Emerging supply chains require more collaboration and less control; more coordination and less optimization

TrevorMiles

Nick LaHowchic brings  up some very interesting points in the interviews on “sense and respond” conducted by Supply Chain Digest, specifically the fact that many companies collect information on demand at a customer/item level and then aggregate it up to a regional or, even worse, corporate level, largely because the companies do not have the systems, processes, and skills required to process the data at the granular level.  This issue is closely related to the interview of Nick LaHowchic on “integrated planning and execution”, also in Supply Chain Digest, in which he discusses the organizational barriers, amongst others, that need to be overcome in order to facilitate integrated planning and execution.  Nick correctly identifies one of the primary motivations for S&OP being “… because the companies are simply dysfunctional”.

The current organizational and management structures where developed for highly integrated manufacturing environments in which the telephone was a new form of communication, “tabulators” were a rarity, and computers a figment of the imagination.  In this environment it was necessary to have a Plant Manager reporting to a Manufacturing Manager reporting to a Regional Manager reporting to HQ in order to have adequate spans of control.  These organizational and management structures in turn informed the manner in which organizations planned and executed to the plan, and the latency of communication and effort required to capture and consolidate information determined the frequency of planning.  The direct result is annual Operating Plans, quarterly Sales & Operations Planning, monthly Demand Planning, monthly Master Production Scheduling,  etc.  These planning structures and cadences are in turn reflected in reporting methods which are after the fact and too slow, leaving far too little time to respond effectively to changes that remained undetected for perhaps as long as a quarter.  The current economic climate is shining a bright light on many of these process shortcomings. The evidence we see is that most IT organizations are operating without an annual budget, which is a result of the fact that the economic environment is changing so quickly that budgets are obsolete before they can be acted upon.

Supply chain management practices, developed in the late 1980’s and early 1990’s, reflected these organizational and management structures, the result of which was the strategic – tactical – operational – execution planning hierarchy adopted by many of the Advanced Planning Systems developed in this period.  This has lead to supply chain management practices and processes which are  unresponsive and too rigid, with a lot of latency in the core processes used to manage and monitor the supply chain.  But these inefficiencies have been masked by the booming economy for much of the last decade. The advent of outsourcing and the globalization of demand have rendered, and continue to render, many of these processes and organizational structures obsolete.  Perhaps obsolete is too harsh, but the current organizational and planning structures are at the heart of what Nick LaHowchic calls “dysfunctional” companies and he goes on to identify the need for “… organizations to become flatter, and operate in more of a team environment”.

The team environment is even more important in a multi-tier, multi-enterprise outsourced supply chain.  Yet too often the relationship between a brand owner and a contract manufacturer is relegated to that of a relationship driven by procurement and more appropriate to the supply of a commodity.  Far too often the relationship is adversarial rather than collaborative.  We have confused a financial instrument (outsourcing) with the need for operational effectiveness.  Angel Mendez, SVP of Worldwide Manufacturing at Cisco, has stated that  Cisco has over 7,000 people in their supply chain, fewer than 2,000 of which work for Cisco.  What is interesting to me in this statement is the recognition that these people are part of the Cisco supply chain.  An adversarial relationship based upon the cheapest price is probably not the most effective over a longer period of time because it does not foster the trust required to deal with supply chain issues in a collaborative manner in order to reach a compromise suitable to all parties.  While undoubtedly hard numbers should be the basis of all decisions, any model, whether a very simply Excel spreadsheet or a very sophisticated optimization model, is first and foremost an approximation and, as a consequence, produces an approximate result.  In addition, there are many so called soft issues, where ambiguity is the norm, that are extremely difficult if not impossible to represent in a model, and yet are so important to the acceptance of the outcome. It is far better to allow human judgment to prevail in these ambiguous situations backed up, of course, by models which provide hard evidence in which to evaluate the benefits and risks of making certain decisions.

While there may be short-comings in existing organizational structures and planning paradigms, companies need structures, techniques, and tools to functional effectively in the emerging supply chains. These emerging supply chains require more collaboration and less control; more coordination and less optimization.  Lahowchic and Supply Chain Digest have identified the twin pillars required:

  • Sense and Respond, which is the ability to
    • detect that something has changed
    • evaluate the consequences of the change
    • identify who is responsible for the consequences
    • elaborate and discuss alternatives in a collaborative environment
    • compare and contrast the alternatives based upon agreed metrics
    • apply human judgment to sifter issues so that compromise can be reached
    • create actionable decisions to which the team has agreed
  • Integrated Planning and Execution, essentially the Respond part of Sense and Respond, which is the ability to
    • plan, monitor, and respond in a single system and in near real-time
    • run S&OP much more frequently, possibly even on an “as needed” basis
    • create scenarios in real-time and to compare and contrast several scenarios to each other and to targets
    • provide senior management near real-time feedback on actual and projected financial and operational key performance indicator target attainment (Sense)
    • have senior management adjust targets which are immediately reflected in the planning systems at the tactical and operational level
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TrevorMiles

As vice president of Thought Leadership, Trevor serves as an expert source for Kinaxis customers, prospects, industry analysts and journalists. Known throughout the supply chain field, he has published many articles, presented at various industry events, and is the primary contributor to the Kinaxis 21st Century Supply Chain blog. Trevor helps Kinaxis seek new market opportunities within the company’s distinctive competence and is instrumental in the company’s competitive and market intelligence. He helps key customers achieve the operational control tower vision, guiding their priorities and architectures to realize the full potential of RapidResponse.

Having lived, worked, and studied in Canada, the United States, Europe and Africa, Trevor brings a global perspective to market needs and customer requirements. Prior to joining Kinaxis, Trevor worked for i2 Technologies where he held a number of sales & marketing roles and worked with global industry leaders such as Continental, Volkswagen, Nokia, and Thomson. Previous to i2, he worked for Coopers & Lybrand performing several studies in supply chain reengineering for companies such as Levi’s, Burmah Oil, TNT Logistics, AGA Gas, and Schneider Electric, among others. Trevor has degrees in Chemical Engineering and Industrial Engineering.

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Discussions

  1. interesting article, trevor. i can’t disagree with anything you say. there is one angle that i would like to add to it.

    you rightly point out that in multi-enterprise supply chains “the relationship between a brand owner and a contract manufacturer is … adversarial rather than collaborative.” this leads to two effects: the deliberate distortion of information by the brand owner (and the consequent second-guessing by the contract manufacturer) and an avoidable latency in the transmittal of that information.

    the distortion of information appears in the form an optimistic bias in the demand signal. this ensures that the brand owner can respond to any upside in the market. often, if that upside fails to materialize, the contract manufacturer is left holding the bag.

    the delay in transmitting demand information upstream is often worsened by the brand owner’s denial of the market reality they sense. typically, brand owners sense changes in the market but their response is often slowed down because any change in their view of the market is likely to be at odds with the targets set at the beginning of the quarter. the demand signal they send upstream continues to reflect their targets while actual demand lags. changing the behaviour on this front is going to be key to increasing the responsiveness of supply chains that span enterprise boundaries.

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