Posts Tagged ‘Operations performance’

This on-demand radio broadcast hosted by John Hanson interviewing ADR CEO Bill Michels on the subject:  “Why GM’s supply-chain is in a state of ruin”  and in it he discusses several potential root causes behind this failure. One of his key points is that GM’s hard line approach with suppliers sacrificed long term sustainability for short term benefit, basically driving their suppliers out of business.  He mentioned that, over a period of time, if suppliers can’t reinvest profits back into the product or process, they will reach a point of no return, and eventually impact product quality or stifle innovation.

This discussion reminds me of a conversation I wish I had a few years back with my key suppliers. As director of Supply Chain for an aircraft manufacturer I was using typical pressures to reduce the supplier’s price and hadn’t yet learned a win-win approach. Looking back and knowing what I know now this is the hypothetical conversation I could have had with that supplier.

Supplier:  I need to raise my prices 5% due to inflation of ______.

Customer:  Interesting, as I was approaching you about the need to reduce your price to us by 5 % due to customer pressure to reduce our aircraft prices due to this tight economy.

Are we at an Impasse? The traditional approach would be to flex my muscle as the customer, and either through the use of threats or incentives figure out how to get as many marbles from him, assuming there are only so many marbles to go around.  A zero sum game.  Can we break the paradigm that you must raise prices to raise profit?

Customer:  Is this situation really as diametrically opposed as it looks?  Let me ask you a question.  If you had to choose between raising prices and raising profit which would you choose?

He concedes if he was the CEO he would say increasing profit would takes precedence over raising prices.

Customer: Is it conceivable that we can both have what we want?  I get a lower price and you get a higher profit.

Supplier:  If that’s possible, I guess we both win.  But I am skeptical.

Customer:  Ok let’s consider this part you are selling me for let’s say one dollar. If you keep your costs the same and raise your prices to 1.05 and successfully pass those costs to me, we have not created value, all you did was push the cost up the chain and compress my margin. Conversely, if I brow beat you into reducing your price to $0.95 there was no value created either, I just pushed to cost downstream and squeezed your margin. So how can we both win here?

Supplier:  I see your point. If we had a long term partnership view, we probably could consider jointly tackling my downstream costs, and if successful in lowering my costs, I can see the possibility of passing some of the savings back to you in the form of lower prices.  Since this approach improves my margin better than if I simply raised my price, it’s worth considering especially since we both are tackling a common problem rather than having conflicting objectives!  I’m willing to talk about this.

This being a theoretical conversation it may not be as simple as this, but I think if GM had more conversations such as this with their suppliers, they may be in a different position today.  Mr. Michels discussed that a company’s supply chain is part of their competitive profile and so compromising the supplier financially with year over year price reductions without tackling the downstream costs to create value eventually threatens the sustainability of the company itself which, he points out, we have seen at GM.

I came across a very interesting IndustryWeek article entitled: “Building A Better Supply Chain”  where experts shared their thoughts about what criteria manufacturers should focus on to improve their supply chain capabilities. 

The University of Tennessee’s J. Paul Dittmann says successful supply chains demonstrate proficiency in these five pillars of excellence:

• Talent
• Technology
• Internal collaboration
• External collaboration
• Change management

I couldn’t agree more…what about you?

For many years I have worked in the high tech industry. Recently my experiences have been in the pharmaceutical industry and I have discovered an interesting insight. There is no question that employees in a pharmaceutical company know why they are there. It is all about the customer.  The customers are patients and often the pharmaceutical companies are producing drugs that are saving people’s lives. Employees certainly have a sense of purpose in their jobs and there is no doubt that the customer is #1. It is intrinsic. Everyone from the person making the bulk formula to the shipping clerk to the CEO understand what it means not to deliver on time.

In other organizations the customer is not always #1 or at least certain parts of the organization are detached from the customer. Should that be the case? I don’t think so. Understanding the customer is just as important in high tech or aerospace or consumer packaged goods. It is more difficult to create a culture of ‘customer is always #1’ in some organizations. However everyone gains a greater sense of purpose in their jobs if the company operates this way. How many buyers are expediting or cancelling parts orders and don’t know who they are affecting?

I am not suggesting that other metrics, like revenue or profit are ignored but customer value, customer satisfaction, and customer responsiveness are differentiators for companies. Is this difficult to measure? Certainly. Your CFO cannot objectively measure customer satisfaction as he or she can measure inventory turns or revenue. One has to consider the opportunity for increased market share and separating your company from your competition.

An excellent post by Colleen Crum that spans a number of topics touches on poor customer service inevitably being the result of poor decisions and poorly designed processes that lack integration.
‘Advances in communicating information across a supply chain aid in better decision making and collaboration’

This confirms that there are a number of opportunities to improve your focus on the customer.

a) Continuously communicate the value of the customer to all employees
b) Identify key objectives linked to customer value for all employees
c) Ensure that processes are integrated such that individual contributors at all levels understand their impact on the customer
d) Ensure that the appropriate tools are in place that identify the customer impact of your actions. This may be the buyer expediting a part or a production scheduler adjusting a production plan.

The end result of having the appropriate people, processes and tools is a leaner, more efficient workforce rewarded by providing customer value which results in positive impact to other key metrics such as revenue, margin and shareholder value.

I’ve spent the day at the High-tech Forecasting & Planning Summit hosted by the IE Group where I’ve heard presentations from Cisco, Microsoft, Oracle, Fairchild Semiconductor, Netgear, AT&T, Google, i2, Samsung, T-Mobile and International Planning & Research.  I plan to put out a couple of posts covering the event – but wanted to start off by summarizing a central theme I picked up today.

As you can probably imagine, EVERYONE talked about the impact of the economy and the pressure to reduce costs throughout the supply chain.  Everyone spoke about the challenges of accurately forecasting demand in such an environment and the supply chain implications resulting from this volatility.  But, there was an over-arching theme that was much more long-term and positive that also came out. 

During a session entitled “Collaborative Planning – Ensuring Strategy is Achieved in Dynamic Environments”, Cisco Vice President in the Office of Strategy & Planning Jonathan Ballon summed it up nicely when he spoke of Cisco’s philosophy.  Namely, he said that at scale, speed & agility matter, that opaque demand is only one problem and their mindset is that you need to “accelerate in the turns.”

This notion of looking at the long-term and retrenching during the current downturn was evident in many of the sessions.  Most of the presenters acknowledged that they were aggressively managing costs, but at the same time staying true to their long-term strategies and trying to turn a negative into a positive by addressing fundamental business structure, complexity and processes now to position themselves to be stronger over the long-term.  Almost to a person they spoke of how their companies are working hard to improve their business planning and supply chain management processes.  They are not hunkering down and strictly focusing on cost reductions.

As Jonathan said, their strategy doesn’t change in the face of dynamic times, but the operational execution steps may change to adapt to changing conditions.

Ernst & Young has published a new report entitled “Global supply chain: Balancing cost reduction and performance improvement.” Among the many good insights, this graphic caught my attention:

As you can see, across a variety of different areas, the respondents are not overly confident (basically a 50:50 chance) in their ability to manage effective change.  This is important given the growing complexity of supply chains and the incredible volatility that every business is facing today.

The core premise of the white paper is a good one – how do you effectively balance what arguably are contradictory goals – that of reducing costs while simultaneously improving operations performance?  And, critically important since this needs to take place in the “real world”, how do you do so in the midst of constant change?  The paper goes on to detail recommendations.

I think one of the challenges many companies face is that their processes, tools, measurements, etc. were not designed to deal with change.  Coming at this from a tools perspective, if you look at the legacy supply chain solutions, they were designed for a much more static world that was less complex.  These tools are consistent with the way supply chains used to be.

But, we’ve entered a new era of surprise and compromise that challenges a supply chain every day with a new set of unplanned events.  As the paper accurately points out, differentiation today comes from your ability to both reduce costs and improve operations performance, but the path to success is not the same one you might have followed ten years ago.

It would surprise me if anyone reading this blog is not aware of the financial crisis precipitated by the sub-prime mortgage lending that has been taking place over the past decade.  With a little creativity, there is a lot we can learn by extrapolating from the crisis into multi-tier global supply chains.  After all, what we are really facing is the money “supply chain” freezing up.

But let us start in the “real” world.  Over the next few months, and possibly even longer, cash is king.  Squeezing every dollar out of the supply chain ought to be high on the agenda.  The ability of a company to convert purchases into cash is best measured by their Cash-to-Cash (C2C) cycle.  The Cash-to-Cash cycle is defined as [“Days of Sales Outstanding” + “Days of Inventory” – “Days of Purchases Outstanding”].  While the contractual terms agreed with customers and suppliers are strong drivers for the C2C, the primary driver is speed with which a company converts purchased materials into products that have been sold to their customers, in other words the supply chain. In many cases the majority of DSO is accounted for by channel inventory, not only the true Accounts Receivables.  As a consequence there is a great deal that companies can do  to run their supply chains more efficiently in order to reduce their C2C.

First, understand which of your products your customer’s customer are buying.  Knowing only your “sell in”  forecast rather than your “sell through” forecast tells you nothing about your inventory liability in the channel.  Any unsold inventory in the channel is a liability regardless of payment terms because it affects your customer’s ability to pay you.  Even worse, if the channel inventory is not moving, it is unlikely that your customers will order more.  Your customers have to sell the stock at a loss, further eroding their ability to order more and pay you on time.  Channel inventory is a liability regardless if it is accounted for as Inventory or  Accounts Receivables.  Gaining visibility into which of your products your customer is selling gives you much greater control over the distribution of finished goods to your customers, increases their ability to pay you on time, and reduces the excess and obsolete inventory in the channel.  The same is true on the supply side, especially in Buy/Sell relationships with Tier 2 and Tier 3 suppliers.  Visibility into these inventories enhances greatly the ability of companies to manage their DPO and raw material inventory liabilities.

Too often we see brand owners leveraging their “muscle” to force suppliers to accept onerous payments terms, often many multiples of  the payment terms they receive from their customers.  While this will undoubtedly reduce the C2C, often making it negative, this is financial management along the lines we have seen from Wall Street, and is likely to drive some suppliers into bankruptcy during this period of tight credit.  As we have learned from Wall Street, clever financial management cannot mask poor fundamentals forever.  Instead the brand owners should be focussing on promoting and embedding superior operations performance.

Let us see if we can extrapolate from the financial supply chain to a manufacturing supply chain in order to derive lessons from the current financial crisis.  In this context I look at mortgages as channel inventory, mortgage lenders as the brand owners financing the consumers (channel partners) to build the houses by borrowing money or selling financial instruments to the banks (suppliers).  Once the market is flooded with inventory that is decreasing in value, this affects the channel partner’s ability to pay for what they have already bought let alone ordering more.  Which in turns affects the ability of the brand owner to pay the suppliers.  Once cash is tight, companies cannot invest in new products or equipment, which further erodes their ability to capture more sales.  We don’t have to look much further than Walmart to understand that most manufacturers live in a world in which the value of their channel inventory is decreasing daily. The key to being able to respond rapidly to changes in the market is to have visibility into what is happening in the market and a collaborative environment in which customers and suppliers can evaluate alternatives to reach a compromise which is of mutual benefit.  Without this level of supply chain visibility and collaboration, supply chain risk management is at best a blunt instrument.

Undoubtedly financial institutions came up with many fancy financial instruments that contributed to the current financial crises.  This is equivalent to the brand owner forcing onerous payment terms on the suppliers.  It doesn’t address the fundamental issue of superior operations performance.  Furthermore, when coupled with a lack of adequate visibility and controls to understand when things are getting out of control, we have a recipe for disaster.