In my last post, I presented some problems with traditional S&OP systems.  I then pondered what if you could…

• Create a new demand plan (or several) and instantly see how this new plan would impact your supply chain down to the smallest component?
• Drive your supply plan from any forecast stream (Sales, statistical, marketing, customer, pessimistic, optimistic) or combination of streams?
• Change which forecast drove your supply chain and evaluate the impacts?
• Visualize these plans against the same key corporate metrics you use to run your business?
• Compare various plans against each other AND against your annual targets?
• See a problem at the sales and operations level, and were able to drill down until you found the problem, no matter how far down the supply chain the problem exists?

Sounds pretty good right?  Let’s see what it takes to get this kind of functionality:

1. You need a system that allows you to create “what-if” scenarios instantly, and provides the ability to collaborate with these scenarios.
2. You need to have both collaborative demand planning and complete supply planning in the same tool.  The supply planning tool needs to accurately emulate the planning done by your ERP system.
3. You need to be able to drive the supply planning system from the demand plan.
4. Further, you need to be able to configure which forecast stream (or combination of streams) forms the demand plan (and therefore drives the supply planning process). This combined with #1 will allow you to evaluate and compare different demand planning scenarios.
5. You need excellent reporting tools that allow you to understand supply issues, their cause, and potential resolutions.
6. You need excellent reporting tools that allow you to present the recommended S&OP plan, the issues, and alternative resolutions to the executive team.

What does this do for your S&OP process?
Two things:

1. Your S&OP planning process will be faster – supply planning and demand planning are in the same tool, collaboration is enabled between supply planner and demand planner, and resources allow you to quickly identify and resolve issues.
2. Your S&OP plan will be more accurate – powerful collaborative forecasting tools are combined with the ability to understand at a detailed component level how a given demand plan impacts supply.

So, why are speed and accuracy so important?  I think accuracy is self-explanatory, but what about speed? We do S&OP on a monthly cadence, so why should I worry if my S&OP process takes several weeks? There are two key drivers for faster S&OP processes:

1. Timeliness of data – remember that the first step in any S&OP process is data gathering.  If your S&OP process takes three weeks, then the data you are basing your decisions on is at least three weeks old! I talked to one company that had a six week S&OP process to support a monthly cycle. I don’t know how they came to any useful decisions with that data.
2. Ability to respond – Imagine the following scenario: You just finished your S&OP process and have an approved plan. You come in Monday morning to discover that one of your key suppliers has had a major problem and has cut production in half and this has impacted items across multiple product lines. The response is going to require coordination across sales, marketing, procurement, and manufacturing. Sounds like an S&OP level problem right?  If it takes you three weeks to pull the plan together, you may as well not bother…decisions will be made on little or no data because they need to be.  If, however, you can pull a plan together in days or hours, you can base your response on current, accurate data.

When I presented my workshops at the Kinexions user conference, I polled the room asking how many participants had an active S&OP process at their companies. In each case, the vast majority of participants had an active S&OP process. Those that didn’t were planning on implementing one soon. What this means is that S&OP itself is no longer a differentiator. To step above the competition requires that S&OP be a more agile, responsive tool. Traditional S&OP systems simply are not capable of being this tool because the supply plan and demand plan are not connected, they don’t allow easy simulation and they don’t allow you go drill from the high level to the detailed in a single tool. It’s time for a new way of looking at S&OP. What do you think? Comment back and let us know.

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

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

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

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

Kinaxis: What is DMSG and when was it started?

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

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

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

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

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

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

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

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

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

The DMSG looked at 3 different bridging processes:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

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

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

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

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

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

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

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

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

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

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

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

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

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

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Clarence Chen
Principal
PRTM

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Doug Lada, PMP
Program Management Consultant
CSC

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

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

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

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

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

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

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

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

Source Aberdeen Report Survey 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Bob Ferrari
Managing Director
The Ferrari Group

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Mary Hayes Weier
Editor at Large

InformationWeek.com

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

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

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

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

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

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

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

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

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

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

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

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

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

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Robert D. Kugel, CFA
SVP & Research Director – CFO and Business Research
Ventana Research

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Rob has been a technology analyst for over 20 years. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.

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

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

Robert: B2B planning is essential in today’s economy.

Business to business (B2B) planning is an emerging imperative driven by the dis-integration of business models and the resulting increased complexity of their supply chains. For more than a century, many industries found value in vertical integration. At one time Ford Motor Car even owned iron mines, barges to transport the raw material, rubber plantations and so on. The rationale for vertical integration has diminished as a result of freer trade and more transparent markets. Rather than capturing value, vertically integrated organizations increasingly found parts of their business were losing them money. Over the past 25 years, vertical integration has been waning as companies seek to focus on those parts of the business system where they have unique competence and strategic advantage. Consequently, businesses now have longer and more complex supply chains to manage. This trend is likely to continue as long as governments remain committed to free trade.

More extensive and fragmented supply chains, however, have exposed corporations to risks that vertically integrated companies don’t have. Buyers must keep on top of suppliers’ ability to deliver reliably at a given price while suppliers must be able to have an accurate forecast of demand. The more specialized the product and the longer the lead time on the item, the greater the risks. Timely and accurate sharing of information is the most important aspect of mitigating these risks.

Early on in the dot-com days, some naïvely assumed that information exchanges would be the solution for effective communication, especially since these could be less expensive than proprietary networks. However, this proved to be useful mostly for high volume, commodity-like items. Rarely are these a problem for businesses. Over the past decade, well managed companies have started to focus their business to business planning efforts with a select group of trusted, strategic partners.

The planning process must provide executives and management across the entire supply chain with the ability to integrate their planning and forecasting activities to achieve better coordination in establishing accurate plans. When conditions change (as they always do) companies must adapt quickly and collaboratively. They must have an integrated business to business planning process in place to succeed in today’s dynamic global economy.

The lack of ongoing, integrated business to business planning may not be a big issue when business conditions are stable, but how often does that happen? Over the past two years, businesses worldwide have had to contend with extraordinary levels of volatility in commodity prices and exchange rates. Economies once booming have gone into recession. When forecast accuracy is almost impossible, the value of having up-to-date demand visibility and being able to re-plan quickly with the most important members of a supply chain is clear. B2B planning ought to be a structured dialogue across the organization – “structured” by the inclusion of numbers that bring precision to the discussions. The challenge is to figure out how to collect the relevant forward-looking data and analysis from the various participants and assemble them into a coherent view in a consistent, timely and accurate fashion.

Companies need tools to help them achieve an effective business-to-business planning effort. Until recently information technology to support a structured dialogue across an organization could not do that in a way that people would find easy to use. Most companies continue to use stand-alone spreadsheets to manage individual planning processes, not realizing that the limits of spreadsheet technology constrain the effectiveness of the process itself and the ability to share information.

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Simon Ellis
Practice Director, Supply Chain Strategies
Manufacturing Insights, an IDC Company

Simon Ellis currently leads the Supply Chain Strategies practice at Manufacturing Insights, one of IDC’s industry research companies that addresses the current market gap by providing fact-based research and analysis on best practices and the use of information technology to assist clients in improving their capabilities in key process areas. Within the Supply Chain practice, Ellis specializes in advising clients on LCS (Low Cost Sourcing), Lean, Six Sigma and more.

With over 20 years experience in the industry, Ellis most recently was the Supply Chain Strategy Director/Futurist for Unilever North America, a $12 billion division of Unilever, the maker of such well-known products as Dove, Suave, Wisk, all, Q-tips and Vaseline. Simon was responsible for leading the implementation of key new technologies that impacted the future of the Unilever Supply Chain. Specifically he led the North American RFID and e-Catalog teams, and was the project leader for the new Data Management Organization.

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

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

Simon:  We are seeing manufacturers really focus on capital preservation and maximization of existing assets. So, ensuring that physical plant and equipment and working capital is being used as efficiently and as completely as possible – but also leveraging intangible assets like brand reputation and ‘trust capital’.

Most of the large manufacturing firms we speak with also realize that with a downturn comes an inevitable recovery. Even the automotive industry talks about past patterns of their industry being “first in, first out” when it comes to a recession and being ready to serve the pent up demand.

Economic downturns also represent an opportunity for manufacturing companies to recalibrate their operations. Channel partners can be rationalized, inventories reduced, production assets modernized, and, most importantly, supply and demand can be rebalanced in preparation for a recovery. We also expect to see continued investment in modernization of the supply chain – particularly on the execution side where investments in physical logistics, inventory and network optimization tolls can offer quick payback.

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

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

Simon: We have written quite extensively about the globalization of demand and its implication on manufacturers supply networks in a concept we call Profitable Proximity Sourcing. Briefly, we see manufacturers looking to balance cost and lead-time optimized networks with the growth in consumer demand. We think that a narrow focus only on low-cost country sourcing can actually lead to a sub-optimized global supply network, particularly as service implications and logistics become a bigger part of the cost equation.

We do expect to see the continued globalization of demand as countries like China and India transition from low-cost producers to emerging economies, and for certain labor-intensive categories, those countries will remain a cost-efficient place to manufacture. But as those economies mature and workers begin to demand a ‘globally fair wage’, manufacturing will have to look much more closely at a total landed ‘profitable proximity’ cost approach to global sourcing.

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

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

Simon: This point picks up again some of the points in our research on profitable proximity sourcing.
Outsourcing continues, particularly as manufacturers increasingly narrow their definition of core competency, and we expect that to continue.

In the US, particularly, as companies feel the cost and profit squeeze, we may actually see an uptick in outsourcing over the next year or so, but eventually we expect to see leading companies move more towards a total landed cost/globally balanced supply network where manufacturing cost is just one component of the equation along with lead-times, global demand balancing, sustainability issues and risk management (including quality and IP protection).

In that context, we do expect to see a balance of off-shoring and near-shoring, with local-to-demand sourcing being an important component.

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

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

Simon: This is what we call the ‘commoditization of the supply chain’ and it continues to blur lines between the brand owners and their contracted suppliers. The outsourcing trend seems unlikely to reverse, given the enormous cost pressures, so a return to the integrated supply chain model is unlikely.

IP and brand protection is critical and brand owners must be very careful to recognize what gives them competitive differentiation and maintain careful control over those ‘assets’. We expect to see a broadening and deepening of the brand owners supply ecosystem to the point where it will be many layers deep. In this kind of ecosystem there is a fine line between control and chaos and the brand owner must have adequate visibility into the network to be able to make the right decisions at the right time. Visibility and networking tools will be increasingly important to maintain an efficient supply network.

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

• What are the drivers for this adoption?
• What are the barriers to wider adoption of SaaS for core supply chain processes?
• Will this trend also lead to the outsourcing of the process itself? In other words, will we see the emergence of companies that specialize in procurement for, say, pharmaceutical manufacturers?

Simon: We expect to see pretty dramatic growth of SaaS over the next few years, particularly as manufacturers get more comfortable with the security of their information.

The movement of SaaS into supply chain analytics, for example, has been an interesting trend to watch as companies have done their fair share of hand-wringing over moving proprietary data outside their firewalls, yet, the pressure on costs and productivity makes this an almost inevitable trend. SaaS, essentially, offers manufacturers with a lower risk, more efficient way of implementing capabilities with a higher ROI and shorter payback – all things they are looking for in a tough economic climate.

The interesting side effect of this though, is a continued ‘commoditization of the supply chain’ where if everyone is using a particular SaaS capability, it cannot by definition be an area of competitive advantage. It is for this reason that we do not see a complete outsourcing of complete business processes as companies try to hold on to the bits that they believe drive their differentiated value proposition.

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Gary Lynch
Global Leader, Supply Chain Risk Management Practice
Marsh

Mr. Lynch is Global Leader of Marsh’s Risk Intelligence Strategies and Resiliency Solutions practice. He is responsible for developing the organization’s risk intelligence capabilities and offerings, as well as aligning and enhancing the firm’s various risk strategies, supply chain, and business continuity offerings. Additionally, he is responsible for developing thought leadership around emerging issues such as pandemics and terrorism.

Mr. Lynch has 28 years of experience in the IT & operational risk management profession. He served as the business continuity and information security executive-in-charge at The Prudential and Chase Manhattan Bank (now called JPMorgan Chase). As a partner at Booz Allen Hamilton, he was responsible for the operational resiliency and Information assurance practice. He also served as research director and industry analyst at the Gartner Group and was responsible for launching one of the firm’s most successful service offerings.

You can also listen to a podcast of this interview at “Getting supply chain risk management right.”

Kinaxis: Is there a supply chain risk management maturity model?  If so, can you describe it and explain how organizations have generally matured in this regard?

Gary: From my perspective, unlike some other disciplines — quality, even continuity as an example — there tends to be a lack of a mature or widely accepted maturity model.  Theoretically, there are different models — for example, some of the guides that are issued in the SCOR (Supply Chain Operations Reference) model are certainly gaining some acceptance—but by no means is there a globally accepted model.  To be globally recognized, the fourth element of any market – clients must reference one another – must be satisfied.

I think how we’ve seen the topic of supply chain risk management mature is interesting because there seems to be two schools of thoughts.  Those in the risk profession have seen an evolution with regards to low probability, high impact events: catastrophic recalls, catastrophic natural hazards – event-driven if you will.  That kind of risk management tends to try and tackle these events through extensive business continuity, emergency planning and crisis management.

And then you have the other camp at the transactional level —which is your operations, logistics, procurement, sourcing executives, even your operations finance executives and CEO for that matter—who are looking at the capital invested in the business, the return on that capital and the daily risk associated with managing the business and many suppliers.

So you have two schools that are maturing the discipline at a very accelerated rate. But it is only within the last three to five years where we have seen acceleration.

One area in particular where we have seen some great strides is greater risk management around the supply base and the suppliers themselves, both at the event and transactional levels. We’ve seen common criteria really coming forward for evaluating and setting expectations with suppliers, and insisting on greater transparency upstream the supply chain.  Unfortunately, the majority of the industry is still viewing supply chain risk management as management of just the suppliers and not of the entire value chain.

Another area where we have seen some maturing is around managing risks to the physical assets and the risk to those physical assets, such as a facility, inventory, and/or key pieces of equipment.

One of the gauges of maturity is if the discipline matures to the point where it can be measured. Then you have the financial markets interested in underwriting that risk, whether it is catastrophic bonds or whether it is contingent business interruption or business interruption insurance.  And we are seeing this today.

Kinaxis: At the day-to-day transactional level, how do you separate out risk management from day-to-day operations?  What is the elemental difference between managing your business and managing it from a risk perspective?

Gary: I think the short answer is – you don’t.  But that’s easier said than done.   Efficiency practices along the lines of lean thinking, or quality practices along the lines of a six sigma, became successful, or had some level of success, when they were fully integrated and began with the demand side of the equation.  I don’t think you can separate the two, nor should you, but at times you do need emphasis and isolation. You do need to create criteria to identify a specific issue, get to a point of concentration where many are looking at the problem, and a dedicated “temporary” organization is driving the initiative with the goal of getting it integrated into the workflow itself.

Kinaxis: So integration is a sign of the level of maturity—being able to integrate it into day-to-day practice, rather than having it as a stand-alone practice?

Gary: Absolutely, and I think some of the industries that have executed on that thinking and have integrated it, or have begun to integrate it well, are the high tech and auto industries.  Industries where we have not seen it as well integrated are the life sciences, retail, food services and construction as examples.

Kinaxis: In terms of the size of organizations, do you find that there is more emphasis on supply chain risk management in large organizations, less in little?  Or do you find that all sizes of organizations are fairly well focused on supply chain risk management at this point?

Gary: We find that there certainly is a lot of discussion and veneer around supply chain risk management and there is a tremendous amount of discussion around managing the risk of suppliers in particular, but from the execution side, I would say across the board it still seems to be a very light practice unless some other initiative is driving it.  So for example, in managing supply chain risks, whether it be from disruptions or environmental implications, we are seeing a lot done in that area, but a lot of it is driven by the opportunity to reduce costs; transportation costs, load costs, things like that.

In terms of a real focus on managing specific risks to the extended supply chain, all the way upstream and downstream —  there are few organizations that are applying that discipline as a whole and trying to overlay it on their supply chain management practices.

I think the organizations that have had the greatest interest and are making the greatest demands are those organizations that face the customers— the hospitals, the retailers — those that are actually on the front end that are touching the customers are the ones that are turning around and setting the demands and expectations of those that are providing them with the goods and services.

Again, I think very little is done in a concentrated way in this space.

Kinaxis: I was interested in your comment that retailers and healthcare are focusing more attention.  Do you think that that’s because of the immediacy of the demand?  In retail, if it’s not on the shelf, you don’t’ sell it. And in an emergency healthcare situation, if you don’t have the medication or the equipment you cannot serve that patient.

Gary: Absolutely, the competition is just absolutely too fierce.  I think it’s really about the pressures; it’s the pressures of added stock conditions, it’s the pressure of poor product quality as we’ve seen over and over again. At the end of the day, you have to look at who’s really taking the heat, not only from a brand perspective but from a financial perspective.  The retailers that have been more conscious and more active are certainly gaining some advantage in that space.

Kinaxis: You’ve mentioned that there’s a difference between dealing with long term or occasional risk and transactional level risk.  Do you find in this period of volatility there is more emphasis in one area rather than another?

Gary: It’s an excellent question and the answer is yes.  I believe there is certainly a lot more emphasis on the transactional level, and in many cases, one-off risk issues.  What I find amazing is that if we would have had this conversation a year or eighteen months ago, we would have been talking about rising commodity prices, rising availability to commodities, and are certain nations such as China capitalizing on that opportunity, and hording commodities?  Our conversation would have been about rising energy costs, transportation, do we move factories because transportation costs have risen so high.  What I find so interesting is that we seldom have those conversations now. The conversation is about the issues around credit, letters of credit, trade credit, trade disruption and to some degree, demand.

Kinaxis: Particularly in discrete manufacturing, people have used inventory as a way of mitigating risk, especially on the demand side. But lean practices have reduced inventory tremendously so they don’t necessarily have the alternative to use inventory as a way of to handle day-to-day disruptions.

Gary: In that case, I think that it puts more pressure on those in the risk profession to ensure that they are really focusing on the metrics and measurement.  If they are going to create the business case for additional inventory they are going to have to be precise as to whether that inventory should be work-in-progress, finished goods or raw materials and why.

Again, I think in all cases, the volatility forces greater measurement both from an impact and an investment standpoint.

Kinaxis: Where do you see technology playing a role in supply chain risk management?

Gary: I think the area most important right now where technology can play a key role is certainly in the visibility of the supply chain — providing some ability to have the correct information to make informed decisions about threats and vulnerabilities along the supply chain.  With technology that’s used to collect the data, understand impact and the implications of the parts, one can look at the whole of the supply chain.

I also think certainly the technology that’s already in use in many cases — whether it’s global positioning or RFID technology —  again, the data that’s collected provides some great inputs from a modelling perspective. Having information more quickly, knowing whether the impacts are large or small, knowing quantities, knowing sources, knowing alternatives; those kinds of issues can be critical but are absolutely worthless without the technology driving it.

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Andrew K. Reese
Editor
Supply & Demand Chain Executive

Andrew K. Reese is Editor of Supply & Demand Chain Executive, which is published by Cygnus Business Media of Ft. Atkinson, Wis. Reese joined the magazine in May 2000, and he is responsible for development and oversight of editorial content and production for the magazine. Reese has more than 15 years experience in research and writing. His prior experience includes time as a consultant for a public relations agency in Moscow, Russia, dealing with accounts for leading Western technology and consumer-products companies entering the post-Soviet market.

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

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

Andrew: One of the lessons that supply chain executives may want to consider as a result of the current downturn is around the risk inherent in pursuing short-term business goals – or applying short-term thinking to business.

Dr. Henry Mintzberg, a professor of management studies at McGill University in Montreal, spoke in a recent interview with the Financial Times about the dangers of orienting strategies toward driving short-term shareholder value. “Any idiot can drive up share price by doing damage that won’t show up [until] later,” Mintzberg says in criticizing what he calls “this nonsense of shareholder value.” He cites the example of top executives who burn out their managers in the intermediate term to get maximum performance “while pushing as much as you can out of them in the short term.”

Similarly, there is a risk in the current downturn that supply chain executives will resort to taking short-term measures that ultimately wind up being counter to their company’s long-term interests. One need only look to the U.S. domestic automotive industry and the O.E.M.’s reputation for squeezing margin out of its supply base for an example of how a supply chain strategy based on immediate-term gains can prove ruinous over the long haul.

So the takeaway for supply chain executives would be to think about the long-term consequences and potential “blowback” of any actions that they take today in reaction to the current economy. Belt-tightening and cost-cutting are going to be a fact of life as company’s realign their operations to survive the downturn, but the goal ought to be to do things better, not just cheaper, and to optimize for the long term as well as in the short term. Those companies that do so are likely to be better positioned to take advantage of the inevitable upturn.

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

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

Andrew: The consensus seems to be that government intervention can certainly prop up a failing industry for a time, but market forces eventually are going to act to drain either the government’s coffers or public goodwill dry. That said, thoughtful public support to help transition an industry like domestic OEM automotive could be constructive if the industry as a whole – OEM management, unions, local governments – are willing to make the hard decisions and shared sacrifices necessary to effect long-term change.

Part of the challenge, if that is the road that the U.S. government elects to go down, will be to provide political leadership to help the public understand why such an assisted transformation might be beneficial to the economy as a whole – why it is better to provide for an orderly transition rather than a sudden failure with the resultant economic and social dislocation.

And there needs to be a dialog about whether it is indeed “in the national interest” to have a domestic OEM automotive industry in the first place. Voices from across the political spectrum are willing to answer “yes” to that question, whether out of support for the union jobs that the domestic-headquartered industry supports in this country, or for the purpose of supporting a component of the “military-industrial complex” viewed as strategic, or for purely economic reasons (the National Association of Manufacturers, for example, recently pointed out that automobiles account for about 20 percent of U.S. retail sales, one out of every 10 U.S. jobs is auto-related, and auto workers receive $355 billion annually in compensation).

One way or another, in the end, industrial welfare can only go so far. And while governments can pick winners and losers in an economy, they can’t long sustain the cost of making winners out of losers.

Kinaxis: We have seen the globalization of demand, especially in the fast growing developing economies of Brazil, Russia, India, and China (BRIC).

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

Andrew: Despite the current global downturn, the fast-growing economies are likely to continue growing, albeit at a somewhat slower pace. If, for example, China dips, for a year or even two, into single-digit growth versus the long-term trend of double-digit expansion, that is going to be seen over the long haul as a very temporary blip.

That has two implications for the supply chain. First, companies will continue to look to developing nations as sources of supply for finished goods and raw materials, so they will continue to extend their supply chains into those regions when it makes economic sense. The long-term upward march of fuel costs is going to affect those decisions over time, of course, but the economics of lower-cost labor and other factors will keep these regions attractive.

Second, the slow but steady rise of middle-class cohorts in these countries will continue to make these countries attractive over the long-term as consumers of products and services from the developed nations – again, the current downturn notwithstanding.

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

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

Andrew: Outsourcing is, in part, of course, about reducing costs and focusing on core competencies, but it is also about flexibility – the ability to “flex” manufacturing capacity up and down to meet the ebbs and flows of demand. For that reason, OEMs are unlikely to turn away from outsourcing where it makes economic sense. In fact, the economic downturn has only increased the argument for leveraging third parties to provide services that can be ramped up or down as required.

The challenge for the brand owners, then, is understanding where and when outsourcing and, more specifically, offshoring makes economic sense. The run-up in fuel and other logistics costs last year led to some rethinking about the true costs of managing a complex global supply chain, while the prospect of supplier failure has turned the spotlight on supplier risk management. The current political environment also puts the expansion of further free trade agreements in doubt.

All these factors speak to the need for a balanced “hybrid” approach in many cases, utilizing domestic “onshore” or “in-sourced” capacity, for example, to meet surges in demand along with offshore capacity to meet base demand, with the balance shifting over the lifecycle of any given product.

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Bruce Richardson
Chief Research Officer
AMR Research

Bruce Richardson brings more than 27 years of experience to his current role as chief research officer at AMR Research. Bruce has spent most of his career analyzing the software industry with a distinct emphasis on ERP and supply chain. Since joining AMR Research in 1988, he has been responsible for spearheading new market coverage and contributing to the company’s analysis of leading market trends in areas such as ERP, supply chain management, service-oriented architectures, software-as-a-service, software appliances, and virtualization and visualization.

You can follow Bruce’s blog at The Future of Enterprisese Software.

Kinaxis: We are experiencing a rapid and perhaps long-lasting downturn in the economy.  What specific supply chain initiatives can be applied in the short term that will have greatest effect on a company’s financial performance and sustainability?

Bruce:  Given the sorry state of the economy one of the top priorities is to get a 360 degree view of demand.  If you sell your products through channels, the data that you get on consumption may be 6 to 13 weeks old.  That’s unacceptable.  You need to move closer to real-time.

Smart companies are also building pipeline management dashboards to manage changes to forecast.  They are a looking at the data across multiple dimensions – products, geographies, customers and reps to sense any changes that may require immediate intervention.

Kinaxis:  We have seen the globalization of demand, especially in the BRIC  (Brazil, Russia, India, China) countries.  Notwithstanding the current economic downturn, will this trend continue?

Bruce:  I wish I could be more optimistic about manufacturing jobs returning back to North America.  The only case would be for products where the cost of logistics exceeds the cost of manufacturing.  In those cases, though, the primary benefactor in North America might be Mexico.

What’s more likely is that every few years we will evaluate our manufacturing partners on the basis of costs and risks against new opportunities (i.e., shifting from China to India or Vietnam.

Kinaxis: How will this impact product development, and by extension the products available in the developed countries?

Bruce:  Follow-the-sun product and software development will continue to be the norm.  The one question is whether any country can challenge Taiwan for product design/manufacturing leadership, especially in consumer electronics.  Indian companies have been threatening to do so.  There are new schools starting up, but we have yet to see a shift to India.

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

Bruce:  We have seen an uptick in interest in multi-enterprise supply networks.  Manufacturers would love to have one low cost,  industry “standard” for dealing with suppliers – and customers, too.  Ironically, despite all the promise of XML, it’s still an EDI world.

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

Bruce:  While my peers at other research firms may dispute the cost advantage that SaaS has over on-premise, I think they are crazy.  SaaS deployments have no servers or data centers, require minimal IT attention, foster continuous innovation (through quarterly or semi-annual upgrades), and use less energy.  Compared to most ERP applications, SaaS looks more like a consumer application.  They are much easier to use.

Kinaxis: What are the barriers to wider adoption of on-demand services for core supply chain processes?

Bruce:  The barrier is often the CIO, aided and abetted by the large ERP vendors.  The primary concerns are Sarbox compliance (i.e., concerns over “where’s my data?”) security, governance, data management, and integration.  So far, security has not been an issue.

Kinaxis: Will this trend also lead to the outsourcing of the process itself?  In other words, will we see the emergence of companies that specialize in procurement for, say, pharmaceutical manufacturers?

Bruce:  Pharma is pretty conservative.  I could take you to a large semiconductor company who’s using a combination of open source, SaaS, business process outsourcing, and cloud applications (e.g., he replaced Microsoft Office with Google apps) to drive down the cost of non-core processes.  Ironically, the CIO there argues that IT fits into the non-core side of the equation.

Kinaxis:  “Cloud” computing is the hot topic in the IT world, and is a superset of SaaS.  Will there be a wide adoption of “cloud” computing in the supply chain management (SCM) world?

Bruce:  Today, the only people talking about cloud computing are analysts, journalists, and vendors operating in the 650, 415, and 408 area codes.  That’s changing quickly.  I think in the not-too-distant future we will have all of our supply chain data available in the cloud.  It will be real-time and available in 3D.  For example, I recently visited Zappos, the $1B online shoe retailer based outside of Las Vegas.  As we walked through the hallways, I saw a flat panel display showing web visitors mapped against the map of the U.S.  Every new visit resulted in a new “footprint.”   In the future, we’ll turn to the cloud to look at real-time data for all facets of our supply chain.  Wouldn’t it be nice to not have to lug your laptop when you travel?  Wouldn’t it be great to use that 42-inch television in your hotel room as your laptop screen?  Imagine having email and your individual dashboards on display on one side and the Red Sox game on the other!

We are very pleased to announce that, starting tomorrow, we will be launching a weekly Supply Chain Expert Series on this blog. The Supply Chain Expert Blog Series is a roundup of thought provoking ideas and unique perspectives on today’s most pressing supply chain management issues from the industry’s top supply chain thought leaders.

The series will feature a weekly Q&A with experts including top research analysts, consultants and key members of industry associations, academia and press.  You can see all of the interviews in the series here.

The series kicks off with insight from Bruce Richardson, Chief Research Officer, AMR Research. In his post, Richardson comments on the declining economic climate and what specific supply chain initiatives can be applied in the short term to have greatest effect on a company’s financial performance and sustainability.

Consistent with the mission of the 21st Century Supply Chain blog, the expert Q&A series will explore relevant and compelling industry issues, such as:

• The economic downturn and its affect on the supply chain and supply chain risk management strategies
• The government stimulus package and its impact on the industry landscape
• Supply chain management trends including outsourcing, integration, sales & operations planning, globalization and more
• On-demand / Software-as-a-Service

For free access to the entire Supply Chain Expert Blog Series, please visit the 21st Century Supply Chain blog and sign up for email, twitter or RSS updates.

Some of the experts that will be featured in the  Q&A series include:

• Corey Billington – Professor, Procurement and Operations Management, IMD Global Business School
• David Blanchard – Editorial Director, Material Handling Management and Outsourced Logistics
• Abe Eshkenazi, CSCP, CPA, CAE – Chief Executive Officer, APICs – The Association for Operations Management
• Clarence Chen – Principal, PRTM
• Colleen “Coco” Crum – Managing Principal, Oliver Wight Americas, Inc.
• Simon Ellis – Practice Director, Supply Chain Strategies, Manufacturing Insights, an IDC Company
• Bob Ferrari – Managing Director, The Ferrari Research and Consulting Group
• Mary Hayes Weier – Editor-at-Large, InformationWeek.com
• Robert Kugel, CFA – SVP & Research Director, CFO and Business Research, Ventana Research
• Larry Lapide, Ph.D. – Research Director, Demand Management Solutions Group and Director, Demand Management at MIT Center for Transportation & Logistics
• Gary Lynch – Global Leader, Supply Chain Risk Management Practice, Marsh
• Andrew K. Reese – Editor, Supply & Demand Chain Exeuctive
• Bruce Richardson – Chief Research Officer, AMR Research
• Nari Viswanathan – VP, Principal Analyst, Supply Chain Strategy & Planning, Aberdeen Group

We welcome your comments on the insights that will be shared during this series.