and the “Board” aware of supply chain. It’s time to redesign the structure. Steve Steuterman had it correct. “Fast”. There’s a foundational shift in supply chain. Gone are the days of functional excellence. Gartner calls it Stage 4 and Stage 5. I call it end-to-end engagement —knowing a LOT sooner, and acting a LOT faster – regardless of the functional tools, functional processes, and functional data. I’ve been doing this supply chain gig for 24 years, and I’m more excited today than ever about what’s happening. You can see those companies that are acting end-to-end. They have the ear of the CEO, and they are executing a new supply chain concept – the end-to-end value concept.

As described in our first blog of the series, we recently completed a customer survey project with TechValidate and are very pleased with the 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.

Mike Burkett’s presentation at last week Gartner’s Supply Chain Executive Conference covered the findings from two recently completed studies. There was a CEO and business executive study, and another focused on the Chief Supply Chain Officer (CSCO).  The comparison of the two studies was really quite interesting.  The good news is supply chains are directly tied to the number one CEO priority. The bad news? CEOs don’t know it (and perhaps some supply chain executives too).

In short, the Gartner CEO study indicated that the top CEO priority is growth (no big surprise there), but subsequent questions around specific business enablers and risks would suggest that CEOs are more likely to view the supply chain as a risk to growth rather than a facilitator of it. Instead of seeing the power of supply chain to drive the top line, they see it as a potential barrier to top line targets. There appears to be a general feeling that you need to effectively and efficiently manage the supply chain in order to avoid having it hinder your success, not for it to be a positive contributor.

So, there is an obvious gap in understanding and a critical need to shape perception of the supply chain’s role and actual impact to the organization.  That function sounds like the very definition of Marketing to me.  Is that what the supply chain organization is missing  ̶  someone to market the function to the office of the CEO and to the broader organization?

Sure enough, supply chain leaders need to focus on doing more and better, but maybe a good first step is making sure everyone knows what they are doing now. Supply chain leaders need to put on their Marketing hat (do they have one in their arsenal of capabilities?) to INFORM, SOCIALIZE and INFLUENCE why and how supply chain is a capability required for growth.  It’s about developing and delivering very clear messages of what the supply chain organization’s priorities are and how they directly support and align to the CEO’s priorities.  There is a need for being more explicit in drawing the line from supply chain functions to corporate performance.

“Mr. CEO, your priority is growth and profitability. Here are the supply chain initiatives that are aimed at helping the company to deliver on that…

• implement customer and product segmentation  practices to ensure the right service level to the right customers, and identify how best to serve new and/or unique market segments
• integrate new product introduction planning and execution more tightly with the rest of Operations to ensure smooth transitions that not only minimize supply risks and costs, but are equally focused on maximizing the product revenue and market share opportunity
• implement supply chain technology to extend capabilities that can in turn, enable market and service differentiation
• shorten customer response times for order commitments and excel on on-time delivery to improve customer service/experience, minimize lost business, and maximize new business opportunities
• etc..etc…”

With each initiative, supply chain leaders need to show the links to performance metrics and the tradeoffs between cost and service, so the discussion is about maximizing value for the organization and not about optimizing supply chain efficiency. The goal is to demonstrate how the supply chain can pull different levers to influence progress. Ultimately, it’s about providing more information than may be asked for, because it is very likely that you are doing more than what is being perceived.

And it’s not only about marketing to the CEO, but also to other functions to promote the cross functional opportunity.  Supply chain executives should be more proactive in defining and influencing what constitutes the ‘supply chain function’ with the goal of being more inclusive, and bringing more groups into the planning and decision making collective.  Take the NPI example above, the Gartner CSCO study showed that new product introduction is only 42% likely to be in the “supply chain span of control”.  How is that the case?  What’s the benefit of that function being actively brought into the fold?

What if the supply chain leader actively marketed the opportunity for expanding the boundaries and made the case for business value driven initiatives?  Take the recent Gartner Chief Supply Chain Officer Study – Respondents with a supply chain center of excellence (which, at a high level, you can argue translates to a deeper supply chain commitment and span of control/influence) showed on average 16% higher revenue and 17% higher margin.  What would the CEO say to that?

And like any good marketing, the education and influence should go both ways.  Supply chain leaders should make concerted effort to engage the different constituents on how to serve their needs better (e.g. Survey the Sales, Finance, Development groups, and follow it up with a supply chain initiative/innovation roadmap that outlines value/impact to each).

Consider some of the by-products of upping the ante on marketing the supply chain:

• By default, it will build a more collaborative, cooperative and inclusive culture
• It will raise the profile and the appeal of the function which may draw new talent
• It fosters added credibility for the function which may incite further investment dollars

In my opinion, I think it’s high time for a little self-promotion.  Supply chain leaders should do so unabashedly, because in the end, it’s about driving better business performance.  You are the CEO’s best friend….he just might not know it yet.

Lora Cecere over at Supply Chain Insights has been writing for some time about Conquering the Supply Chain Effective Frontier. Lora characterizes this as a focus on long term resiliency of the supply chain, not just short term cost efficiency. She is right.

Lora writes that

As shown in the Supply Chain Effective Frontier framework it needs to recognize the impact of corporate trade-offs, business investment strategies, supply chain trade-offs and the degree of complexity in business policies. These together form the system definition of the Supply Chain Effective Frontier. … While students of economics might caution that this is the efficient frontier, we have consciously chosen not to define this as the “Efficient Frontier.” Companies have traditionally defined the most efficient supply chain as the most effective supply chain with the lowest cost per unit. It is our belief that the most effective supply chain is not always the most efficient.

In other words the primary focus of the supply chain function should be the conscious trade-offs between customer service and cost-to-serve. These trade-offs can only be made horizontally, across multiple functions and even trading partners. This becomes more obvious when discussing the trade-offs needed by, for example, a pharmaceutical manufacturer when trying to determine how to respond to a tender. This requires the evaluation of long term profitability of the tender considering the costs associated with non-conformance, both immediate and long term. These need to be balanced against satisfying non-tender business, which is both a lot more uncertain and more profitable over the life span of the tender. How does accepting the offer impact capacity needs? Will the capacity be required beyond the life span of the tender? Will inventory need to be placed closer to the market?  How will planning introductions of the same into new markets be impacted?  These are not decisions that can be made in isolation by Demand Planning, or Marketing, or Sales, or Inventory Management, or Manufacturing, or Purchasing. These are decisions that have to be made horizontally, across these vertical functions, and often in conjunction with Contract Manufacturing Organizations (CMOs) and Third-Part Operators (TPOs).

The tender process is only one example of the increasing need to focus on horizontal process enablement in order to make the conscious, risk adjusted trade-offs Lora is writing about.  It is time that the ‘war room’ concept – a co-located cross-function team which is often used to deal with crisis – became standard operating practice. We have to look beyond the ‘divide and conquer’ concepts dating from the 1980s, which broke up planning into multiple function and time horizons, such as in the diagram below. Many of us may feel uncomfortable with this idea because it challenges our pre-conceived notions, how we were taught to view supply chain as a practice. Change can be difficult, even when it is good for you.

Source: http://www.partnersforexcellence.com/toptenlist.htm

Change starts by recognizing that an approach that puts horizontal process effectiveness first is far superior to an approach that only focuses on functional excellence. It starts by recognizing that harnessing and harmonizing human ingenuity and imagination across functions trumps functional optimization every time. It starts with the recognition that the ‘divide and conquer’ approach that guided the development of all legacy APS solutions is no longer enabling, but limiting progress. Yesterday’s approach fails todays dilemma.

All the APS suites were developed in this ‘divide-and-conquer’ paradigm with individual applications being developed for Demand Planning, Inventory Planning, Distribution Planning, Capacity Panning, Master Production Planning, …  To be fair, technology in the 80’s and 90’s was not able to support the data scale, speed, and analytics required to connect horizontal business processes in real-time. In fact, the only partially successful attempt to do so was ERP, but with a batch oriented computational engine that took hours, often days, to run. Technology limitations are no longer an excuse with the advent of the internet, social, and in-memory computing.

And it isn’t all the fault of the vendors. There is a great article just published in Modern Materials Handling titled “JDA Focus Challenges Attendees to Think Outside the Silos” which comments on the first conference of the joint JDA/Red Prairie operation.  According to Modern Materials Handling Tom Kozenski of JDA states that

“Optimization is a funny word,” he says. “You can optimize a WMS. You can optimize a TMS. But if you optimize a platform that sits above them, it might be one plus one equals three. We love to pitch the platform approach [such as in JDA eight], but the customer buys by silo. They think the platform is interesting, but only as long as it solves the problem in the silo. For many of them, siloed behaviors, thinking and budgets are hard to get away from.”

While I praise JDA for raising this issue of silo buying, solving it from a solution perspective will take much more than simply integrating the functionally focused applications through an integration framework. This approach will do little to address Lora’s Effective Frontier of providing horizontal conscious trade-offs, which is the fundamental reason for connecting these processes in the first place.  Connecting the data without connecting the people still promotes a siloed decision making approach focused at functional expertise. Unfortunately, in many cases the people do not want to be connected, which is the point being made by JDA about siloed behaviors, thinking, and budgets in the user community. Only strong executive leadership will drive an organization to conquer the supply chain Effective Frontier with a strong emphasis on horizontal processes supported by functional excellence.

It isn’t just the so-called East-West, or horizontal, integration that has been lacking in processes and technology, it is also the North-South integration between financial and operational plans. Executives have long experienced the side-effects that result from trusting a thin S&OP process disconnected from its deeper operational implications, namely misalignment between objectives and achievements.  Leaders are now expecting full and deep alignment between their highest level plans, and their lowest level operational constraints. Far too many companies believe that they cannot operationalize the S&OP plan, let alone the Annual Operating Plan (AOP), because it can only be developed at a corporate level in aggregate form and in chunky monthly buckets, at best at a Business Unit level. The net effect is an AOP that is, at best, a very loose statement of intent rather than an alignment between intent and feasibility.

I’d like to see all of us in supply chain management – executives, practitioners, analysts, commentators, and vendors – lift our heads to focus on the art of the possible. We have the opportunity to rewrite how supply chain management is conceived, enabled, and performed by focusing on the Effective Frontier.

In my first blog of this series, I explained how we recently completed a customer survey project with TechValidate. We are very pleased with the over 150 survey responses, and so, every Friday for the next few weeks, we will feature different customer results.