SupplyChainBrain attended our annual Kinexions user conference, and while there, they completed a number of video interviews with customers, analysts, and Kinaxis executives. And, we’d like to share them!
In this interview, hear Kathyleen Beveridge, director of sales operations with Qualcomm discuss “What’s Wrong With Traditional S&OP?” According to Beveridge, the sales and operations planning (S&OP) process brings great value to an organization, but companies need to take a fresh approach in order to ensure more efficient planning cycles.
Sales and operations planning involves a number of sequential stops. Mistakes anywhere along the way can lead to inefficient planning, says Beveridge. A new approach is needed that allows companies to become more agile in a difficult business climate.
Under the traditional approach to S&OP, it can take upwards of two weeks to compile data. “By the time you get in front of the management team, that data has already changed,” Beveridge says. Qualcomm has adapted S&OP to a weekly cycle, under which it has more frequent discussions with key decision makers. They focus on the state of the company’s supply and demand balance, with an eye toward making “immediate course changes” if necessary. The company also conducts monthly S&OP meetings that focus on longer-range issues.
Qualcomm isn’t throwing out S&OP in its traditional form; it’s simply supplementing the practice with shorter-term solutions, says Beveridge. That becomes necessary “if you’re working at a company where demand is ever-changing. Our lead time is shrinking. We need to augment.”
Integration of supply and demand planning is essential to a company’s ability to react to volatility. Working with Kinaxis, Qualcomm brought together the two disciplines to scrutinize the company’s project road map, with a goal of implementing capable-to-promise functionality. In the process, it’s able to build what the customer wants, instead of what it forecasts demand to be.
The journey isn’t over yet. Having implemented available-to-promise and commitment to finished goods, Qualcomm next wants to extend its visibility and control back to raw materials and semi-finished goods. The ultimate goal is to make possible customization of product. “If we can delay the build-out of finished goods,” Beveridge says, “we’ll be better positioned to satisfy our customers.” And Qualcomm, for its part, will benefit from improved inventory optimization.
Check out the other videos in this supply chain interview series:
This past week was the IE Group’s S&OP Innovation Summit at the beautiful venue of the Bellagio in Las Vegas. Kinaxis was well represented, especially with the wonderful keynote speech from Kathleen Geraghty from Celestica. Her keynote hit the main theme of the conference: S&OP Skills. Having attended and presented at many S&OP conferences, I was expecting the standard S&OP challenges of maturity and alignment with cross functional teams. The reason I found this conference surprisingly unique, is the focus on talent and skills.
Celestica’s keynote centered on “Planning with Predictive Power”, which is done as a managed service from Celestica. Having worked many years in the supply chain with the contract manufacturing firms, I find this managed service, sometimes called PaaS (Planning-as-a-Service), extremely intriguing. The contract manufacturer, Celestica, already manages manufacturing and inventory. They are best prepared to do the planning service. Kathleen spoke about managing demand planning and scenario modeling of the Brand’s S&OP process, with the goal of improving forecast accuracy to above 85% and modeling in minutes, not days.
The benefit is directly in the inventory, as seen in Kathleen’s slide.
Celestica is providing the “talent” in this service. With the breadth of skills from being a contract manufacturer, Celestica uses Predictive Power and Kinaxis supply chain solution to insert the talent and skill in the S&OP cycle, directly impacting inventory, order fulfillment and cost.
The Kinaxis Workshop – Learn and Laugh
For the Kinaxis Workshop, my theme was “Laugh & Learn”. From the audience I heard they were pleased to take a humorous journey through S&OP, with follow on comments like, “that was great to break out of the typical S&OP materials”. As well, we shared the Four Keys of successful S&OP, with the audience participating by ranking their company against the keys.
Some of the highlights from the “learn & laugh” session…
1. The S&OP journey is quite an ambitious one. From the early days of using excel and having only supply chain people attend, spending a few years stuck in “Stage 2” doing just demand and supply balancing, to holding real-time tradeoff decisions. It’s a journey of a 1000 miles, but in the end, it does pay off…
2. We shared our war stories about breaking through the corporate culture, and the significant change management needed to adopt this S&OP process. Everyone has heard the saying about tradition, “We’ve always done it that way here…”
3. Ultimately, S&OP is about finding problems. And, done correctly, an effective S&OP will be able to not only spot the obvious problems at the volume level, but also the underlying issues at the mix/SKU level.
4. The S&OP journey leads to a team of leaders that make tradeoffs and decisions. It’s the mark of an effective leadership team to decide those tradeoffs for the best interest of the company. As well, some decisions center on “survival”, using the S&OP to know when to “not make a decision”…
5. My personal favorite ended on the foresight a supply chain leader needs to have. Steering his/her team to a mature, Stage 5, S&OP requires the ability to stand against people who say “it cannot be done”….
This image reminds me of my Apple S&OP days, and taking the team north of San Francisco for white water rafting down the Russian River….
The four keys to a successful S&OP are shown in the box below.
As I walked through the Four Keys, I had everyone from the audience fill out this form, ranking from 1-10 (low to high), how their company performs.
The summary results:
East West Integration: average of 4.8
North South Integration: average of 3.9
Volume and Mix: average of 5.9
S&OP On-Demand: average of 4.4
This is extremely interesting in that the better performing key was volume and mix. This is the ability to take a volume plan and quickly drill down to the mix/SKU level, testing the feasibility of the two, and having the ability to keep the plan feasible. This shows the high level of supply chain participation in the S&OP. Drilling up and down the product supply network is a core competency of the supply chain team.
The lowest Key was S&OP on-demand. I remember my days at AMR Research, and the questions I would get on S&OP cadence. People would ask, “Should I run a Monthly Cycle?” and “How often should S&OP be done?” However, the best ability is to revise the plan and take action anytime S&OP is at risk. Through my past 25 years, I’ve reviewed 106 companies’ S&OP processes. The SINGLE best practice is doing What-If Simulations. Not the kind of simulations that your Stats PhD does over the weekend with his/her Access database, but doing What If Simulations during the S&OP sessions. That requires Speed and Integration with your process and solution.
Speed can be best defined by a few Kinaxis prospects who attended our annual conference at Miramar (where Top Gun was filmed). Coming off the flight path after seeing the Kinaxis demo, these two certainly understood the need for speed…
Integration can only come from a planning solution that pulls the data, policies and structures together, from all the nodes of the supply chain network, running concurrent planning at the S&OP to the MRP levels, in ONE code, not multiple Modules with massive middleware & excel. This is a customer who is very intense about the Kinaxis One Code…
Standing inside the Bellagio, in the entertainment capital of the world, I know the IE Group attendees have been entertained, much beyond the standard S&OP sharing.
Let me know your Four Key’s ranking. Where do you stand against the average? For now, I hope you’ve “learned and laughed”.
In the 1980’s, Europe had what was colloquially known as butter mountains and wine lakes. Farmers in the EU under capitation grants were being paid to produce product for which there was no market. The overhang was enormous, and this inventory glut of unsold butter and wine went on to impact the price industry could command for these products. Europe is still paying the price with what is now known as decapitation, effectively paying farmers to leave land fallow in order to try and manage the supply demand imbalance.
China, and more widely the Asian region, is not immune to the global economic downturn despite growth figures their western counterparts envy. Europe & the US are still struggling. China’s input and output figures released for August are lower than expected. They have also reduced expected growth rates for 2001/2012 by 1/5 to 1 %. The upshot of this to a regular consumer is quite staggering, and to business worldwide. China is a country of production. If we, and in we, I mean all of us, don’t buy, or more accurately can’t buy, where does all of the production stuff go? Into warehouses. And that’s when the problems really begin. Building inventory mountains is a major problem. Masking the problems and creating falsified growth make it much more difficult to manage. So, what can you do to avoid it, and if not avoid it completely, best manage it?
The moral to the story is this: Know your inventory. Here is the key:
Make inventory management a direct part of S&OP, not a by-product of the process. There is a difference.
With the trend of outsourcing still strong, inventory planners cannot go down to an inventory floor and visually see what they are managing. Your CM’s contractual obligations can also be negatively impacting you. Harsh sale or return clauses on VMI (Vendor Managed Inventory) can negatively impact your bottom line. And depending on your forecasting model, you could be contributing to the problem.
Having, and managing key inventory metrics are key to knowing your position, and enabling you to react. Often, S&OP can be implemented with inventory falling out as a by-product of S&OP policy, not as an integral part of it. Linking dynamic inventory management to S&OP is the key.
Maintaining strong E&O (Excess & Obsolete) reporting, measuring DoS (Days of Stock) and ToR (Turns of Ratio), reviewing contractual VMI clauses, and closely monitoring forecast accuracy is the best way to keep your inventory glut to a minimum.
Forecasting accuracy is the bugbear of the supply chain. With business building to forecast as opposed to real demand, this is shortening lead-times and enabling responsiveness. All good. But, and it’s a big but, it only works if you closely monitor forecast consumption and adjust your horizon accordingly. Use market trends to help determine the right statistical model to use. Regardless, historical trends should be an indicator, but not the only consideration. Given economic instability, what was in the past, may not be the future and determining the weight you apply to historical is key.
This nicely segues into VMI. Depending on your contractual obligations to your CM— normally a 60 day sale or return policy— you could end up with a large inventory bill on your P&L statement that few companies have the luxury to absorb easily. Ensure your figures look like they should.
Trending DoS and ToR of your inventory will allow for intelligent analysis. If the numbers are rising for DoS and lowering for ToR, this should be reflected by your CM’s figures and is an indicator of forecast consumption.
Growing inventory mountains bring bad news. It reduces product value, negatively effects employment therefore reducing consumer spending power, and floods the market with cheap goods. It is crucial that inventory management is treated within the S&OP process as an integral part of planning strategy, and not a by-product.
In October 2011, Simon Rabinovitch of the Financial Times published an article entitled “China labor cost soars as wages surge by 22%.” This figure is an average across the breadth of the country, with Shenzen and Beijing named as the costliest locations to do business. This trend has been covered extensively by the media in recent months, including Supply Chain Digest last month.
Rabinovitch’s article is interesting, and he listed a number of factors influencing this trend. Chinese inflation and local municipal policy on raising the minimum wage are the primary factors. Rabinovitch also talked of this being a direct policy of the Chinese government, driving municipal action, to move activity in the region further up the value chain. We now see contract manufacturers offering managed services, Celestica being a prime example. It is simply a case of margin. CMs build to low margin and high volume. Margin jumps significantly when they move into professional services.
It is incumbent upon the supply chain to ask if this is a positive move or a negative move.
In previous blogs, I have written about the move toward the Asia-Pacific labor market in the mid to late 90s, primarily driven by low-cost manufacturing, low corporate rates, power services, and inexpensive labor. So, the question is, how does this impact change of cost in the region, impact global companies and their manufacturing base, and ultimately, the cost for the consumer?
This is where the discussion becomes interesting. Do we move out of the Asia sphere, or is this actually a where supply chain needs to be positioned—close to an emerging market? Why would you disregard a market of this size and continue to view this portion of the globe as an export-driven manufacturing base to support western consumerism? We need to be cautious about a knee-jerk reaction here and move bases out of China to lower cost bases in the APJ region or elsewhere. This reaction may well turn out to be a case of kicking the can down the road, as this wage trend is playing out across all of APJ.
So instead of looking at the negative, the supply chain should look at this as a potential growth and consumer market as well as a manufacturing base.
So initially, the base margin is being squeezed. The upshot of this trend, however, is that a large technology-hungry population has expendable income for “luxury goods.”
Take China alone. Chinas population exceeds 1.3 billion. With an average workforce of 900 million, this is an astonishing large consumer market. If the working population has money to spend, then, the demand chain needs to rise to the occasion and deliver. As a profession, the demand chain is becoming just as much of a buzz word as the supply chain.
So looking at the whole picture, reducing baseline margin, and placing the money into consumer hands will drive the “demand chain,” and ultimately drive sale of goods. Volume will ultimately win out over margin.
Companies need to get “smarter” at managing their supply chains. Labor is only one cost factor in margin as discussed in previous blogs. Technology and people create a lean supply chain. Give people the tools required to react to the market, and the supply chain will find its own margin, and adjust accordingly. So the discussion becomes market size versus market margin.
It is amazing to me that there are many in the West that continue to hope—dare I say, pray—that the shift in the world economies over the past 5-10 years is an aberration, and soon we will be back to the heady daysof the mid-2000s. Every day I read stories about how manufacturing is going to return to North America. Sure some if it will, but we are trying to close the stable door after the horse has bolted. For one thing, the global economy has changed, and people are simply not interested in some of the products we produced “back then.” Even if wages in China and India double, it will only mean that products are more expensive in the West, not that it will be cheaper to produce in the West.
I know this sounds harsh and uncaring, especially stated from my ivory tower position in a software company that is doing very well, thank you. I don’t mean to be harsh, but I am impatient because we are trying to fix the wrong problem. And I admit that it is easier to point out problems than it is to devise solutions, but without an agreement on the problem at hand, there is little opportunity to reach consensus on the manner in which to resolve the issue. I wish I had a crystal ball that would tell me how to turn things around, but I don’t. But I know it isn’t by sitting around hoping for the world to right itself. The horse has bolted, and closing the stable door isn’t going to keep it in.
The real question: Can China pump up domestic demand soon enough? Chinese private consumption’s share of GDP fell steadily over the last decade to around 35%, meaning it may have a long way to go to pick up the slack of the export sector and export-oriented investment.
Last week, Nike reported it had made even more profit than it did the quarter before, yet its stock sank. Investors hacked about $1 billion off the company’s value on March 23 because of a reference to “declining gross margin” stashed in the firm’s quarterly report. The details are complicated, but Nike’s jargon in part referred to rising wages in places like China taking a chunk out of profits. Indeed, the details show rising wages—along with some other factors like higher material costs—caused Nike’s margins to fall two percent in just one year.
Andrew goes on to state:
That leaves U.S. manufacturers with only a handful of options: accept lower profits, pass the cost on to consumers or lower labor costs some other way.
But that is a very U.S.-focused perspective. What does this look like from China? Commenting in The China Daily in 2004, Xin Zhigang says that:
The Chinese Academy of Social Sciences (CASS) released a report earlier this year that suggested China’s “middle class” accounted for 19 per cent of the country’s 1.3 billion population by 2003.
Based on an annual growth of one percentage point, the “middle class” people in China is expected to make up for 40 per cent of the total population in 2020, the academy report said.
The issue for the West has shifted from how much can we buy from China, to how much can we sell to China. That’s my opinion anyway. We’ve got to shift our focus from outsourcing to marketing and sales. How are we going to capture as much of the Chinese market as possible? That is the question that should beat the top of every Western CEO’s mind.
While rising labor costs may make many grumble in China about the costs of staff, another benefit occurs. That increasingly wealthy and prosperous worker can now afford to buy more goods.
Vietnam, then, is starting to stand up as an important regional player when it comes to servicing markets in Asia, especially so for those wishing to take advantage of new opportunities in selling to the growing Chinese and Indian middle class markets. The role of ASEAN, and the free trade and double tax agreements it holds with China, India and other nations now need to be evaluated as the global race to sell to Asia begins in earnest. Establishing a manufacturing operation in Vietnam may well be a strategy that will hold up well in order to consecutively sell to China and India–and ASEAN.
In other words, even as Western companies try to satisfy the markets in China and India, it is unlikely that manufacturing will return to the West. So let’s move on. I will leave larger social policy discussion to others that are much better informed and knowledgeable in this area. But from a supply chain perspective, the discussion has to move from “how do we get goods to the West from China” to “how do we design, market, and manufacture goods to satisfy demand in China and India?”
We have all been awestruck by the human impact the quake and tsunami had (and is still having) on the good people of Japan. The impact of the quake is also financial, however, and impacts people and companies around the world. Toyota cites the quake as being responsible for a drop in earnings for 2011. As a photography enthusiast, I watched as Nikon and Canon both stopped production after the quake. The quake didn’t just impact companies based in Japan, it also impacted manufacturing companies that source from Japan.
I thought that from a supply chain perspective, the quake in Japan was bad. Really bad. Until, that is, I came across this post from the @risk blog. The post highlights a study from commercial/industrial insurance company FM Global. The study examines how reliant the companies involved in the study were on China for some or all of their manufacturing and supply. Some interesting points from the study;
86 percent of companies surveyed are more reliant on China than Japan for key product lines
83 percent of companies surveyed think supply chain disruption is a moderate or higher risk to the financial wellbeing of their companies
94 percent of companies surveyed are concerned about natural disasters in China as a result of the Japan earthquake
Over 60 percent of companies surveyed are evaluating their supply chain risk in China as a result of the Japan earthquake
The study goes on to suggest you assess your resiliency to a disaster in China by asking the following questions;
Does your senior management view resiliency as a competitive advantage and has it made the necessary commitment?
Has your organization examined how it can mitigate risk within its products and processes?
How well does your company collaborate with its suppliers to assess and mitigate risk?
Does your corporation have appropriate business continuity and disaster recovery plans for supply chain disruptions emanating from emerging markets such as China?
A significant earthquake in China is going to happen. China shares many Geologic features with Japan and a quick Google search shows significant seismic activity including earthquakes over the last several years (2011, 2010, 2009). So, the question is when (not if) will an earthquake hit a major manufacturing center? When this happens, it doesn’t take a doctorate in supply chain to see that the impact to unprepared businesses will be devastating. Do you agree this is a concern? What steps are you taking to mitigate the impact of an event like this? Comment back and let us know.
The headline in this Reuters article jumped out at me. “Big-name brands sourcing from polluting China firms”. Wow. I would hate to be those guys. Why? Because people don’t see the distinction between the company that owns the brand and the company that makes the product. The article named several major companies including Adidas, Nike, Puma, Calvin Klein, Lacoste, Abercrombie and Fitch whose products are sourced through one of two major textile suppliers; the Youngor Textile Complex in Ningbo and the Well Dyeing Factory in the Pearl River Delta. Both of these companies have been accused of polluting waterways with “toxic, hormone-disrupting chemicals banned in Europe and elsewhere” according to Greenpeace.
This incident hammers home the point that the companies we contract to build our products become extensions of our brand. If the company does something unethical, illegal or environmentally damaging, the brand owner is mired by the contractor’s actions. The problem is that as a brand owner you may feel that you have limited influence on your subcontractor as they are a separate corporate entity.
Let’s look at how you can address this;
1) It’s more than just price – Look beyond the price point and consider the total cost of contracting with this company. If they are the lowest cost, perhaps there is a reason. Perhaps they achieve their low cost through shoddy quality, through unethical business practices or through irresponsible environmental behavior.
2) Hold the contract manufacturer to the same standards that you hold yourself. Remember, they are an extension of your brand. If you have environmental or ethical policies, make sure that your contract spells out that they are expected to follow these policies. Further, stipulate that failure to follow these policies would be considered a breach of contract.
3) If you are holding your contract manufacturers to your standards, make sure that you do periodic audits to ensure that they really are adhering to the standards you’ve set. At a minimum, go to the place where your product is being made and observe how things are done.
4) If there are environmental standards or certifications applicable to your industry, look for contractors that have achieved those certifications. This can make life much simpler as the certifying organization is now responsible for auditing.
When we close our factories and have product made for us by another company, we are giving up a lot of control. If you partner with the wrong company, it’s not just cost and delivery that can be hurt; it’s your company’s hard won reputation.
How do you ensure that your contract manufacturer is protecting the image of your brand? Comment back and let us know!
I am fascinated by the social and cultural changes taking place throughout the world, driven largely by the emergence of the so-called BRIC countries, and hastened by the predominantly Western recession in 2008. I used to love the fact that only certain products were available only in certain countries and regions. When I write ‘used to’ I don’t mean that I now no longer love this, but rather that the distinctions and uniqueness’s are no longer available. We can buy Nutella in Canada now, no need for my kids to visit my in-laws in Germany to get one of their favorite bread spreads.
I was boarding a plane in Frankfurt to fly to the UK, surrounded by a bunch of kids from the Culham European School, about which I know nothing. But while boarding, some of the boys were making the usual boorish comments English people reserve for German. Nothing unusual in that except four of the boys then swapped into French, and with French accents to boot, while just a second before they were talking English with middle class English accents. It turns out that they are French, attending a school near Oxford. Well, when last have you heard a French person speaking English with an English accent? I think the French accent is something to cherish and to enjoy. I love the differences that make up cultures, warts and all. I much regret the homogenization of cultures. But times, they are a-changing.
Having struggled for a week with, and been embarrassed by, my non-existent Mandarin, I am happy to report that I did see the future at the Shanghai airport while checking in for my flight to Frankfurt. Next to me was a 25-30 year-old German speaking in what I can only assume to be fluent Mandarin. I wish I could report that he was speaking Mandarin with a German accent, but I regret to say that I could not tell. He was the first Westerner I had come across in my week in China who did not speak Mandarin like I speak French: With more hope than expectation of being understood. This reminded me of a guy I worked with in the mid-1990′s who now has a pretty fancy title with SAP in China. Nice guy, but not one that would have been chosen to be very successful in his yearbook. Turns out that he studied Mandarin at university in the early 1990′s. I wish I had his foresight, and that I had not underestimated him.
During the two day conference in Shanghai there was only one presentation in Mandarin; the rest were all in English. Based upon the simultaneous translation, it was a fantastic presentation by Haier.
I couldn’t understand the slides since they were in Chinese script, but wish I could have at least got the basics. According to OneSource Haier’s revenue in 2010 was about $14B, and likely to become the largest white goods manufacturer in the world in 2011 in terms of revenue. They are already the largest in terms of units shipped. I had at least heard of them. One of my colleagues had not even heard of them. My point isn’t to pick on my colleague’s lack of knowledge, but rather to point out that in general there is a woeful lack of knowledge in the West of what is truly happening in China.
A few weeks ago, we had a visit from a friend who is a bigwig in the music industry and travels frequently to China looking for Classical talent. His opinion is that if items cost as much in China as they do in the West there would be much greater parity between China’s GDP and that of the US. He thinks China is already the world’s defacto leading economy and that we in the West are simply uninformed or have our heads in the sand. After this trip, I agree, even though the World Bank numbers indicate otherwise.
What is interesting in my friend’s statement and consistent with the Haier story is the emergence of China as a market, not just some place where nearly everything in the West is produced. Many companies, like Haier, are building brands little known in the West. There was also a presentation by Siemens, the giant German engineering company, on how much they have not only shifted manufacturing to China, but how much R&D they are doing in China, and how big a market China is for Siemens. What I see emerging is brands headquartered in the West with the majority of their sales, R&D, and operations in China. How long will it be before the HQ is deemed to be out of touch and moves to China?
I picked up Vinnie Merchandani’s book “The New Polymath” before I started on my journey. I wouldn’t put it into the same category as Tom Friedman’s “The World is Flat“, perhaps only because “The World is Flat” came first, but also because Vinnie is actually writing about something else than the emergence of the BRIC countries. But there are some fascinating sections on the manner in which competition from China and India is going to change how Western companies will do business. No, I don’t mean securing business as Siemens and other western companies did in the 2000′s through briberybut rather how they will need to win and deliver business through superior execution. He writes about how a factory in China, with living quarters for the workers above the factory floor, was designed in less than a week and how the contractor submitted a quote for construction in less than 24 hours. I am sure many readers will immediately smirk about safety standards and quality of build. Perhaps some of that’s warranted, but it also misses the point about the speed of business, and the associated costs. No Western company I know of could compete in the design and build business at this speed. We can question government regulation and oversight as much as we want, the reality is that this is the speed and flexibility required to do business in this area. Thankfully, Chinese software companies will likely have more business in China than they know what to do with for the next 10 years, giving us in the West some time to adapt. But as I reflect on my trip I cannot but wonder about the software companies in China and India about which I know nothing, and whose products may already be competitive with products from the West. Have you heard on the ERP system called Kingdee? Look it up.
Some months ago I was interviewed by our Marketing team. One of the questions was what advice would I give to young people entering the supply chain market, to which I replied “Go East young man”. I’d like to revise that to “Go East young man. Go NOW.”
I am not naive enough to think a week-long trip to China makes me an expert. There are real political, environmental, cultural, and economic issues that must be addressed in China. A Western education is still a prized possession in China, especially a graduate degree. It is simply that I am staggered by how much I am out of touch with reality despite reading a lot about the rise of the BRIC countries, and China in particular. The wave isn’t coming, it is here, and it is a tsunami.