Posts Tagged ‘Supply chain flexibility’

Forbes magazine recently published an article titled  “What’s wrong with Toyota?” where the author describes that critics are wringing their hands that capacity was built too fast to capture the truck market in the US.

The article describes how even Toyota is not immune to the troubles facing the automotive industry and that, in spite of the short term impact this economy is having on Auto/Truck sales, critical questions are being raised.  Should Toyota continue its aggressive pursuit of market share in the US truck market, or retrench and go back to basics with smaller cars?

Could Toyota, known for its long sightedness in a near sighted marketplace, have anticipated this recent economic downturn, which put a halt on consumer spending from electronics to automobiles? One could argue that if Toyota, with its Toyota Production System (TPS) which is known as the leanest and best manufacturing system in the world, if they cannot adequately detect and respond to sudden changes in the economic climate, what hope is there for any of us in manufacturing?

There are some clues in the TPS that tell us why Toyota can and will respond to these market changes and will continue to grow and dominate the automotive market.  It has to do with the embedded culture of the Toyota Way.  The first two principles of the Toyota Way :

• Base your management decisions on a long term philosophy, even at the expense of short term goals.
• The Right Process Will Produce the Right Results: Create a continuous process flow to bring problems to the surface.
   

One of the key elements of the TPS is Jidoka. Jidoka is the ability for anyone involved in the manufacturing process to see what’s going on and if necessary, stop the production line, bringing problems to the surface. Basic empowerment at all levels to ensure that errors that can cause defects (in materials, equipment, process) are monitored and detected right away in order to ensure they get passed on to the next operation.

In order for all employees to see what’s going on with the process, it seems like the traditional tools of management need to be shared with a larger audience.  What manufacturing process wouldn’t benefit from having more eyes on it?

Not even Toyota has a crystal ball and can predict the future. But they do understand that by monitoring the critical process inputs and outputs, performed with the right tools in place, and coupled with the Jidoka mindset, the organization can learn, respond and re-engage.

In summary, Toyota can and will make mistakes like the rest of us, but the key differentiator is they have the tools to learn faster, and they take advantage of institutional knowledge, and empower all employees to think from a management and customer’s perspective. This strategic advantage will ensure Toyota remains in leadership of any market it enters.

The good news is that these principles and visibility tools to see what’s going on in the process are available for all manufacturers to leverage.

I came across this great report by Accenture: High Performance through Supply Chain Planning: Accenture Research and Insights into Supply Chain Planning Mastery

I think their findings are right on the mark – I’ve included them below:

Report Conclusions:

• Our first conclusion is that planning must not be relegated to a department; instead it must be a widely embedded capability that extends across business functions. To adopt this philosophy, companies must shift the way they use data across the supply chain and the enterprise, replace obsolete processes, make key decisions much more frequently, strike much closer relationships with suppliers, customers and other “partners” to share critical data in real time, and nurture the supply chain planning professionals so they can accomplish all these goals. Such actions will be a major challenge to companies that view improvements to planning as being largely about upgrading their forecasting capabilities. The companies that have excelled in planning know it requires far more than that to be successful.
• Our second conclusion is that analyzing and managing in a world of increasing volatility depends more on the ability to adapt than to generate long-range forecasts and supply plans. Companies that see improving forecasting and planning capabilities as the route to improved agility will be able to manage a world of increasing supply chain volatility. While forecasting is critical to planning, it is still just a scientific process to predict future demand based on historical performance. Many supply chain disruptions cannot be predicted. The increasing volatility of business now requires companies to possess highly flexible operating models and processes—ones that allow them to adapt rapidly to unpredictable changes. Superior supply chain performance today demands top-notch forecasting and planning as well as highly adaptable sourcing, manufacturing, transportation and other supply chain operations.
• Finally, to deal with a greater number of contingencies in the future, supply chain planning must happen faster and more frequently and be more tightly integrated with pricing, logistics and other functional disciplines—both internally and externally (with suppliers, customers, etc.). This is the essence of an effective sales and operations planning process. All key constituencies in a company (sales, finance, marketing, logistics, etc.) in each channel segment and/or product line must play a role in this process. They all need the right information and the ability to make critical decisions based on sharply defined decision criteria. Furthermore, they must make rapid decisions continually and through an entire product life cycle. In addition to being integrated internally, the sales and operations planning (S&OP) process must be synchronized with a company’s key suppliers, customers and other business partners. Collaborative planning both internally and externally must be the rule rather than the exception.

Without a doubt the authors correctly identify the need for greater agility to address the increasing volatility in supply chains. The question is what constitutes agility. Too many supply chain decisions are conducted by central organizations and decisions have to be approved by central organizations, greatly increasing the time it takes to reach a decision, which greatly reduces agility.

Our view, captured in the post entitled “Volatility is here to stay“, is that front-line people should be making day-to-day decisions in response to realities on the ground rather than a theoretical plan developed at HQ (agility), but based upon targets set by HQ/Finance/… Human judgment should be allowed to prevail. Companies will always have to plan. Agility is when they respond rapidly and effectively when things do not go as they planned.

I was just reading a draft of David Oppenheim’s (a Kinaxis consultant) new white paper (we’ll announce availability and provide a link when it’s published on this blog) and there was one line that jumped off the page and caught my attention.  David wrote, “we know that change is the only constant, and yet our processes treat change as the exception instead of the rule.”

I think this is at the heart of many of the challenges that manufacturers face today.  Think about it this way – most supply chain professionals grew up in an era where there was less global competition, less outsourcing and less volatility.  Product lifecyles were shorter and customers were less demanding.  These are obviously all relative statements, but when I talk to people across manufacturing industries, there seems to be broad concensus that we live in more challenging, complex and volatile times.  Because of this heritage, most business processes, and the tools to support them, were designed for this type of environment.  That is, they were optimized around the notion that if you built a solid plan and were good at executing that plan, you’d win.

But as David accurately points out, today more than ever, change is the only constant.  Despite this reality, most organizations haven’t adapted to this new reality.  Why?  Because that’s the way we’ve always done things.

Ask yourself this.  Does your organization think first about how to manage things when they go according to plan (which quite frankly is the easy part)  or first about how to manage things when they don’t go according to plan?  My experience is, as David points out, it’s usually the former.  And, there’s the disconnect.  Today’s environment is dominated by dealing with exceptions, yet supply chain processes are still optimized for a largely exception-free world.

At the recent High-tech Forecasting & Planning Summit I heard a presentation from Swati Saran, Director – Customer Value Teams at Cisco.  Her presentation focused on providing customers with an end-to-end experience.  She started by saying that Cisco focuses on the power of “and” – ensuring that they are both an efficiency engine and a strategic growth engine.

What I found most interesting were her comments about the typical view companies have about their supply chain.  Swati commented that the typical supply chain view is idea to offering, market to order, quote to cash, forecast to delivery, issue to resolution.  However, this is what the customer sees and expects – an integrated view with perfect orders all the time.  It raises the question of whether or not you’re looking at your supply chain from your perspective or your customers?

She went on to say that today’s marketplace complexity puts a premium on supply chain agility.  Their model is to invest in flexible  IT systems since things change frequently – new models,  new channels, new supply chains.  Consistent with these goals, they place a high premium on making collaboration technologies pervasive.  They have a strong need to get closer to customers, suppliers, etc. to understand their perspective and enable greater agility.  In turn, Cisco gets increased alignment across the extended supply chain through higher quality interactions, improved and enhanced flow of real time data, and the ability to scale organizational capacity while managing costs.

There’s a good article at Supply Chain Digest entitled “A “triple-A supply chain” that I provided feedback on and wanted to include here as well.

### 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.

I commented recently on the “Measuring Inventory Performance“ article in Supply Chain Digest on ways of measuring the efficiency and effectiveness of the supply chain.  In the article I argued that Purchasing/Procurement has a direct effect on the manner in which the supply chain can be operated effectively and efficiently.  In fact, that the contracts entered into by Procurement are as much of a constraint on the supply chain as are physical constraints such as machine capacity and plant layout.  These effects are felt in both the long term and the short term.

Many who work in product design often comment that over 80% of the cost of manufacturing a product are determined during the design and procurement phases.  This is a number with which I cannot argue.  Clearly many of these costs are determined by decisions made by the design team, such as which materials to use for a component.  However, best design practices I have come across are a well choreographed dance between the design engineers “creativity” and procurements “pragmatism” in which processes and incentives are put into place to encourage the design team to, in order of priority:

1. Reuse an existing item purchased from an approved supplier
2. Design a new item that can be purchased from an approved supplier
3. Design a new item that needs to be purchased from a new supplier

Clearly this process is designed to reduce the costs – which can be considerable – of acquiring a new supplier.  While the description above deals with the design of a new product, a great example of how R&D and Procurement can work together to reduce supply chain costs for existing products was presented in a webinar titled “Radically Simplifying The Supply Chain To Facilitate Growth – Learn From Best Practice In FMCG” (paid registration required) by Hans Droge, SVP of R&D at Unilever on SCMWorld.  The emphasis of Hans’ presentation was the rationalization of product families to reduce the complexity of manufacturing and purchased materials. He made a great distinction between product diversity, which is visible to the customer, and supply chain complexity, which is invisible to the customer.  The benefits of the exercise Hans highlighted were:

• Rapid roll out of innovation due to fewer plant trials and factory clearances
• More flexibility in product sourcing; stronger contingency options
• Lower capital expenditure from consolidated buying
• Harmonising of machinery training courses

Throughout the presentation Hans emphasized how Global Purchasing, Brand Development (Marketing), Supply Chain, and the operating companies (Sales) were all brought together in order to balance the competing needs of product diversity while reducing supply chain complexity/cost.  What was very clear in the presentation was the active role that Global Purchasing plays in reducing supply chain complexity and therefore cost.  One benefit emphasized by Hans is the reduction in purchase price that can be achieved with consolidated procurement.  By rationalising the purchased materials and the suppliers, the quantities purchased from each supplier increase dramatically providing great leverage to the purchasing organization.  This benefit is only available with consolidated procurement through a global procurement function.

While this is a great example of how to reduce supply chain complexity and operating costs at a strategic and tactical level, as we all know from our daily lives, there are plans and there is reality.  The product rationalization described above was based upon a set of assumptions of market conditions, demand patterns, and supplier capabilities which are unlikely ever to be completely correct.  However, decisions made at the strategic and tactical level constrain the supply chain to a fairly narrow range of efficiency and effectiveness at the operational and execution level.  As stated earlier, a rough rule of thumb is that 80% of the costs are determined during the design of the product and the supply chain level, or determined by the contracts entered into by Procurement.

Faced with late orders or idle equipment, every manager‘s instinct is to do the expedient rather than the expeditious, solving the immediate problem but perhaps creating additional longer term problems.  Typical of the expedient is to purchase materials from a supplier with which there is no long term relationship, agreed pricing, or agreed delivery.  As a onetime response this may be the right thing to do, but all too often this “maverick” buying becomes a pattern, negating the benefits of consolidated procurement.  In fairness, this behaviour could be a result of the market conditions changing to the extent that the original purchasing contracts and conditions are no longer valid.  A strong consolidated procurement capability should be able to detect these situations and adjust the contracts appropriately.  Alternatively, the solution could be as simple as planning around the constraint by carrying more raw material inventory.  This will result in higher carrying costs, but these costs are likely to be smaller than the increased purchase price resulting from maverick buying.

In summary, consolidated procurement contributes to reduced supply chain cost in many ways. Focussing attention too narrowly on the metrics of any one function, such as supply chain, can reduce the efficiency and effectiveness of the supply chain as a whole.  Yet the supply chain needs sufficient flexibility to balance the competing needs of satisfying all demand and doing so at the cheapest cost. Supply contracts negotiated by central procurement can reduce supply chain flexibility greatly.

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.

PRTM has released new research talking about the fate of gloablization in light of the current economic turmoil (you can access the report here – free registration required).  One of the first things the paper talks about is how companies are building adaptable supply chains to reap benefits and manage supply chain risk.   According to their research, “Sixty percent of the study participants say the lack of supply chain flexibility is a major barrier to sustainable globalization.”

The paper also outlines PRTM’s views on the top 10 major global supply chain trends for 2009.

I think the current economy is forcing everyone to rethink their globalization strategy.  Long-term thinkers are going to cut costs while positioning themselves for the renewed growth that will eventually come (I still believe it will come!).  Short-term thinkers will just look to cut costs.

I’ve been a long-term believer that out of every crises like we’re in right now there are critical lessons to be learned.  Our systems had gotten out of balance and markets have a way of breaking under such imbalances – which is what we’re seeing now.  The key is to fix the structural imbalances to make the system stronger coming out of this than it was before.

The same is true for a company’s supply chain.  Manufacturers are no doubt finding new weaknesses in their supply network that are cracking or outright failing under the pressure of this economy.  It might be in the way your company was forecasting demand based on historical data that is no irrelevant.  It might be in your suppliers that you thought were strong and able to meet your needs but no longer can.  Whatever the situation, there are lessons to be learned.  Long-term thinkers are not just cutting costs at random, they are cutting back while learning and repositioning for the future.

What is your company’s perspective – short-term or long-term?

By John Sicard, vice president of services

In 1992, Peter Drucker wrote an article that was published in the Wall Street Journal called “Planning for Uncertainty”. In this article, he said:

“Uncertainty—in the economy, society, politics—has become so great as to render futile, if not counterproductive, the kind of planning most companies still practice: forecasting based on probabilities.”

Peter was likely one of the first to recognize the significant shift in consumer buying patterns and the resulting implications to how manufacturers run their businesses. For many manufacturers, the ability to predict your demand using mathematics was going to be a thing of the past, if it were ever a “thing” to begin with. There certainly is enough evidence to support this position in the high-tech consumer market, where products vie for the fashion of the day, and usually only have a couple of quarters to do it in before the latest-and-greatest hits the street.

Stephan Haeckel coined the phrase “sense and respond” late in the 90’s, and drew attention to the growing trend that business performance would soon be governed more by a organizations ability to respond to unpredictable change then it would be through forecasting. In his article “Beyond Demand Forecasting: Sense and Respond Organizations” (free registration required) under the paragraph heading “From Forecasting to Anticipating Customer Needs and Preferences”, Haeckel states “Sensing and responding to individual customers’ current requests, as opposed to making and selling offers they are forecasted to want entails a transformation–not just a reformation–of what the business is and does.”

Today, we are seeing growing evidence of global manufacturers that ‘embrace change’, and are learning how to leverage their ability to rapidly respond to any changing supply chain condition, either with demand, supply, capacity or product design, and turn it into a competitive weapon. Companies that transform themselves from “make and sell” organizations to “sense and respond” organizations will become tomorrows “great” companies.