The obvious first approach is to fix the situation with the late supply, but a lot of times this cannot be accomplished.   Many different strategies are in place at some manufacturers to mitigate this type of situation, such as: vendor managed inventory, lean manufacturing, schedule sharing with suppliers etc. but, regardless, I have seen at many of the customers I have worked with a lot of late and past due end product demand.
So when late supply, and therefore late end product demand is inevitable, what is the best way to deal with this situation and reduce inventory?  From my point of view, to effectively plan and reduce inventory, there are some key capabilities required:

1. Ability to identify the gating components and determine when they will be available.  Required here is a tool to easily identify gating components as well as an effective way to collaborate with and get reliable commitment dates from suppliers.
2. Visibility into the gating components far enough in the future to reschedule the end product demand so that purchase orders and production orders on other components can be delayed in time to realize inventory savings.
3. Capability to determine if the rescheduling of demand is worth the inventory savings given the administrative effort involved, as well as the change and disruption at the suppliers.  This implies an ability to simulate the change and calculate the potential inventory savings as well as the amount of rescheduling that will need to be executed.

I would like to know your thoughts on this subject. If this situation is applicable to your manufacturing operations, how do you deal with it? What tools or applications do you have that assist you in effectively managing late supply against customer satisfaction and inventory levels?

I heard about this issue on TWIT (This week in Tech – a technology podcast).   I followed up and found this story from the LA Times.  The LA Times story is based on a post in Bunnie Huang’s personal blog.

It goes something like this…

Bunnie Huang, Founder of Chumby Industries was called in to look at a quality problem with one of his products, the Chumby one – a handheld digital device. It turns out that the memory card being used in the product failed the quality tests. The failing memory cards were all Kingston branded and all from a single batch.  When Bunnie tried to exchange the cards from that batch, Kingston refused because the memory cards had already been programmed.

Not to be dissuaded, Bunnie did some detailed (and I mean DETAILED – check out Bunnie’s post to see the extents he went to) investigation and was able to determine that the defective cards were very likely produced on the same machines as the certified Kingston memory. This led Bunnie to believe that the Micro SD cards he had been sold had been run in a “ghost shift”.  A ghost shift is where a rogue  worker walks into the factory after hours and runs off a couple hundred units of a product without the knowledge or consent of the factory.  Further, there is no quality control checks made on the finished product, and the products are often made with rejected materials.   When presented with this evidence, Kingston decided to exchange Bunnie’s defective chips with new ones.

This raises issues for both component buyers, and for component suppliers;

For component buyers, the source of your supply is as important as the brand of your supply.  There have been numerous stories outlining the risk and impact of counterfeit components. Similarly, we need to be aware of the risk of supplies that aren’t really counterfeit – they are actually produced in the same factory, on the same machines, but are not certified by the brand owner.  In Bunnie’s case, he was very lucky that the QA process caught the bad parts before they went out to his customers.  This won’t always happen.  The flaws may well show up weeks or months after the customers get their hands on the products.  Depending on the nature of the flaws, the  impact could be anywhere from an inconvenience, to a full blown disaster (a-la Toyota).  When buying components, make sure that your supply source is a reputable dealer. You may end up paying a bit more, but you have a better chance of getting what you paid for.

For component manufacturers, make sure your equipment is being used only to run those components you have authorized.  How many customers would have had the perseverance and technical where-with-all to do the analysis that Bunnie did.  Most would have chalked up the bad chips to poor quality on behalf of the manufacturer – in this case Kingston – after all, the chips were Kingston branded – right?   Companies such as Kingston that have (and deserve) a stellar quality reputation can see that market perception erode if branded rogue products start entering the market.

Do you have a similar story to tell?  Have you run into counterfeit products?  Respond back and let us know.

Our very own, Monique Rupert (vice president of professional services) offered her solution to the case-study challenge.  And to our great delight, so did Kevin Hume, a principal at Tompkins Associates.

Does the following situation sound familiar? 

One year ago my company embarked on an enterprisewide implementation, selecting an ERP system and a suite of software to address our primary business functions. This decision was not made lightly. Lestornia Lighting is a $120 million manufacturer of commercial and industrial lighting fixtures and components (e.g., sockets, lampholders, wiring harnesses, reflectors). We’ve grown incrementally over the past two decades, and our business practices and processes — and the information technology (IT) that supports them — has grown piece by piece as well. I finally concluded that the Frankenstein IT infrastructure we had cobbled together needed to be destroyed. Now I greatly regret my decision.

Literally from the outset of our enterprise implementation, the scope of functionality, customizations, and departments and personnel engaged in the effort have spread like wildfire. Lestornia expected to be operating with our new systems six months ago; now we cannot get a projected date for when we will hit the switch. The escalation of costs specific to software licensing and the implementation have blown beyond anything I’d ever imagined. And with the infectious spread of applications and department-specific functionality and customization, our training and maintenance costs are doubling by the day.

I swear that every person in the company is working on this system and software implementation in some way or another, and no one is focused on making lighting products or focused on our customers. I am afraid that this project will, quite simply, kill Lestornia before we ever see a dime of return from our investment. How can we subdue the new monster we’ve created?

Find out what Monique and Kevin recommended….  Better yet, share your stories of hard lessons learned…

While trying to formulate my ideas about the causes of lack of alignment, I came across a set of postings by Dustin Mattison on his Logipi blog and on one of the LinkedIn discussions, which postulates that the problems at Toyota can be boiled down to organizational structure and culture.  This has been manifested by power “fiefdoms”, lack of transparency, and therefore lack of alignment between different functions.

There is a great section in “The Big Switch” in which Nicholas Carr traces the origins of organizational structures and their impact on performance.  (I wish I had a more formal source, and I am sure some of our readers can point me to one.)  Our organizational structures have been inherited from the military and really date from as far back as Roman times when there was no ability to communicate in real time.  Imagine the time it took to get a message from Rome to Cairo?  As a consequence, hierarchical structures were developed to ensure a process of central command and control.  Loyalty was prized above all else and disloyalty was dealt with very harshly.  The 20th century phenomenon of the corporation used the same organizational structures and same command and control attitudes, largely because the means of communications had not progressed since the Roman times, though the penalties for disloyalty (or poor performance) are considerably less harsh.

The business process reengineering efforts led by Michael Hammer, Tom Peters, and Peter Drucker in the 1990’s was the first attempt to correct this by “de-layering” management. But think about it: They were doing this before the wide-spread adoption of the internet, when faxes were still considered state of the art.  While the enthusiasm for BPR has waned because when put into practice it focused too much on efficiency (read headcount reduction), the fundamental idea that business processes can be more effective – not just more efficient – has been carried forward by Lean and Six Sigma concepts.  And the internet specifically, but technology more generally, is the enabler.  This is what can/does provide/enable the transparency Richard Wilding of Cranfield University talks about in an interview with Dustin Mattison, which is so crucial in breaking down the power barriers to more effective sharing of information across functional and organizational boundaries.

And yet we still have senior management (and professors in business schools) to whom IT in general, but the internet specifically, is a learned phenomenon.  Before anyone thinks “Yeah, yeah”, let me point out that I am one of the people who have “learned” how to use the internet and I am still not comfortable with “tweeting” and “blogging”.  In short, I am not comfortable with that level of personal “transparency”.  At the same time, I am staggered at how many mid-tier managers, let alone senior managers, still receive paper-based reports, scribble all over them, and then send the scribbled notes back to an underling who is supposed to act on the scribbled notes.  This is all about power and has little to do with effectiveness.  They could have just as easily made changes to values in a system and annotated these with some comments. This information would be available immediately to anyone who had to take action or make further decisions based upon the inputs from the senior manager.

Exacerbating the fact that much of senior management does not come from the “internet” generation is the difficulty of using existing IT applications and systems.  The fundamental drawback of existing supply chain systems specifically, but operations systems in general, which prevents their wide adoption by senior management is that they lack the ability for people (read senior management) to perform quick and effective what-if analysis.  It takes too long for them, and in truth it is also too complex, to create and analyze scenarios themselves, so they devolve this to more junior people who don’t really understand what it was the senior manager wanted to investigate in the first place.  More correctly, the senior manager is forced to take a structured approach to investigating and solving an issue whereas in reality problem solving is a very unstructured process governed strongly by exploration and discovery.  Even when senior managers have monster spreadsheets available to them, there is:

• little to no connection to the current situation
• insufficient level of detail to get a realistic evaluation of the future consequences of their decisions on financial and operational metrics, and
• very limited ability to explore multiple scenarios. 

They have to wait until the month end or quarter end to get a report on what has happened, and by that time it is almost impossible to deconstruct the cause and effect.

While I realize the limitation of my thinking (fundamentally I am an operations person) and recognize the impact – both short term and long term – that Finance, and HR, as examples, can have on the performance of a company, in companies that sell, design, and/or manufacture a physical product, Operations is the core business process that determines the current and future success of an organization.

All of this gets me to a brief discussion of Sales and Operations Planning (S&OP).  There are many definitions of S&OP out there and also a lot of discussion on S&OP “maturity” models.  At its heart and in its more simplistic form, S&OP is all about demand/supply balancing.  In other words alignment between the demand and supply side of the organization.  In a multi-tiered outsourced environment, this is not a simple exercise, so my use of “simplistic” is not meant to denigrate this level of S&OP adoption. 

The greatest long term benefit of S&OP, even if this is difficult to quantify, is increased transparency and alignment, as noted by John Westerveld and discussed by Richard Wilding. AMR Research calls this “East-West” alignment.  And yet there are so many more benefits that are achievable by linking Operations to the Executive, by linking financial measures and objectives such as revenue, margin, cash flow to operational metrics such as orders delivered on-time and in-full, inventory turns, and capacity utilization.  AMR Research calls this “North-South” alignment.  A number of the analysts such as Ventana Research, Aberdeen, Gartner, and AMR Research (now part of Gartner) have referred to this North-South alignment as Integrated Business Planning.  Tom Wallace and Oliver Wight have referred to this an Executive S&OP, and now Accenture is referring to this as “Profit, Sales, and Operations Planning”.  Whatever we call it, there are lots of benefits.

The principle barrier to tapping into these phenomenal benefits is the organizational power structures we have inherited from a previous era.  These will not be easy to break down.  But an S&OP process – however sophisticated or rudimentary – will start this process of greater transparency and alignment.  I’ve been participating in 2 discussions on LinkedIn (Has Sales & Operations Planning (S&OP) improved your forecast accuracy? and  What is your biggest S&OP pet peeve?, both of which require membership) and in both discussions there is consensus that the greatest contributor to the successful adoption of an S&OP process is Executive support because this is required to get everyone to “play nicely” with each other.  Clearly this is simply a symptom of the organizational power structures.  S&OP is challenging these power structures, which leads to resistance. There is plenty of technology out there to assist in this process, but ultimately you will need both for a truly successful S&OP process that contributes massively to your company’s future success.  But there is no need to wait until you have organizational buy-in.  As with all organizational change, showing the people how they will benefit for adopting new practices is the best way of getting their buy-in.  So start small and give people information that is useful to them and over time you will be able to ask for information that is useful to you.  If this is too slow for you, make a pitch to your executive team to make sure they back you up to get faster adoption.  Either way, you should not wait.  The benefit to your company is too great to ignore.  Help us create the organizational structures of the future.

1.   Alignment
2.  Decision Making
3.  Visibility
4.  Finance Integration
5.  New Product Introduction

6.  Responsiveness – Responsiveness you ask?  Sales and ops is a monthly process (usually).  How can a monthly process help me be more responsive?  There are two answers to that question.  First of all, S&OP typically deals with longer term concerns; procuring equipment, adding capacity, updating of outsourcing strategies.  That being said, these activities typically have longer lead times. If you have visibility to planned demand changes and can position yourself to be ready for them, you will be able to better respond when they happen.  The other side of responsiveness is asking…why does S&OP need to be monthly?   If there is a significant change that requires a change to the agreed S&OP plan, why wait for the next month?  With traditional tools like Excel, monthly S&OP plans were almost a requirement because it took so long to put together a plan.  With better, more integrated tools, a new Sales and Operations plan can be completed in hours.  Imagine being able to react to a change, with the entire company in alignment within hours.

7.  Monitoring – A big part of the S&OP agenda is reviewing the key corporate metrics in order to identify and resolve poor performance or preferably to reverse negative trends.  This is a key meeting where all the stakeholders are present.  When performance issues are raised, this is the team that can get things resolved.  I’ve sat in meetings where a product line manager was called to task for quality metrics that were trending downwards.  You can well imagine that immediately after that meeting, changes were made to address quality issues.

Once a Sales and Operations plan is set, many companies have difficulty monitoring performance to that plan until after the period is finished and the monthly metrics are posted.  Imagine being able to monitor current and planned performance to your current S&OP plan.  Imaging seeing mid-month that your demand plan wasn’t going to happen the way you planned.  Going back to my comments about responsiveness above, what if you could identify the issue and re-cast the plan mid-month?

8.  Risk Management – Risk management is an issue that many companies are starting to deal with (and all companies SHOULD be dealing with).  The problem is that many times a company will identify their risks, put together a mitigation strategy, wipe their collective hands and says “we’re done!”.  You’re NOT done.  The risks are continually changing; world politics, outsourcing strategies; product design; markets all are changing and with those changes, the associated risks change as well.  Any risk management process needs a regular review that evaluates the risk management strategy in light of new demand plans, new supply plans and new product introductions.  Seems a good fit for S&OP, no?

9.  Accountability – When you make commitments at the S&OP meeting, you are making a promise to your peers and to your boss.   Your commitment is recorded and is reviewed at the next meeting.  Guaranteed, you will do whatever you possibly can to make sure your team comes through.  If you don’t meet your commitment, you make sure your reasons are documented and that you have a recovery plan in place before the next meeting.

10.  Teamwork – This may not become apparent until the team has been meeting for a while.  However, as the team works together, as they learn that they can trust one another.  As they figure out that they all need to be pulling in the same direction, teamwork will improve.  This improvement in teamwork will manifest itself outside of the S&OP meeting as well.  Paths of communication will open that were not there before. Problems will get resolved, things will get done.

So…what are you waiting for?  Get busy…start doing S&OP! 

Already have an S&OP process in place?  Reply back and let people know what benefits you are seeing from your S&OP processes.

Let’s think about a world (maybe your world?) where S&OP isn’t done. 

The high-end DVD player your company makes is not selling well.  There is excess inventory in the system, driven by an overly optimistic forecast.  The product is good, but complaints are that the price is too high. The marketing team puts together a sale starting in a few weeks to increase demand for the high-end DVD player.  They put the sales plan into effect and it works wonderfully.  The high-end DVD player sells out in the first few weeks; however, customers and stores are complaining because they don’t have any stock.  So they go to manufacturing and ask them to build more.  Manufacturing is busy building the mid-range DVD player.   Why?  Inventories on those were low (they were the ones that were selling).  Now, however, demand for the mid-range DVD player falls off because those people looking to by a mid-range DVD player decided to buy the high-end player because of the reduced price.  In fact,  inventories are now too high on the mid-range DVD players.  So,  manufacturing puts a stop to the mid-range production and ramps up production of the high-end DVD players.  As the procurement orders start to go out, Finance raises an alarm because the ramp up in high-end production is impacting cash flow.  They are also concerned because of the inventory levels on the mid-range DVDs.   An emergency meeting is held,  fingers are pointed, tempers flare. 

Been there? Done that?  Got the t-shirt?

No one wants to be in that position.  While S&OP isn’t a magic pill that solves all problems, many of the problems identified in the story above could have been avoided if there was a functioning S&OP process in place.   Many of the top companies are running sales and operations planning.  Your company should be too.

Here are 5 of 10 reasons you should be doing sales and operations planning.  I’ll provide the remaining 5 tomorrow so not to overwhelm everyone in one sitting.

1. Alignment – Sales and operations planning forces alignment at multiple levels of the company.  At the highest level, it represents an agreement between Sales, Marketing, Manufacturing and Finance on the volume of products to be produced over the horizon of the plan.  In the vignette above, Marketing would have announced the plan for the sale on the high-end DVD player and Manufacturing would have been ready for it, and would have reflected it in the plan.  Finance would have had visibility to the anticipated spend impact and could have raised concerns BEFORE commitments were made.  When a sales and operations plan is approved, it represents agreement between the department heads on the plan.  Alignment from Sales and Ops goes beyond just the S&OP meeting. With a well functioning S&OP process, the entire company is aligned to a given direction.  The Master Scheduler is implementing the decisions made by the S&OP team.  The planners and buyers are aligning to the Master Scheduler. Capacity is being increased and decreased in accordance to the plan.  Changes to the financial plan are made in advance given the decisions from the S&OP meeting.
2. Decision Making – One of the huge benefits of a sales and operations planning process is that it brings people together to make decisions.  It is a  monthly meeting, held on a regular schedule, where issues can be raised, tracked and resolved.  As noted in my first point above, the key department heads are present so that the entire company can be aligned behind a decision.
3. Visibility – The sales and operations planning process provides team members with visibility in a couple of different ways;  First, the sales and operations plan looks 12 – 18 months into the future.  For people accustomed to thinking in terms of the next month or so, this level of visibility opens the door to a different way of thinking: a longer term view.  Second, the sales and operations plan brings together data from different departments and presents it to the team.  Now, Operations has visibility to Sales and Marketing’s plans.  Sales and Marketing have visibility to the supply plan.  Finance now has visibility to expected revenues and expenses. 
4. Finance Integration – The company exists to make money.  Further, it takes money to make money.  It constantly amazes me how many people forget these simple facts.  Any successful S&OP process must include Finance to ensure that the financial plan and the operational plan are in alignment.  Further, especially when times are tight, companies need to monitor their planned spend to ensure that they have the resources to implement the proposed plan.  It’s no good planning to ramp up 50% if you only have the  resources to ramp up 20%.   That being said, given enough lead time, your Finance team might be able to negotiate bridge financing to cover the ramp-up costs until the revenues start coming in.
5. New Product Introduction– This is often one of the most difficult and risky events companies need to deal with.  Forecasts are tricky because there is no history.  Pipelines need to be filled.  Costs go up with new product introduction.  Manufacturing challenges abound; changing processes, new suppliers, technical issues, ramping production, quickly changing versions driving obsolete inventory.   You need to make sure all stakeholders are aware when a new product introduction is happening.  Marketing needs to be talking to Operations.  Operations needs to be talking to Finance. Issues need to be raised and resolved.  Sales and operations planning is a perfect place to manage this process.  Many companies have an agenda item dealing specifically with new product introductions and many identify new product demand separately on the S&OP spreadsheet.  A related topic is end of life.  This needs to be managed carefully because the last thing a company wants is lots of inventory (end item and component) hanging around after a product is dead and gone.

Have I sold you yet?  If not, tomorrow, I’ll provide you with 5 more reasons….stay tuned!

Part 2

Kinaxis just published a white paper that describes seven success factors for today’s SCM projects, which have been identified by seasoned executives with decades of experience in the field.

DOWNLOAD NOW

I believe what I call SaaS 2.0 will change the enterprise software model forever. Software vendors will take the entire risk of deploying major SaaS based software offerings – before the customer has to commit any monies. The SaaS 2.0 vendors will have to prove the value of their offerings in a production environment – not just some trivial demonstration.

When you think about it – enterprise software vendors have been getting away with the business equivalent of murder. If you think this is an exaggeration – how about getting away with fraud?  There have been billions of dollars and millions of man years wasted on failed enterprise software projects. Consumers do not buy any kind of other products (homes, cars, buildings, airplanes, etc.) under such a crazy business model.

CIO’s are justifiably sick and tired of an enterprise software model which is ludicrous. CIO’s also hate enterprise software offerings which are only useful to a very small user community. SaaS vendors have already addressed this issue.

How could a vendor offer such a riskless value proposition? The SaaS vendor must have a very strong balance sheet (to fund initial deployments), shorter more efficient deployment cycles, and more importantly have an offering which they know works!

Look out for SaaS 2.0 – it is coming!

Here is more about it:

“Using Segmentation Strategies for Better Demand and Supply Balancing in the Mid-Market”, presented by:

• Jeff Range, VP, global operations and customer service, March Networks,
• Nari Viswanathan, VP and principal analyst, supply chain planning practice, Aberdeen Group, and
• Trevor Miles, director, industry and applications marketing, Kinaxis.

Mid-market OEM’s are faced with unique challenges in today’s world of outsourcing. An effective balance between demand and supply in this environment is crucial, yet difficult to achieve. Learn how March Networks has used product segmentation processes and systems to overcome some of the supply chain challenges presented by outsourcing.

This 60-minute webcast presentation will be held on March 3, 2010, at 1:00 pm EST.

So…let me get this straight.  70 percent of people say supplier viability is their biggest risk…yet only 10% of people do a risk assessment when analyzing outsourcing.  Huh….go figure.

So let’s take this back to the beginning and look at the outsourcing process. This process for the most part is expensive, time consuming and difficult.   You decide you want to outsource your manufacturing process.  The goods being outsourced are your best selling products.  These are worth millions to you.  You find a supplier, negotiate a great price and terms and you make the deal.  Then you move tooling and design specs,  spend weeks, maybe months getting the manufacturing processes up to speed.  You work though the logistics process of moving goods from your CM (typically oversees) and finally, after months of effort you have a stable supply of goods coming from this CM.  

 There is a LOT of effort involved in this process.  And yet, according to the study above, only 10% of companies going through this process take the relatively small additional effort of doing a risk assessment! 

Imagine for a second that you have just completed the outsourcing effort I described above.  You’ve received your first shipment of goods from your CM and are expecting the next shipment to leave the factory in a few days.  Your phone rings…the CM has just declared bankruptcy and has closed their doors.  Oh **** (insert appropriate expletive). What about that shipment that was just about ready to go?  Where is it now?  You’ve got customer’s waiting for that shipment.  What about that special tooling that you shipped to the now defunct supplier?  How are you going to get that back?  Are you going to get it back?  How long will it take to get new tooling made? How long will it take to get another supplier set up?   Is the bar open yet???  Why didn’t we look into the financial position of this company before we entered this agreement?!?!?!? 

So…obviously, we don’t want to find ourselves playing out this little scenario at some point in our professional lives. How do we avoid it

1. When outsourcing, include a risk assessment along with price, terms and inventory analysis.   Make sure that the risk analysis includes financial information.  If the company is public, this is easy enough to get.  If the company is private, it will take more work but is usually do-able.
2. Maintain your risk assessment.  If the last 2 years has taught us anything, it is that companies that may seem fine when times are good can crumble to dust when things go bad.
3. Establish mitigation strategies.  Even a financially strong company can succumb to disaster (the earthquake in China a while ago is proof of that).
4. Improve your ability to respond.  Put the tools, practices and people in place to allow you to recognize an event and respond quickly to it.  For details on capabilities need to respond quickly to significant supply chain events, check out a  post I wrote about this last year.

What sort of risk assessment do you do when outsourcing?  Comment back and let me know!