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.

The canals are a vital part of Venice and a dependent source of transportation for numerous purposes. What if you were in a water taxi rushing to get to the airport and you were behind 10 gondola’s in this narrow canal? Yes, depending on where your hotel or residence is, even the water taxis have to navigate the narrow passages.

So how does the Venice taxi service manage this? They focus on their bottlenecks in the routing to the airport. If it is a busy time of day and depending on the season, they adjust their start time; meaning the pick-up time for the passenger.  If you have an early flight the water taxi is your only option.

Just like the Venice canals, your operation has specific capacity bottlenecks. Risk management processes need to be put in place to respond to capacity changes within these bottlenecks. The bottlenecks may not only be within your own manufacturing operations. If you have contract manufacturing the bottleneck may be with your contract manufacturing partner or a direct material supplier. Capacity planning may involve:

• Ensuring that a second source supplier is qualified
• Continually confirming current lead-times
• Empower your supplier or contract manufacturer with the responsibility of updating their lead-times for you, ideally directly into your systems
• Design your product such that it can run on multiple manufacturing lines, at least to a certain stage of manufacturing
• Analyze your projected demand and supply balances against your current inventory policies. Early warning signals, as described in Kerry Zuber’s blog entitled: Supply chain thoughts from the edge: do you have an early warning system? clearly confirm the value of having the right amount of inventory at the right place.
• Understanding how a constrained bottleneck will affect your customer. Often companies are so focused on maximizing productivity in a workcenter that they lose sight of the impact on the customer.
• Calculate the tradeoffs involved in capacity planning. Too much inventory to support ‘just in case’ orders versus the inventory cost or the cost of an overtime shift versus the revenue opportunity for the quarter. Understanding the tradeoffs will lead to better decision making.

Keep it simple. Tribal knowledge tells you what your bottlenecks are. Focus on proactive measures that will ensure that you are ready when the capacity crunch comes.

### My comment ###

Agility, Adaptability, Alignment – these are terms we should use outside of supply chain management to describe most processes and systems.

At the end of the article you make the statement regarding alignment that “It will be a long journey for most, but I do think it is possible to move increasingly closer to the goal.” I agree and think that at the heart of the issue is that outsourcing is a financial instrument, not an operational instrument.  The same operational flexibility could be achieved by using contract manufacturers to satisfy peak demand while satisfying the bulk of demand from in-house manufacturing, yet the decision is most often made to outsource manufacturing.  Outsourcing most if not all of manufacturing might indeed be the correct course of action from a financial perspective, but it adds a huge amount of “friction” to the process of planning the supply chain to satisfy customer demand.  The problem arises when the suppliers of key components, perhaps even of fully assembled products, get treated from an operational perspective in the same manner as suppliers of commodity materials.  As you point out, Toyota specifically, but Japanese keiretsu more generally, have managed to foster the level of trust and collaboration necessary to achieve the alignment required in an outsourced manufacturing model.  In addition you point out that many, maybe even most, VMI programs fail because of misalignment.  It is not that I think outsourcing is “bad”.  I think we have not yet developed the appropriate processes to handle a relationship that from a legal and financial perspective needs to be one based on distrust but from an operations perspective needs to be based upon mutual trust and shared objectives.

As we all know, Henry Ford supposedly stated that “They can have any colour as long as it is black”.  Clearly this statement illustrates neither agility nor adaptability, but nevertheless illustrates that operations people would prefer that the product itself, the product mix, and the volume did not change.  The only variability would be under their direct control, namely the uptime of the equipment.  In this environment inventory levels could be brought down to nearly zero and everything would run as smoothly as clockwork.  Unfortunately for operations people, as Koh Niak Wu points out in his reply, “high-mix/low-volume manufacturing environment is steadily dominating”.  This describes the demand side of the equation.  Outsourcing and off-shoring is adding an equal level of complexity on the supply side.  While poured concrete is mostly certainly an inhibitor to adaptability, so too are long term supply contracts that are focussed principally on the lowest price.  These often reduce the adaptability of an organization tremendously.

Supply chain agility, or more correctly the lack of it, is the result of decisions made early on in the design, engineering, construction, and purchasing/contracting phases.  People with greater knowledge in the design and engineering space tell me that 80% or more of the cost of goods sold is determined during these stages.  That still leaves a great deal which can be managed in the short term through agility.  At one time there was a big “Design for Manufacture” push in Engineering/Design.  I would like to see this concept extended to “Design for Delivery” which would include, for example, capabilities for late stage configuration to customer order.  But all complexity cannot be designed out of the product or variability designed out of the supply chain, which is where the need for agility comes in.  The Advanced Planning Systems designed in the early 1990’s that focussed on optimizing the supply chain at the tactical planning level, have proven not to be nimble enough at the operational planning and execution level.  One can even make an argument about their lack of adaptability given the 12-24 month implementation cycles.  What is needed for agility is the ability to plan, monitor, and respond very rapidly in a collaborative manner across at least 2 tiers of the supply chain.  And nearly all decisions made at this level require compromise between competing and “soft” requirements.  People are best suited to make these compromises, provided that have some way of evaluating alternative courses of action based upon both operational and financial metrics.

### My comment ###

I think Alex Rotenberg – who happens to be an ex-colleague – has identified the biggest myth, namely the use of “APS systems as a panacea”.  The key word in Alex’ reply is panacea.  We all thought that the Advanced Planning & Scheduling (APS) provided a perfect answer forgetting that the answer was based upon an incomplete and inaccurate understanding of demand and an incomplete and inaccurate model of the supply chain.  We then tried to force fit reality to the “ideal” plan generated by the APS.  What is more, there are many “soft” issues that need to be taken into consideration that simply cannot be represented in a mathematical model and require human judgment to incorporate and evaluate the nuances implicit in “soft” issues.

Much as we do with a statistical forecast, we need to realise that a plan generated by an APS may be close to what can be achieved, but it is the starting point of a planning cycle, not the end point.  Human judgment needs to be applied and compromises need to be agreed within enterprises and between enterprises.

I don’t believe the value of a plan has diminished.  The dogma that is no longer relevant is the belief that one can create an optimal plan and force reality to fit the plan.  Emerging supply chains require more collaboration and less control; more coordination and less optimization.  What is more important is to have the ability to detect changes, evaluate the consequences of the changes, identify the people responsible for dealing with the consequences, and provide a collaborative environment in which they can share, record, and evaluate scenarios for dealing with the situation.  And in today’s multi-tier outsourced supply chain, the team is likely to include people outside of the company, be they customers, contract manufacturers, or suppliers.

Evaluating alternate scenarios requires a model of some sort.  After all, at the very least a bill of material is required to explode finished goods demand into part demand, lead times and capacities are required to make a (near) correct statement about when the parts will be needed, and sourcing rules and contract terms are required to determine from where the parts will be sourced and at what price.  This information then needs to be rolled up to determine the effect of each scenario on financial and operational measures such as revenue, margin, inventory turns, customer service, etc.  And this needs to be done in a timely manner in order to be effective.  Gone are the days of waiting 5 hours for an optimization run.

The part of the article which prompted me to respond was the section on the correct level of modeling. Having studied optimization techniques in an Operations Research graduate program and worked for i2 for many years, I was steeped in the belief that optimization was the answer. Over the years I have come to the conclusion that optimization can provide direction but not the ultimate answer. The reason is captured in the article under the headlines of:

• Complexity of the Underlying Model
• Data Quality
• “The Business has Changed”

Without accurate representation of the business (Complexity of the Underlying Model), it is not possible to generate an optimum. One may get close, but a small change in the assumptions or model can have a big effect on the results, especially at the detail level. Yet the level of information required to model the business accurately is massive (Data Quality). More importantly, it also changes constantly (The Business has Changed). Not only does the physical structure of the supply chain — suppliers, items, locations, customers – but so do the business rules and objectives.

The solution is to provide “enough” detail in the model that an optimization/search engine can get one into the region of the optimum and then have people evaluate the results in a collaborative manner in order to provide the human judgment and compromise necessary to adapt to the latest business conditions. This is a lot more efficient than trying to capture and modify constantly the business rules used to guide the optimization.

To take the paradigm of human judgment further, the speed of business has increased dramatically over the past two decades, when many of the APS solutions where designed and constructed. At that time it was sufficient to run and APS engine once a month or once a week. Coupled with the knowledge that the optimzation does not provide an exact answer (nor is the forecast 100% accurate), this leads to the requirement for a system in which people can create scenarios in a rapid and effective manner in order to evaluate the organizations response to reality. Human judgment and compromise is used to select the “best” option amongst the scenarios.

It would be remiss of me not to point out that I work for a vendor that provides an on-demand service with integrated demand-supply planning, monitoring and collaborative response capabilities.