Unlike traditional pirates, today’s pirates don’t want the cargo…in most cases they don’t even care what the cargo is.  The purpose of the attack is to hold the cargo and crew hostage.  For example, in January 2010, somewhere between 5.5 and 7 million dollars was paid to release an oil tanker containing 28 crew and 2 million barrels of oil.   More recently, pirates struck a Panamanian freighter, the MV Suez carrying…you guessed it…bags of cement.  The goal again was ransom, not the cargo. 

It seems that piracy even has a well defined business model, which includes staffing levels, equipment requirements, supplies, investor profiles and profit distribution plans.  Those guys are organized…which means you need to be too.  The SupplyChainBrain article describes several best practices for ship owners to avoid the risk of shipments being attacked;

1. When travelling through the Golf of Aden (the region notorious for piracy) travel the Internationally Recommended Transit Corridor
2. Maintain lookouts to provide warning of approaching small boats
3. Use of non-lethal deterrents such as water sprays and horns
4. Protect logical boarding points with plywood and razor wire.

These best practices are not fool proof, however.  The MV Suez had employed all of the above and was still boarded.

While the protection of a ship from pirates is not directly applicable to the readers of this blog, I found it interesting to see what shipping companies were doing to avoid this risk.   What is applicable, is how you can protect your supply chain from the impact of one of these attacks.  If a ship carrying your cargo is attacked, the best of possible outcome is that your shipment is recovered with no loss of life.  However, your shipment will still likely be tied up for weeks, possibly months.  That can be a disaster for a lean supply chain.  What can you do to reduce this risk?  Back to the SupplyChainBrain article…

The article points out that a supplier in poor financial shape may be tempted to route shipments through dangerous waters to minimize cost.  Further, insurance companies are starting to respond to the additional risk by doing what insurance companies always do in these situations; charge more.  These additional costs could be enough to sink (pardon the pun) a struggling supplier.

So it really comes down to a supplier management issue;  identify the suppliers at risk. Look at the parts they supply. If the part is critical to your business, make sure that you have mitigation strategies in place.  If you have options with respect to suppliers and routes, identify those sources and routes that avoid high risk areas.

Funny titles and supply chain issues aside, the real tragedy is the risk to the lives of the  brave crew members of these ships. As I write this post, the crew of the MV Suez has still not been released, crews from other ships are also missing and some crews have been killed.  Our hopes and prayers go out to them and their families.

The WSJ article, From Snowmobiles to Cellphones, a Scramble for Parts, (paid subscription or preview sign-up may be required) further notes that companies have had to reconfigure offered products due to persistent supply shortages. It notes that shortages of transistors, capacitors and integrated circuits became pronounced in the first quarter, and persist in the second quarter. Telefon AB L.M. Ericsson indicated that shortages cost the company $400-$550 million in sales and delayed shipments, and Royal Phillips Electronics, Polaris Industries Inc. Motorola and Whirlpool are also mentioned as being impacted. Motorola CEO Sanjay Jha  summed it best noting that his company is scrambling in a “constrained environment.” Companies utilizing current hard-to-find components are seeking their own fixes which include offering customers different features or alternative components and/or technologies.

While it is obvious why Ericsson, Philips, and Motorola are affected by electronics component shortages, what is interesting is Bob’s inclusion of Polaris and Whirlpool in the list of companies. The original WSJ article clearly focuses on electronic parts shortages. Polaris makes snowmobiles and ATV’s. Whirlpool makes dishwashers, dryers, etc.  What does this have to do with electronic parts?  Well, a lot actually. I remember working on a project at Volkswagen in Germany in the late 1990’s shortly after they had just come out with the Golf Mark IV.  I don’t remember the exact details but the number of chips in the Golf had gone up from about 5 in the Mark III to about 50 in the Mark IV. Yet the demand that this represented for the chip manufacturer was still relatively low compared when compared to the demand from electronics companies such as Ericsson. The difference in the relationship with the more traditional Volkswagen suppliers, who made mechanical components for the Golf, was profound.  Whereas the chip demand represented a lot less than 10% for the chip manufacturer, often the demand from Volkswagen for the mechanical component suppliers represented well in excess of 30%-40%, sometimes in excess of 75% when factoring in aftermarket sales. Clearly Volkswagen had a great deal more leverage with the mechanical component suppliers.

Other industries, such as the white goods industry, will often design different washer or dryer models using virtually the same mechanical components, but use different chips to provide differentiation. Electronic components are everywhere. Delays in component deliveries affect many industries. The original WSJ article contains a graphic showing how the lead time for a common type of transistor has increased from 10 weeks in July 2009 to 20 weeks by February 2010.

Initially I set out to try to estimate the effect of electronic component shortages on G20 gross domestic product, but the more I looked into the data, the more it seems that electronic component shortages might already be “old” news. Clearly there is still a lot of caution in the industry and the effects are very real otherwise neither the WSJ nor Bob would have written about component shortages. It is also something we have been hearing from customers and prospects for the past 6-9 months. Yet some really good results over the past four quarters, such as those from Intel, seem to indicate that the situation may be easing. Since the financial results of semiconductor companies are a leading indicator of how other companies are investing in raw materials, it is encouraging to see the upward trend in both revenue and gross margin reported by Intel. But this blog is about component shortages. While Intel has shown better revenue numbers, the increase in the margin would still indicate a shortage situation. Looking at Intel’s inventory numbers indicates that these have been rising sharply too, especially finished goods.

The question is whether Intel is the proverbial “swallow that does not a summer make.” Looking at public semiconductor companies around the globe would indicate that the same is true throughout the industry. The figure below shows averaged financial results for all semiconductor companies.

This effect is most pronounced when considering the semiconductor companies in Asia, though a similar pattern is observed in North America, and less so in Europe.

Clearly it takes time for inventories to be built across the entire supply chain, but it is encouraging to see the level of inventories being built in the semiconductor industry. Notice that inventory levels far exceed the levels in early 2008.  In addition, the semiconductor industry is only one segment of the overall electronics industry. But, as I noted earlier, the semiconductor industry is a leading indicator because it is far up the supply chain.

What is your experience? Are you beginning to see an easing in the electronic component supply shortages?

• Excellent data (I agree this is critical, but doesn’t provide for successful S&OP on its own);
• Excellent, repeatable processes;
• Executive commitment and buy-in;
• Communication of the plan to those that must execute.

Now that I have that off my chest, I do agree with the core part of the article which basically outlines the benefits of a successful S&OP process (see the article for an explanation of these points);

• Minimize surprises
• Optimally manage inventories
• Improve margins
• Improve customer satisfaction
• Better resource  utilization

In addition to these benefits, a robust S&OP process will also allow you to respond quicker to the macro events that impact your business.  Worldwide material shortages, changing demand trends (who would have predicted the success of the iPad  besides Apple? ), major world events all can be detected and responded to faster with S&OP.  Those companies that recognize the event first and respond fastest often end up benefiting from the event while their competitors lose business.

What benefits have you seen from S&OP?  Respond back and let us know!

Image via Wikipedia

It’s amazing what you can learn from Wikipedia.  I was reading a couple of blog posts here and here from Sourcing Innovation where “the doctor” describes how to “avoid the Black Swan”.  He had what looked like some great advice on how to avoid this thing…but it was lost on me because I didn’t know what a Black Swan was. (Please pardon my ignorance…). Curiosity got the best of me so I went on to the source of all knowledge, Wikipedia ,and discovered the Theory of the Black Swan.

The original meaning of black swan (from back in the 16th century) was an expression that implied rarity … “ it’s as rare as a black swan”. Black Swan events are described by Nassim Nicholas Taleb in  his book “The Black Swan: The impact of the Highly Improbable”.  In his book, Taleb identifies Black Swan events as having three key attributes;

1. The event is a surprise to the observer (what might be a Black Swan surprise for the Turkey is not a Black Swan surprise for the Butcher – so…avoid being the turkey!)
2. The event has a major impact.
3. Once rationalized by hindsight, the event is seen as being “expected”.

Black Swan events can be negative (like the collapse of the levies in New Orleans after Katrina) or positive (like the invention of the personal computer).  According to Taleb, the key is to not try and predict Black Swan events, but instead to try and build robustness against negative events and the ability to exploit positive events.

In his article, ‘Tips for avoiding the Black Swan’, the doctor gives a good list of things you can do to avoid the impact of a negative Black Swan.  To this list, I’d like to add one more thing.  Given that you can’t, by definition, predict a Black Swan event, the ability to respond when a Black Swan event occurs can mean the difference between a bump in the road and disaster.   This ability to respond requires three things;

1. The ability to recognize an event and model the impact of this event on your business.
2. The ability to model various potential resolutions to the event.
3. The ability to compare these resolutions and identify the best option. 

Responsiveness allows you to not only limit the impact of a negative event, but can also position you to benefit in the case of a positive Black Swan event.

Are you ready for the next Black Swan?  Comment back and let us know!

So what’s this got to do with supply chain management?  Well, I think a lot.  But I will expand on this later.  Let me first continue with the planning/response duality, and the effect technology has had over the past 20-30 years on one’s ability to be more responsive.

Our 2nd son has gone to Europe for some weeks in the summer.  I was equally fortunate after high school to get a trip to Europe, but that was in 1973.  The available technologies were very different…

                                              His base is an apartment in the south of France and he will be travelling to Turin, Venice, Rome, Paris, Frankfurt, Prague, and Munich.  Lucky guy, huh?!  As you can imagine, this trip has been in the planning stage since before Jan 2010.  Not only does he have an anxious father, he has a German mother, so meticulous planning was required.  This included searching for concerts/events across Europe on the internet and then booking Eurail tickets to get to the different destinations.  And finding youth hostels over the over the internet and pre-booking accommodation.  I, on the other hand, had a well thumbed paper copy of a “Europe on the cheap” guide.  Whenever I got to a new location, the first thing I had to do was to find a youth hostel for the night.  And believe me, English was far less prevalent in 1973.  So a lot of the planning and coordination which we did in 2010 that simply not possible in 1973.

Guess what?  He left the key to the France apartment at home!

He called in a panic from Zurich at 1:30am (parents not amused) using his cell phone.  We were able to find a hotel near the apartment using the internet and to book him a room for a few nights.  When I was travelling, I guess I could have sent my parents a telegram, but that would have only reached them later in the day, long after I would have had to try to sort something out for myself. 

And he has his own credit card.  I had to carry around a thick wad of traveller’s cheques and go to a bank – which were only open Mon-Fri from 10:00am to 3:00pm.  Actually, on Wednesday they closed at 12:00. 

Once he had checked into the hotel, he sent us an email to say that he was well settled, which we had in our inbox’s once we woke up again.

To get the key to him we went on-line to find the quickest (and cheapest) over-night service, and then emailed the concierge with the tracking number and expected delivery date and time.  He now has the key and hopefully the rest of his trip will be filled with as much adventure, but from positive experiences.

The key here is that we take technologies that are available to us for granted.  We forget how these technologies have changed the manner in which we can conduct business, and all too often the manner in which we use technologies in business lags the capabilities available to us.  So I smile when I hear people state that technology has no role in S&OP.  No business process is about the technology, but imagine if we did not use even a rudimentary technology such as EDI?  What about the ubiquitous use of Excel?  Let me tell you that in 1973 we were still using paper punch cards to submit a job to a data center.  The job queue was usually a few hours and when you came back you would discover that you had typed an S instead of a D, meaning the whole job had failed.

As my story about my son’s trip illustrated, technology has allowed us to shrink the time it takes to reach a decision and to include others in the process of compromise required to reach this consensus.  Not only that, we have mechanisms to know much sooner that an issue has occurred, which is of tremendous value.  The sooner you know about something happening and the quicker you can respond, the more likely you will be able to affect the course of events and reduce the risks or take maximum advantage.

Given the assumption that a plan is crucial, together with the realization that the plan will not be accurate, we are led to the conclusion that we need a stable plan, but be able to adjust the plan as and when needed. We need to be able to adjust the plan only when significant enough factors warrant a change to the plan, and with enough lead time and stakeholder buy-in to execute properly.  To restate, I believe that the following are important:

1. Plan Accuracy and Stability – The MRP plan needs to be stable enough to enable effective execution but we need to be able to detect exceptions that are significant enough to warrant a change
2. Responding to Change – The capability to effectively respond to required changes needs to be in place

How do we effectively accomplish the above?

Plan Accuracy and Stability

• First, the plan needs to start with an effective Sales and Operations (S&OP) process.  The more robust the S&OP process, the better that the high level plan will be.   
• We need to be able to detect or sense the need for changes, and once needed changes are detected, we need to be able to discern which are significant enough to warrant a change to the plan. 
• We also need to be able to prioritize these since there may be more than we can deal with. 

The key is that potential problems such as material shortages and late customer orders need to be detected for the future.  Obviously, once late orders or shortages have occurred, they are easy to detect (maybe even by way of angry calls from customers or buyers getting urgent messages from production regarding shortages.)

Referencing a recent blog post by Kerry Zuber, “Driving performance improvement through exception management“, Kerry states that in some organizations, there can be as many as 30,000 action messages generated by an MRP regeneration.  This exemplifies the complexity of the MRP plan and sheer volumne of exceptions in many organizations.  The organization cannot work all of these recommended actions, but which ones are the right ones to work?  Which ones signal that something in the higher level plan needs to be adjusted?  A second level, automated process needs to be in place in this type of environment to prioritize actions and also alert the responsible parties. 

The capability is required to detect what future demand will be late due to the mis-alignment of supply schedules,  issues with capacity in the supply chain and other issues.  If the future state/impact cannot be detected, then adjustments or contingencies cannot be put in place to avoid or mitigate them.  And as mentioned, we also need to be able to determine which of the detected changes require action and by who.

Responding To Change

Once changes are detected, we need a process to effectively implement these changes. This involves two key process and system capabilities:  simulation and collaboration.

We need to be able to simulate what-if scenarios to determine how best to deal with the change.  For example, it is difficult to calculate what the impact of a supplier changing commitments on a PO schedule will be in many environments without being able to simulate what that change in the commitment does to the overall plan.  In developing a response to the change, we need to be able to simulate multiple action alternatives and assess how well they will solve the problem and also whether they are achievable.

These simulations cannot be done in a silo.  Any significant change needs to be collaborated on with the extended supply chain.  Collaboration is certainly required with other internal organizations and potentially with affected external suppliers.

I realize that the above is very high level and probably over simplified, but I believe the general concepts are necessary in a complex manufacturing environment to optimize planning.  Without an optimized plan, execution cannot be effectively and efficiently accomplished and we have to resort to a lot of brute force exercises, including expediting.  Even the best of plans needs to be monitored for required adjustments and we need to have effective processes and systems in place for responding to these changes.

Has your organization implemented a process for responding to change?

First you have to decide where the concept can be applied.  This suggests that you examine your existing processes to determine where you can address a significant portion of the normal variation with a minimum of organizational effort.  That alone can be a major stumbling block and too often I’ve heard the comment “everything is an exception around here”.  So the challenge is identifying what constitutes a meaningful exception, and in my book, a sign of a good process is where something is an exception less than 10% of the time.  The next step is to identify who needs to act, how they will be notified, and what tools they will need to address the exception.  Not a trivial job, but well worth the effort.   

Let’s use a common administrative process as an example, committing to a sales order delivery date.  For this example, your business uses either a traditional ATP process, or perhaps product lead time to automatically establish a proposed commit date.  If in 90% of the cases this results in a date that is in alignment with the customer need date, then you have the basis for implementing an exception based process.  In this case, only those orders that do not meet the customer requested date would be identified as an exception and flagged for special consideration.  All other orders would be automatically committed and confirmed with the customer.  This might be refined further to establish tolerances where the exception is only in cases where the delivery date is more than 3 days later than the customer request.

Once the exception condition is defined, an effective process for dealing with them requires timely notification (alerts) to the people who must collaborate to establish an acceptable outcome.  In today’s largely outsourced supply chain, that can be both technologically and logistically challenging.  Not only do they need to be notified of the business condition requiring their attention, but given access to the tools and information that can lead to a rapid and reliable decision.  Using the order commit process as a further example, the ability to meet the customer request date might take one of several paths;

1. Product substitution (if availability exists)
2. Production acceleration (if capacity and material availability exist)
3. Order split (if a partial order can be delivered when the customer needs it)
4. Order prioritization

A well defined exception management process would consider options in a logical sequence and within a time frame that meets customer expectations for responsiveness.

Applying the concepts of exception management to ERP action messages is an area ripe with opportunity.  I’ve known organizations that get 30,000 or more action messages following an ERP regeneration.  In those organizations it is readily acknowledged that planners will never get through the action list.  Therefore, the real question is, “Are they working on the right actions?”  In one organization, a second level analysis was performed on the action queue to evaluate the messages and prioritize them with regards to their importance and impact.  This had a huge impact on planner productivity and overall business performance.  A well designed exception management system should have that effect where ever it is applied. 

The bottom line is that I strongly recommend examining if your organization has the tools to effectively implement exception management processes.  This requires the ability to generate alerts, identify the right participants, provide the right views of information, and facilitate collaboration where needed.  The investment to put this in place will typically yield returns that are often 10X within the first year.  With the economy now on the rebound, the time is right to better leverage your organizations human capital through the implementation of effective exception management processes.

Here’s the big question:  Will companies think differently after suffering the consequences of this natural disaster?  What will they do different?

I don’t think the answer is building more just in case inventory. In order to stay competitive supply chains have to be lean. (In fact, they are becoming even leaner with late stage postponement to satisfy increasing levels of customization on consumer goods.)

Here are some questions for consideration:

1. Can you proactively analyze and understand the risk of unplanned events?  This may be the upside or downside in demand or supply disruptions. This also includes the identification of sole sourced material.
2. Do you have the visibility and access to information in your supply network that you need? More and more companies are looking for a global view of all of their inventory with the need to rebalance as the demand and supply fluctuate
3. Do you know what to do when you have a problem that you just can’t solve?  When a volcano happens there is not much you can do about it. The question is are you making the best use of the supply that you have? How do you want to prioritize demand and allocate your supply? How quickly are you able to make these decisions?

While there may never be another volcano that disrupts the supply chain, there are daily disruptions that affect companies every day, and that taken in sum can have a material impact to the business. How do you deal with them?  Send in your stories!

Each week that I went to the store and saw a sign “Eggo Waffles are temporarily experiencing a shortage” on the freezer door my heart started pounding thinking about the drama I would have to endure at home.  This made me think about the whole issue of the supply chain breaking down for this product that is beloved by so many people.  I can’t remember in recent history (other than Elmo at Christmas) any time where a consumer product was missed so much by so many.  How could this happen??

Obviously, you can’t predict a natural disaster or even some technical repairs, but you could prepare for both of these unpredictable events if you had the ability to simulate these types of changes and understand the financial and operational impact in advance.  With a capability to simulate demand changes or supply changes, a company could put in place backup measures to ensure that if this event occurs they could minimize the disruption to their business.  Being able to respond to unpredictable events is clearly not unique to Kellogg’s; it is something all manufacturers should think about.  The world today is very unpredictable with many natural disasters, the state of the economy, political issues, etc.; I think it would be wise for everyone to plan for the unexpected and be able to respond quickly to change… as I would hate to go through the “Great Eggo Disaster” again with any other product.

I’m sure no one was predicting the need for these products in 100ml sizes a couple of years ago. And what if the airlines lifted the size requirement on liquids or reduced it to 50ml? What chaos would that cause the demand planners of the world? Walking to the front of the store I noticed some Olympic wear. As you know, Vancouver just finished hosting very successful Olympic and Paralympic games. I could only imagine the heroics and horrors that were experienced to make these games the success they were. Everything from scheduling materials for the new venues to the clothing, flags, food and everything else required for the games. Will the promotions to sell off Olympic paraphernalia make up for the excess inventories now on the shelves and in the warehouses?

In a discussion thread on the supply chain expert community, Joshua Gao asked what your “Vision of the Supply Chain” is?  Well, if we look to the past many things are different from our grandparents’ supply chain. Two of the biggest stand out.  First, customers are more demanding. I mean that in a positive sense, in that customers can quickly research products, understand trends in technologies and purchase what they want with a few clicks of a mouse. The second is that supply has become more fragile. Outsourcing, margin pressures and even catastrophic events can cause supply challenges. So this gets us back to the vision of the future and the question, how accurate does the forecast need to be.

In the past, good enough may have worked because there were fewer demand and supply pressures. But today and in the future, is it better to have an accurate forecast or should the focus be on handling the deviation?

If the focus is to manage the deviation and leverage your supply chain as a competitive advantage, then how much effort should go into developing the forecast if you know it is going to be wrong anyway? This is where it would be helpful to get your feedback since the answer may vary based on industry etc. Does the forecast need to be more accurate given the supply chain challenges of today or do you just need some number to start with since you will have to handle change regardless what the forecast states? How close does the forecast need to be, 40%, 60%, 80%?

Just one final request for feedback: if you were involved in any Olympic related supply chain stories, it would be great to hear them. Maybe your story will make the podium and win gold, silver or bronze!