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A relatively new software-based technology—product life cycle management (PLM)—has been adopted by numerous manufacturers because it allows the collaborative design of products from anywhere in the world. Developers can tap into a central workspace and get access to part designs, bills of material, product specifications, production schedules, and other data. PLM includes elements of earlier computer-based technologies, such as computer-aided design, engineering, and manufacturing (CAD/CAE/CAM), as well as product data management (PDM), but PLM is much more of a supply chain solution because it allows the sharing of product information not only throughout a company's many offices but throughout the offices of supply chain partners and suppliers as well.
The Joint Strike Fighter (JSF) program, for instance, is a prime example of supply chain collaboration. This multibillion-dollar initiative to build a next-generation aircraft for both the American and British militaries includes Lockheed Martin as the lead contractor and fellow aerospace and defense manufacturers Northrop Grumman (U.S.), BAE Systems (U.K.), and Fokker (Netherlands) as major subcontractors. Product experts from these companies can tap into Lockheed's virtual workspace platform to work on their own piece of this massive international project. As many as 1,500 engineers can access the virtual workspace as heavy users, and another 3,000 can tap into it on a more limited basis.
Product life cycle management (PLM) technology enables manufacturers to manage and share complex design and production information across an extended enterprise, with the goal of streamlining the product development process.
Like aerospace companies, automotive and high-tech manufacturers have also been early adopters of PLM software because of the complex nature of their production process. However, given the increasing importance of developing new products and getting them to market as quickly as possible, consumer packaged goods and pharmaceutical companies have also turned to PLM as a supply chain best practice because, when properly deployed and managed, it can help reduce costs while increasing efficiency. Here are some examples:
Playtex Products, a manufacturer of personal care consumer products, outsources 70 percent of its manufacturing to seven facilities throughout North America. Tracking document routing and product record data was increasingly difficult because this information was maintained on any number of electronic systems, or in some cases, on paper. By standardizing on a common PLM platform, Playtex enjoyed a 98 percent improvement in its document routing time. Time-to-market improved significantly as well, contributing in part to added revenues in the neighborhood of $20 million annually.
Regulatory requirements from the FDA as well as legal bodies in Europe have become more demanding for pharmaceutical manufacturers such as Roche Diagnostics. Roche was having difficulty stepping up its quality management processes because its quality data were scattered among a dozen nonintegrated systems, with much of that information being shared via fax machines rather than over a computer network. By implementing a PLM solution throughout the company, Roche has been able to automate its documentation process, which helps the company manage its growing product lines as well as satisfy the government audits.
At Eaton's Hydraulics Division, a maker of hydraulic products for farm and construction machinery, it frequently took up to 10 days to distribute CAD files throughout the company. The process began with the transfer of completed drawings to microfilm, which were then sent to the main library and duplicated so they could be sent to other sites' libraries. Not only did it take too long, but the error rate was as high as 6 percent at some of the libraries. A PLM solution capable of storing and retrieving more than 70,000 imaged documents has not only made the microfilming system obsolete, but it has also shaved the wait time from 10 days down to a mere three hours.
Tuesday, September 2, 2008
Six-Sigma - Motorola's Learns to Measure Quality
Supply chain manufacturing concepts often seem to emerge fully formed out of nowhere, and while there have been numerous short-lived trends du jour, in reality the legitimate best practices have gestated for many years, sometimes for decades. There's nothing new about lean manufacturing or the Toyota Production System, for example, even though they're currently popular buzzwords. The TPS, after all, emerged in Japan shortly after World War II ended, and in fact was based on concepts popularized even earlier in the twentieth century by Henry Ford. So even though lean is at the top of many people's minds these days, the only thing truly new about lean is the acceptance it's finally gained in the United States.
Another manufacturing concept that is frequently associated with lean is Six Sigma, a structured, quality-centric approach to manufacturing. It began at Motorola in the 1980s as a way of improving the quality and reliability of its products, which would enable the company to deliver a consistently high level of customer service. Based on quality initiatives developed by the Japanese, Motorola's Six Sigma program—like the TPS—involved every employee in the company.
Six Sigma is a measure of quality that strives for near perfection, which is defined as no more than 3.4 defects per million opportunities.
Motorola learned from the Japanese that "simpler designs result in higher levels of quality and reliability," explains consultant Alan Larson, a divisional quality director at Motorola when Six Sigma was launched. The company also learned that it needed to improve manufacturing techniques "to ensure that products were built right the first time."
The term Six Sigma refers to the idea of near perfection, defined as six standard deviations between the mean and the nearest specification limit. In practice, this means a product or process can have no more than 3.4 defects per million opportunities. Six Sigma, like the SCOR Model, focuses on five areas: define, measure, analyze, improve, and control. Six Sigma programs typically use statistical process control (SPC) tools to monitor, control, and improve a product or process through statistical analysis.
To achieve the desired result of enabling continuous improvement, rather than merely putting a temporary bandage on a problem, Larson recommends that every department, group, and unit within a company complete the following six steps:
* Identify the product you create or the service you provide.
* Identify your customers, and determine the customers' needs.
* Identify your suppliers and what you need from them.
* Define your process for doing the work.
* Establish metrics for measuring the goodness of your process and feedback mechanisms to determine customer satisfaction.
* Ensure continuous improvement by establishing a team that measures, analyzes, and completes focused action items.
Proponents of the Six Sigma approach typically cite its lack of ambiguity as a major plus. The Six Sigma methodology applies a mathematical precision to what might otherwise be highly imprecise supply chain processes. A corollary benefit comes when a company insists on getting commitment from every employee, and requiring everybody to focus on the better good for the entire supply chain.
"Getting our business units to accept change has been accelerated because we're talking a common language and common methodology through Six Sigma," observes Lori Schock, site supply manager with Dow Corning, a manufacturer of silicone-based products. "It removes the doubting Thomas attitude because it is a common process based on facts."
Srinivasan' s 14 Lean Principles
Lean is not a quick fix. When 771 managers and executives were asked by the Lean Enterprise Institute to identify the biggest obstacle to implementing lean at their companies, nearly half (48 percent) said it was, "backsliding to the old ways of working." It's also revealing to note that when asked how far along they were with their lean implementations, more than half (53 percent) characterized their companies as being in the early stages. So while a lot of lip service is being paid to the idea of lean manufacturing, there remains a sizable gap on the execution end.
Lean manufacturing is a management philosophy focused on eliminating waste, reducing inventory, and increasing profitability.
As a result, companies continue to seek guidance in how exactly a lean operation should be set up, and just as importantly, how to maintain it. Mandyam Srinivasan, a professor with the University of Tennessee, has identified 14 principles that companies should follow to build and manage lean supply chains:
1. Measure any improvements in subsystem performance by weighing their impact on the whole system.
2. Focus on improving the performance of the lean supply chain, but do not ignore the supply chain's business ecosystem.
3. Focus on customer needs and process considerations when designing a product.
4. Maintain inventories in an undifferentiated (unfinished) form for as long as it is economically feasible to do so.
5. Buffer variation in demand with capacity, not inventory.
6. Use forecasts to plan and pull to execute.
7. Build strategic partnerships and alliances with members of the supply chain, with the goal of reducing the total cost of providing goods and services.
8. Design products and processes to promote strategic flexibility.
9. Develop performance measures that allow the enterprise to better align functions and move from a functional to a process orientation.
10. Reduce time lost at a bottleneck resource, which results in a loss of productivity for the entire supply chain. Time saved at a non-bottleneck resource is a mirage.
11. Make decisions that promote a growth strategy and focus on improving throughput.
12. Synchronize flow by first scheduling the bottleneck resources on the most productive products, then schedule non-bottleneck resources to support the bottleneck resources.
13. Don't focus on balancing capacities—focus on synchronizing the flow.
14. Reduce variation in the system, which will allow the supply chain to generate higher throughput with lower inventory and lower operating expense.
Lean manufacturing is a management philosophy focused on eliminating waste, reducing inventory, and increasing profitability.
As a result, companies continue to seek guidance in how exactly a lean operation should be set up, and just as importantly, how to maintain it. Mandyam Srinivasan, a professor with the University of Tennessee, has identified 14 principles that companies should follow to build and manage lean supply chains:
1. Measure any improvements in subsystem performance by weighing their impact on the whole system.
2. Focus on improving the performance of the lean supply chain, but do not ignore the supply chain's business ecosystem.
3. Focus on customer needs and process considerations when designing a product.
4. Maintain inventories in an undifferentiated (unfinished) form for as long as it is economically feasible to do so.
5. Buffer variation in demand with capacity, not inventory.
6. Use forecasts to plan and pull to execute.
7. Build strategic partnerships and alliances with members of the supply chain, with the goal of reducing the total cost of providing goods and services.
8. Design products and processes to promote strategic flexibility.
9. Develop performance measures that allow the enterprise to better align functions and move from a functional to a process orientation.
10. Reduce time lost at a bottleneck resource, which results in a loss of productivity for the entire supply chain. Time saved at a non-bottleneck resource is a mirage.
11. Make decisions that promote a growth strategy and focus on improving throughput.
12. Synchronize flow by first scheduling the bottleneck resources on the most productive products, then schedule non-bottleneck resources to support the bottleneck resources.
13. Don't focus on balancing capacities—focus on synchronizing the flow.
14. Reduce variation in the system, which will allow the supply chain to generate higher throughput with lower inventory and lower operating expense.
Lean without Silos
To Tom McMillen, director of global logistics with automaker General Motors, implementing lean practices is a continuing adventure. The company is constantly coming up with new ways to optimize its supply network and remove waste in the process of moving parts from its suppliers to a GM assembly plant. "Throughout our organization, lean practices allow us to reduce inventory in plants and streamline business practices. The benefit is more efficiency and productivity in our supply chain."
Taking the supply chain view is the approach Toyota has taken all along, but it's a difficult lesson for many American manufacturers. In the past, too many companies have looked upon the Toyota Production System (TPS) model—the definitive lean manufacturing model—as a departmental solution suitable only for the plant floor and the production line, observes Jim Matheson, a professor with Stanford University. What's more, this short-sighted thinking comes despite Toyota's insistence that lean should be embraced at the enterprise level to guide future growth from senior management levels on down.
The TPS is based on the concept of continuous improvement, which is reinforced by a corporate culture that empowers employees to improve their work environment. "Things that are running smoothly should not be subject to any control," observes Teruyuki Minoura, a senior managing director of Toyota Motor Corp. "If you commit yourself to just finding and fixing problems, you'll be able to carry out effective control on your lines with fewer personnel." That presupposes an environment where people have to think, which is why Minoura says the "T" in TPS can also stand for "Thinking."
The success Toyota and other automotive companies have achieved with lean techniques is being monitored by other industries as well. For instance, Moen, a manufacturer of plumbing products, has studied world-class lean operations with the intent of introducing lean practices and standardizing work within its manufacturing facilities. "We're trying to find the best fit for our operation and determine how much change we can bring about within our organization, and how quickly," says Scott Saunders, Moen's vice president of global supply chain.
Part of that change is being accomplished by having teams determine the best manufacturing processes, document those processes, train each other on those processes, and then implement a plan where they all agree to follow those processes. It's easier to run lean in a self-contained plant, Saunders admits, so it's important to get input from operations managers as to the best way to do the work. Running lean throughout the supply chain, which is where Moen expects to enjoy the most benefits, requires evaluating every step within the manufacturing cycle.
Taking the supply chain view is the approach Toyota has taken all along, but it's a difficult lesson for many American manufacturers. In the past, too many companies have looked upon the Toyota Production System (TPS) model—the definitive lean manufacturing model—as a departmental solution suitable only for the plant floor and the production line, observes Jim Matheson, a professor with Stanford University. What's more, this short-sighted thinking comes despite Toyota's insistence that lean should be embraced at the enterprise level to guide future growth from senior management levels on down.
The TPS is based on the concept of continuous improvement, which is reinforced by a corporate culture that empowers employees to improve their work environment. "Things that are running smoothly should not be subject to any control," observes Teruyuki Minoura, a senior managing director of Toyota Motor Corp. "If you commit yourself to just finding and fixing problems, you'll be able to carry out effective control on your lines with fewer personnel." That presupposes an environment where people have to think, which is why Minoura says the "T" in TPS can also stand for "Thinking."
The success Toyota and other automotive companies have achieved with lean techniques is being monitored by other industries as well. For instance, Moen, a manufacturer of plumbing products, has studied world-class lean operations with the intent of introducing lean practices and standardizing work within its manufacturing facilities. "We're trying to find the best fit for our operation and determine how much change we can bring about within our organization, and how quickly," says Scott Saunders, Moen's vice president of global supply chain.
Part of that change is being accomplished by having teams determine the best manufacturing processes, document those processes, train each other on those processes, and then implement a plan where they all agree to follow those processes. It's easier to run lean in a self-contained plant, Saunders admits, so it's important to get input from operations managers as to the best way to do the work. Running lean throughout the supply chain, which is where Moen expects to enjoy the most benefits, requires evaluating every step within the manufacturing cycle.
Silos & Supply Chains - Part 3
When aerospace manufacturer Boeing committed itself to lean manufacturing, it sent teams of workers to various automotive plants around the world to learn the best manufacturing practices from companies such as Porsche and Volkswagen. The aerospace industry is considerably more parts-intensive and labor-intensive than the automotive industry—a typical jet has more than 3 million parts—but Boeing still learned plenty about job scheduling and just-in-time manufacturing. Those lessons have been put to good use in streamlining what is arguably the most complex manufacturing supply chain in the world.
Boeing has been devoted to lean principles since the early 1990s, and one of the company's key goals has been to eliminate waste and the costs associated with it, whether it's wasted time, wasted production materials, wasted labor, or wasted money To reach that goal, the company has substantially reduced its supply base (down by 65 percent since 2000), and now partners only with those suppliers that can provide the best in terms of capability, quality, delivery performance, and collaboration, explains Nonna Clayton, vice president of supplier management for Boeing's Integrated Defense Systems group.
Boeing's lean consultants work directly with suppliers and train them so they can implement lean on their own, Clayton notes. Additionally, suppliers are encouraged to attend lean conferences and symposiums, as well as participate in manufacturing extension partnerships where available. Through a process known as value stream mapping, Boeing has been able to reduce its procurement costs while helping its suppliers identify areas where they can drive out costs as well. With value stream mapping, a company begins by defining the current state of how a process is being done. Then it focuses on where it wants to be and identifies areas of improvement that will bring about that desired state. Using this process, one cable supplier to Boeing has been able to cut assembly time by 44 percent while increasing productivity by 27 percent. It's all part of Boeing's program goal of keeping the flow of information, requirements, products, and services free of waste. In that situation, everybody in the supply chain ends up a winner.
Boeing has been devoted to lean principles since the early 1990s, and one of the company's key goals has been to eliminate waste and the costs associated with it, whether it's wasted time, wasted production materials, wasted labor, or wasted money To reach that goal, the company has substantially reduced its supply base (down by 65 percent since 2000), and now partners only with those suppliers that can provide the best in terms of capability, quality, delivery performance, and collaboration, explains Nonna Clayton, vice president of supplier management for Boeing's Integrated Defense Systems group.
Boeing's lean consultants work directly with suppliers and train them so they can implement lean on their own, Clayton notes. Additionally, suppliers are encouraged to attend lean conferences and symposiums, as well as participate in manufacturing extension partnerships where available. Through a process known as value stream mapping, Boeing has been able to reduce its procurement costs while helping its suppliers identify areas where they can drive out costs as well. With value stream mapping, a company begins by defining the current state of how a process is being done. Then it focuses on where it wants to be and identifies areas of improvement that will bring about that desired state. Using this process, one cable supplier to Boeing has been able to cut assembly time by 44 percent while increasing productivity by 27 percent. It's all part of Boeing's program goal of keeping the flow of information, requirements, products, and services free of waste. In that situation, everybody in the supply chain ends up a winner.
Silos & Supply Chains - Part 2
Dell's strategy hinges on having visibility into the latest supply and demand trends. The company posts its hub-level inventory on the Web, enabling suppliers to check their inventory levels at the hubs, since materials suppliers aren't necessarily the same set of companies as those at the hub. Dell issues forecasts through its supplier extranet, and suppliers commit back to Dell, based on those forecasts. Dell then works from that information, covering any deviations from what it asks for against what a supplier or a set of suppliers can promise.
Suppliers maintain inventory in their hub facilities located near Dell's assembly plants. Dell sends orders to the suppliers on a rolling basis, and factory-scheduling software generates material requirements every two hours per facility. Those requirements get posted to Dell's supplier Web site, and the hubs then pick, pack, and ship the materials to Dell for the next two hours of production. The result is a built-to-order computer.
"The more we know about the capabilities of the supply chain and our suppliers, the better decisions we're going to make for our customers," Hunter observes. In practice, that sometimes means that Dell makes a better choice for a customer than it does for itself, at least for the short term. Lean manufacturing experts James P. Womack and Daniel T Jones have observed that there is "a logical disconnect" between what Dell does for its customers and what it ought to be doing for them based on cost effectiveness.
"Because the short-term spikes in demand can be several times long-term demand and extra capacity is very costly, it is not practical for Dell to maintain enough capacity to respond instantly to every swing in the market," Womack and Jones explain. To be able to respond to individual consumers who want their own customized computer at a good price, then, Dell tries to create customer demand by changing the prices on optional features or even entire systems based on how many or few of any given item the company has.
What sometimes happens, though, is a consumer will request a system that includes components Dell doesn't have readily on hand. Rather than requisitioning a part that might have to be shipped via air freight (by far the most expensive transportation mode), the computer maker will instead substitute an upgraded component it has in stock. The consumer gets a better computer, though the wait for the system will be longer than originally expected. In effect, Dell will take a loss on the cost of the components if it can save on transportation costs and in the process keep a customer happy. And it's been Dell's ability to "cost-effectively supply exactly what its customers want" that has made its supply chain best-in-class.
IBM Corp., another computer industry leader, spends roughly 50 cents of every dollar of revenue on its supply chain, which based on 2005 sales of $91 billion, represents a supply chain spend of $45.5 billion. Big Blue refers to its on-demand supply chain, which Nick Donofrio, executive vice president of innovation and technology, explains is one that can sense and respond to customers' demands and to changes in the marketplace—no matter how frequent and sudden.
"In the past, manufacturing was a rather isolated activity," Donofrio says. "It was located at or near the end of the supply chain. The manufacturing team didn't get involved in anything until after the product had been designed and developed, the planning and forecasting had been done, and the customer had placed the order. That model is history. It will never suffice for today's customers who demand instantaneous response to their inquiries. What's required now is the complete integration of manufacturing into the overall supply chain, as well as the integration of the overall supply chain itself."
IBM's transformation to an on-demand model didn't happen overnight. A key factor in its integration was a razor-close examination of how an order moves throughout its system. "We looked at how we could integrate logistics and inventory, and what we needed to purchase from suppliers," Donofrio explains. "By embracing the e-business model, we were able to deploy capabilities that would increase efficiency of our supply chain, and strengthen our relationships with our suppliers and customers. We were able to link customer-facing systems, such as order entry, order scheduling, and confirmation, to the supply-facing systems that drive procurement, warehousing, manufacturing, distribution, and invoicing." In short, IBM now ties together all of the relevant "plan, source, make, deliver, and return" elements of its supply chain.
Suppliers maintain inventory in their hub facilities located near Dell's assembly plants. Dell sends orders to the suppliers on a rolling basis, and factory-scheduling software generates material requirements every two hours per facility. Those requirements get posted to Dell's supplier Web site, and the hubs then pick, pack, and ship the materials to Dell for the next two hours of production. The result is a built-to-order computer.
"The more we know about the capabilities of the supply chain and our suppliers, the better decisions we're going to make for our customers," Hunter observes. In practice, that sometimes means that Dell makes a better choice for a customer than it does for itself, at least for the short term. Lean manufacturing experts James P. Womack and Daniel T Jones have observed that there is "a logical disconnect" between what Dell does for its customers and what it ought to be doing for them based on cost effectiveness.
"Because the short-term spikes in demand can be several times long-term demand and extra capacity is very costly, it is not practical for Dell to maintain enough capacity to respond instantly to every swing in the market," Womack and Jones explain. To be able to respond to individual consumers who want their own customized computer at a good price, then, Dell tries to create customer demand by changing the prices on optional features or even entire systems based on how many or few of any given item the company has.
What sometimes happens, though, is a consumer will request a system that includes components Dell doesn't have readily on hand. Rather than requisitioning a part that might have to be shipped via air freight (by far the most expensive transportation mode), the computer maker will instead substitute an upgraded component it has in stock. The consumer gets a better computer, though the wait for the system will be longer than originally expected. In effect, Dell will take a loss on the cost of the components if it can save on transportation costs and in the process keep a customer happy. And it's been Dell's ability to "cost-effectively supply exactly what its customers want" that has made its supply chain best-in-class.
IBM Corp., another computer industry leader, spends roughly 50 cents of every dollar of revenue on its supply chain, which based on 2005 sales of $91 billion, represents a supply chain spend of $45.5 billion. Big Blue refers to its on-demand supply chain, which Nick Donofrio, executive vice president of innovation and technology, explains is one that can sense and respond to customers' demands and to changes in the marketplace—no matter how frequent and sudden.
"In the past, manufacturing was a rather isolated activity," Donofrio says. "It was located at or near the end of the supply chain. The manufacturing team didn't get involved in anything until after the product had been designed and developed, the planning and forecasting had been done, and the customer had placed the order. That model is history. It will never suffice for today's customers who demand instantaneous response to their inquiries. What's required now is the complete integration of manufacturing into the overall supply chain, as well as the integration of the overall supply chain itself."
IBM's transformation to an on-demand model didn't happen overnight. A key factor in its integration was a razor-close examination of how an order moves throughout its system. "We looked at how we could integrate logistics and inventory, and what we needed to purchase from suppliers," Donofrio explains. "By embracing the e-business model, we were able to deploy capabilities that would increase efficiency of our supply chain, and strengthen our relationships with our suppliers and customers. We were able to link customer-facing systems, such as order entry, order scheduling, and confirmation, to the supply-facing systems that drive procurement, warehousing, manufacturing, distribution, and invoicing." In short, IBM now ties together all of the relevant "plan, source, make, deliver, and return" elements of its supply chain.
Silos - Break 'Em Down!
One of the major objectives of supply chain management is to break down the silos that operate within any company. The term silo refers to the silhouetted portrait of a typical manufacturer: smoke-belching chimneys towering over several-stories-tall factories situated near tall office buildings. Every school kid recognizes that picture, and it's become the default icon for every PowerPoint presentation that needs an instantly recognizable image of a production facility. Unfortunately, it's not just the silo image that lingers in the public consciousness—it's the entire silo mentality that supply chain proponents keep trying to break down, with varying degrees of success.
Let's face it: Taking control of the supply chain and aligning a company's processes so that improvements are regular and long-lasting are very difficult tasks to accomplish. For some companies, though, an even harder task is deciding whether to start the process at all, particularly given the long tradition of "throwing it over the wall" between various production departments. When it comes to aligning manufacturing within a supply chain context, it's not easy being lean.
Today, thanks largely to the historic success of Japanese automaker Toyota and the more recent but equally storied success of American computer maker Dell, textbooks outlining the principles of lean manufacturing sit on the bookshelves of countless executive suites. Yet for all the talk about lean, there's still a pervasive wait-and-see attitude at most of those companies, especially outside of the automotive and high-tech industries. While manufacturers and distributors of all types of products recognize that lean offers a more-or-less direct route to eliminating waste, reducing inventory, and becoming more profitable, wanting those benefits and actually having a plan in place for going after them are two very different things.
Improving efficiencies within a lean environment takes a concerted and coordinated effort to align all facets of the supply chain toward achieving the same goals. And the job is far from done once a company has all its internal oars moving in the same direction; that same process must be replicated throughout the main supply base. Any breakdown in communication with a key supplier will result in those lean inventories getting bloated again in very short order.
The patience that is required for a successful supply chain transformation can evaporate after one bad fiscal quarter, and any kind of company-transforming initiative by definition requires significant expenditures of time, money, labor, and other vital resources. Confronted with "put up or shut up" ultimatums from top management, many supply chain managers are stymied in their attempts to streamline manufacturing operations, even in the face of evidence that such efforts are working for other companies.
There's also the business-as-usual mindset that looks upon supply chain initiatives as mostly a one-time opportunity to reduce costs in a single area, with little or no thought given to a sustained effort throughout all corporate operations.
Nevertheless, companies continue to seek ways to break down the silo mentality for one basic reason: That's what the best manufacturing companies in the world have done. Best-in-class manufacturers have at least this one thing in common: Their cycle times are shorter than their order lead times. What's more, they've figured out how to reduce waste in numerous areas, which allows them to control their costs as they increase capacity and inventory turns. And in supply chain circles, nobody does that better than Dell.
The secret to Dell's success is really no secret at all—the company's direct model works because of a single-minded dedication to its customers, focusing on one customer at a time. Since its founding in 1984, the company has pioneered a make-to-order philosophy within an industry that was traditionally make-to-stock. Rather than sell its personal computers through retailers, Dell decided to customize every PC to the unique specifications of the individual end user. So customers get exactly what they want, while Dell builds PCs that have already been sold.
Let's face it: Taking control of the supply chain and aligning a company's processes so that improvements are regular and long-lasting are very difficult tasks to accomplish. For some companies, though, an even harder task is deciding whether to start the process at all, particularly given the long tradition of "throwing it over the wall" between various production departments. When it comes to aligning manufacturing within a supply chain context, it's not easy being lean.
Today, thanks largely to the historic success of Japanese automaker Toyota and the more recent but equally storied success of American computer maker Dell, textbooks outlining the principles of lean manufacturing sit on the bookshelves of countless executive suites. Yet for all the talk about lean, there's still a pervasive wait-and-see attitude at most of those companies, especially outside of the automotive and high-tech industries. While manufacturers and distributors of all types of products recognize that lean offers a more-or-less direct route to eliminating waste, reducing inventory, and becoming more profitable, wanting those benefits and actually having a plan in place for going after them are two very different things.
Improving efficiencies within a lean environment takes a concerted and coordinated effort to align all facets of the supply chain toward achieving the same goals. And the job is far from done once a company has all its internal oars moving in the same direction; that same process must be replicated throughout the main supply base. Any breakdown in communication with a key supplier will result in those lean inventories getting bloated again in very short order.
The patience that is required for a successful supply chain transformation can evaporate after one bad fiscal quarter, and any kind of company-transforming initiative by definition requires significant expenditures of time, money, labor, and other vital resources. Confronted with "put up or shut up" ultimatums from top management, many supply chain managers are stymied in their attempts to streamline manufacturing operations, even in the face of evidence that such efforts are working for other companies.
There's also the business-as-usual mindset that looks upon supply chain initiatives as mostly a one-time opportunity to reduce costs in a single area, with little or no thought given to a sustained effort throughout all corporate operations.
Nevertheless, companies continue to seek ways to break down the silo mentality for one basic reason: That's what the best manufacturing companies in the world have done. Best-in-class manufacturers have at least this one thing in common: Their cycle times are shorter than their order lead times. What's more, they've figured out how to reduce waste in numerous areas, which allows them to control their costs as they increase capacity and inventory turns. And in supply chain circles, nobody does that better than Dell.
The secret to Dell's success is really no secret at all—the company's direct model works because of a single-minded dedication to its customers, focusing on one customer at a time. Since its founding in 1984, the company has pioneered a make-to-order philosophy within an industry that was traditionally make-to-stock. Rather than sell its personal computers through retailers, Dell decided to customize every PC to the unique specifications of the individual end user. So customers get exactly what they want, while Dell builds PCs that have already been sold.
Monday, September 1, 2008
Supply Chain Metrics 5 - About the SCOR
By far the best-known and most detailed performance metrics are encompassed in the Supply Chain Operations Reference (SCOR) model, which was created in 1995 and has been continuously refined ever since. The SCOR model provides an industry-standard approach to analyze, design, and implement changes to improve performance throughout five integrated supply chain processes—plan, source, make, deliver, and return—spanning the full gamut from a supplier's supplier to a customer's customer and every point in between. The SCOR model is aligned with a company's operational strategy, material, work flows, and information flows.
As explained by Peter Bolstorff and Robert Rosenbaum in Supply Chain Excellence, a handbook on using the SCOR model, the five SCOR processes encompass the following measurable activities:
Plan: Assess supply resources; aggregate and prioritize demand requirements; plan inventory for distribution, production, and material requirements; and plan rough-cut capacity for all products and all channels.
Source: Obtain, receive, inspect, hold, issue, and authorize payment for raw materials and purchased finished goods.
Make: Request and receive material; manufacture and test product; package, hold, and/or release product.
Deliver: Execute order management processes; generate quotations; configure product; create and maintain a customer database; maintain a product/price database; manage accounts receivable, credits, collections, and invoicing; execute warehouse processes, including pick, pack, and configure; create customer-specific packaging/labeling; consolidate orders; ship products; manage transportation processes and import/ export; and verify performance.
Return: Defective, warranty, and excess return processing, including authorization, scheduling, inspection, transfer, warranty administration, receiving and verifying defective products, disposition, and replacement.
The SCOR model provides a supply chain scorecard (or SCORcard, if you will) that companies can use to set and manage supply chain performance targets across their organization. Given the increased attention and scrutiny Wall Street is applying to the supply chain's impact on a company's financial performance, being able to measure exactly how well each process is doing is one of the key steps on the road to developing a best-in-class supply chain. Therefore, one of the main roles of the SCOR model is to provide a consistent set of metrics a company can use to measure its performance over time as well as compare itself against competitors.
In the end, supply chain metrics have three main objectives, according to Shoshanah Cohen and Joseph Roussel, authors of Strategic Supply Chain Management
1. They must translate financial objectives and targets into effective measures of operational performance.
2. They must translate operational performance into more accurate predictions of future earnings or sales.
3. They must drive behavior within the supply chain organization that supports the overall business strategy.
Supply Chain Metrics 4 - Supply Chain Check-up
How do you know that you need help in the first place, though? Benchmark studies and process maps are both expensive and time-consuming, and many companies whose earnings put them well outside of the Fortune 1000 realize that their supply chains aren't all they ought to be, but they are still hesitant as to what to do about it. Consultant Mike Donovan of R. Michael Donovan & Company offers a relatively short but challenging checklist that provides a basic assessment of how healthy your supply chain might be. If you answer "no" to any of the following questions, or even worse, if you don't even know the answers to some of these questions, then the time to get serious about fixing your supply chain problems is right now:
Do your order fulfillment rates meet management's specific and measured customer service strategy?
Are your delivery lead times competitive and predictable?
Do all of your supply chain departments agree on which products are made-to-stock and which are made-to-order?
Do sales and manufacturing share equally in determining the mix and investment in inventory?
Are the appropriate calculations being used, rather than "rules of thumb," to establish the desired mix and levels?
Are management's inventory investment plan and customer service objectives being compared against the actual results that are achieved?
Are short-term forecast deviations being monitored and adjusted, and is long-term forecast accuracy continuously improving?
Is your inventory accuracy consistently above 98 percent?
Are you able to avoid carrying excess safety stock buffers?
Are your excess and obsolete inventories being measured, and are they less than 1 percent of total inventory?
Time for a Turnaround
Automaker Nissan Motors is a good example of a company that recognized it was in trouble and used strategic benchmarking to launch a complete corporate turnaround. David Morgan, president and CEO of consulting firm D.W. Morgan Company, points out that Nissan was one of the relatively few companies that sat out the boom years of the 1990s, charting instead a decade-long course of failed products and poor financial results. In the year 2000, Nissan decided enough was enough as it began an initiative aimed at achieving an 8 percent profit on each vehicle sold.
"Through data collected in its supplier benchmarking program, Nissan discovered that suppliers were consistently producing inferior products at higher than average prices. In effect, Nissan was giving away $2,000 on every car sold. Further, Nissan's distribution costs were the highest among automakers," Morgan explains.
Once it became aware of these problems, Nissan quickly responded by improving its supply base. "Today, Nissan employs sophisticated benchmarks for every partner doing business with them. Any partner that fails to meet established standards is notified of corrective action that needs to be taken," he notes.
It took more than just benchmarking to effect these changes, of course. For one thing, Nissan expanded its closely held supply base to include global component suppliers. It also embraced many of the same lean manufacturing and quality philosophies that fellow Japanese automaker Toyota had pioneered. As a result of all these initiatives, Nissan has become a benchmark for the automotive industry. As Morgan points out, since 2000, the company's stock price has nearly doubled, and in 2005, vehicle sales were up more than 10 percent. Not too bad for a company that had been written off as comatose at the turn of the millennium.
Part 5 coming soon....
Do your order fulfillment rates meet management's specific and measured customer service strategy?
Are your delivery lead times competitive and predictable?
Do all of your supply chain departments agree on which products are made-to-stock and which are made-to-order?
Do sales and manufacturing share equally in determining the mix and investment in inventory?
Are the appropriate calculations being used, rather than "rules of thumb," to establish the desired mix and levels?
Are management's inventory investment plan and customer service objectives being compared against the actual results that are achieved?
Are short-term forecast deviations being monitored and adjusted, and is long-term forecast accuracy continuously improving?
Is your inventory accuracy consistently above 98 percent?
Are you able to avoid carrying excess safety stock buffers?
Are your excess and obsolete inventories being measured, and are they less than 1 percent of total inventory?
Time for a Turnaround
Automaker Nissan Motors is a good example of a company that recognized it was in trouble and used strategic benchmarking to launch a complete corporate turnaround. David Morgan, president and CEO of consulting firm D.W. Morgan Company, points out that Nissan was one of the relatively few companies that sat out the boom years of the 1990s, charting instead a decade-long course of failed products and poor financial results. In the year 2000, Nissan decided enough was enough as it began an initiative aimed at achieving an 8 percent profit on each vehicle sold.
"Through data collected in its supplier benchmarking program, Nissan discovered that suppliers were consistently producing inferior products at higher than average prices. In effect, Nissan was giving away $2,000 on every car sold. Further, Nissan's distribution costs were the highest among automakers," Morgan explains.
Once it became aware of these problems, Nissan quickly responded by improving its supply base. "Today, Nissan employs sophisticated benchmarks for every partner doing business with them. Any partner that fails to meet established standards is notified of corrective action that needs to be taken," he notes.
It took more than just benchmarking to effect these changes, of course. For one thing, Nissan expanded its closely held supply base to include global component suppliers. It also embraced many of the same lean manufacturing and quality philosophies that fellow Japanese automaker Toyota had pioneered. As a result of all these initiatives, Nissan has become a benchmark for the automotive industry. As Morgan points out, since 2000, the company's stock price has nearly doubled, and in 2005, vehicle sales were up more than 10 percent. Not too bad for a company that had been written off as comatose at the turn of the millennium.
Part 5 coming soon....
Supply Chain Metrics 3 - What Makes a Supply Chain Leader?
Here's the good news: Whereas the Singhal/Hendricks study exposes the vulnerability of poorly managed supply chains, another study conducted by Accenture (in partnership with INSEAD and Stanford University) reveals that companies identified as supply chain leaders have a market cap up to 26 percentage points higher than the industry average. That begs the question: So what makes a supply chain leader, anyway?
That's where the statistical approach comes in. If you can measure the performance of your supply chain, then you'll be able to determine how close you are to being best-in-class. But how do you know exactly who is the best at supply chain management? When Fortune magazine identifies the top-performing companies in a given industry, it uses the straightforward standard of annual sales. When it comes to identifying the top supply chains, though, merely counting up dollars and cents won't get the job done. After all, a supply chain that is truly best-in-class will encompass numerous operations and processes that don't necessarily show up on a profit-and-loss sheet, such as planning and forecasting, procurement, transportation and logistics, warehousing and distribution, customer service, and other key factors in the overall supply chain equation.
Measure Satisfaction
Automaker Hyundai uses its parts distribution operation to build customer loyalty. The company's goal is to provide high levels of customer service while keeping its costs as low as possible. In this case, the customers are Hyundai dealers, and through dealer satisfaction surveys the company has learned that order fill rate is the number-one driver of satisfaction. "If needed parts are available, our dealers are happy," explains George Kurth, director of supply chain and logistics with Hyundai Motor America.
So to ensure that it's keeping its dealers happy while keeping its costs down, Hyundai measures the facing fill rate, which is the order fill rate from the warehouse assigned to the dealer. "If we can keep that fill rate very, very high, it's good for dealer satisfaction and it reduces transportation costs," Kurth notes. "Shipping from the assigned warehouse on our dedicated delivery route is cheap. We pay for the truck no matter how full it is. If the part is not available from the assigned warehouse, we have to ship from another warehouse via an expedited carrier. We can satisfy the dealer and get the part there on time, but the cost soars."
Hyundai's facing fill rate on orders is about 96 percent, which is considered good for the automotive industry. The automaker also measures the fill rate for its entire warehouse network, which is 98 percent, also a high score for automakers. Kurth isn't satisfied with that score, though, because "that still means that 2 percent of the time, I have to use premium transportation."
Transportation costs, however, are just part of the total supply chain cost, which also includes inventory and productivity costs. Hyundai monitors the amount of inventory it carries at any given time, with the understanding that best-in-class for the automotive industry is never going to equate well with the high-tech industry's goals. "We tend to carry a lot of parts inventory because our automobiles last several years," Kurth says. "In contrast, Dell has virtually no parts inventory because a six-month-old computer is obsolete."
To stay on top of current automotive industry trends, Hyundai belongs to an independent automotive and heavy equipment group that collects performance and cost metrics from member companies and provides benchmarking services.
Part 4 next....
That's where the statistical approach comes in. If you can measure the performance of your supply chain, then you'll be able to determine how close you are to being best-in-class. But how do you know exactly who is the best at supply chain management? When Fortune magazine identifies the top-performing companies in a given industry, it uses the straightforward standard of annual sales. When it comes to identifying the top supply chains, though, merely counting up dollars and cents won't get the job done. After all, a supply chain that is truly best-in-class will encompass numerous operations and processes that don't necessarily show up on a profit-and-loss sheet, such as planning and forecasting, procurement, transportation and logistics, warehousing and distribution, customer service, and other key factors in the overall supply chain equation.
Measure Satisfaction
Automaker Hyundai uses its parts distribution operation to build customer loyalty. The company's goal is to provide high levels of customer service while keeping its costs as low as possible. In this case, the customers are Hyundai dealers, and through dealer satisfaction surveys the company has learned that order fill rate is the number-one driver of satisfaction. "If needed parts are available, our dealers are happy," explains George Kurth, director of supply chain and logistics with Hyundai Motor America.
So to ensure that it's keeping its dealers happy while keeping its costs down, Hyundai measures the facing fill rate, which is the order fill rate from the warehouse assigned to the dealer. "If we can keep that fill rate very, very high, it's good for dealer satisfaction and it reduces transportation costs," Kurth notes. "Shipping from the assigned warehouse on our dedicated delivery route is cheap. We pay for the truck no matter how full it is. If the part is not available from the assigned warehouse, we have to ship from another warehouse via an expedited carrier. We can satisfy the dealer and get the part there on time, but the cost soars."
Hyundai's facing fill rate on orders is about 96 percent, which is considered good for the automotive industry. The automaker also measures the fill rate for its entire warehouse network, which is 98 percent, also a high score for automakers. Kurth isn't satisfied with that score, though, because "that still means that 2 percent of the time, I have to use premium transportation."
Transportation costs, however, are just part of the total supply chain cost, which also includes inventory and productivity costs. Hyundai monitors the amount of inventory it carries at any given time, with the understanding that best-in-class for the automotive industry is never going to equate well with the high-tech industry's goals. "We tend to carry a lot of parts inventory because our automobiles last several years," Kurth says. "In contrast, Dell has virtually no parts inventory because a six-month-old computer is obsolete."
To stay on top of current automotive industry trends, Hyundai belongs to an independent automotive and heavy equipment group that collects performance and cost metrics from member companies and provides benchmarking services.
Part 4 next....
Supply Chain Metrics 2 - How to Prevent a Supply Chain Heart Attack
Here's an example of how sabermetrics-style supply chain analysis can frame Nike's problems as part of a trend that goes far beyond the apparel industry. Two researchers—Vinod Singhal of the Georgia Institute of Technology and Kevin Hendricks of the University of Western Ontario—looked at more than 800 announcements of supply chain problems from public companies over an eight-year period (1992—1999). These problems included things like inventory write-offs, parts shortages, shipping delays, and the like. The researchers then tracked the price of these companies' stock one year before and two years after the announcement.
So what happened? After all the numbers were crunched, a clear trend emerged: Companies that experienced supply chain glitches over that time period saw their average operating income drop 107 percent, return on sales fall 114 percent, and return on assets decrease by 93 percent. And that's not all: These companies also typically saw 7 percent lower sales growth, 11 percent higher costs, and a 14 percent increase in inventories. Exacerbating that already dismal situation is the fact that it takes a long time to recover from these disruptions.
"The supply chain disruption lowers the level of operating performance for a company, and then firms continue to perform at that lower level for the next couple of years," Singhal explains. He says a supply chain disruption can be compared to a heart attack because it cuts off the flow of information and supplies to a company, and it can have long-term—and sometimes fatal—effects on a company's health.
It doesn't really matter which industry the company is in, either, because any company reporting a supply chain glitch will see its shareholder value plummet. Process manufacturers (e.g., chemicals, food and beverage, textiles) tend to suffer the biggest hit to shareholder return, with a 51 percent drop. Retailers experience an average decrease of 42 percent, while high-tech manufacturers will see a 27 percent decline. Smaller companies are usually hit harder than large ones, although the drop in income is enormous for any size company—150 percent for small companies, 86 percent for large.
"When people talk about supply chain management, they may agree that it's important, but they're not investing in solutions," Singhal points out. However, even when companies do spend on solutions, they're not necessarily spending wisely. "One reason supply chain problems occur is because there isn't enough slack in the system," Singhal notes. "As companies try to make their supply chains more efficient, they take away slack because it's expensive."
The answer, though, isn't to throw a lot of money at your supply chain problems. It's to get smarter at identifying and tracking key indicators that might indicate potential glitches early on. That means developing better forecasts and plans, collaborating with suppliers and customers, ensuring real-time visibility, building flexibility into your supply chain, and other best practices.
Part 3 coming soon....
So what happened? After all the numbers were crunched, a clear trend emerged: Companies that experienced supply chain glitches over that time period saw their average operating income drop 107 percent, return on sales fall 114 percent, and return on assets decrease by 93 percent. And that's not all: These companies also typically saw 7 percent lower sales growth, 11 percent higher costs, and a 14 percent increase in inventories. Exacerbating that already dismal situation is the fact that it takes a long time to recover from these disruptions.
"The supply chain disruption lowers the level of operating performance for a company, and then firms continue to perform at that lower level for the next couple of years," Singhal explains. He says a supply chain disruption can be compared to a heart attack because it cuts off the flow of information and supplies to a company, and it can have long-term—and sometimes fatal—effects on a company's health.
It doesn't really matter which industry the company is in, either, because any company reporting a supply chain glitch will see its shareholder value plummet. Process manufacturers (e.g., chemicals, food and beverage, textiles) tend to suffer the biggest hit to shareholder return, with a 51 percent drop. Retailers experience an average decrease of 42 percent, while high-tech manufacturers will see a 27 percent decline. Smaller companies are usually hit harder than large ones, although the drop in income is enormous for any size company—150 percent for small companies, 86 percent for large.
"When people talk about supply chain management, they may agree that it's important, but they're not investing in solutions," Singhal points out. However, even when companies do spend on solutions, they're not necessarily spending wisely. "One reason supply chain problems occur is because there isn't enough slack in the system," Singhal notes. "As companies try to make their supply chains more efficient, they take away slack because it's expensive."
The answer, though, isn't to throw a lot of money at your supply chain problems. It's to get smarter at identifying and tracking key indicators that might indicate potential glitches early on. That means developing better forecasts and plans, collaborating with suppliers and customers, ensuring real-time visibility, building flexibility into your supply chain, and other best practices.
Part 3 coming soon....
Supply Chain Metrics 1 - Measuring Up to High Standards
It's probably just a coincidence, but the rise in popularity of supply chain management happens to coincide with the emergence of sabermetrics. No, you're not going to find that term defined in any business management journal; sabermetrics is the application of statistical analysis and research to the game of baseball. When personal computers became affordable in the early 1980s, supply chain analysts and sabermetricians alike fell in love with databases and spreadsheets that could crunch months' worth of product forecasts and decades' worth of box scores in minutes, rather than days. These days, "keeping a scorecard" is as much a part of the supply chain language as it is sports talk.
To paraphrase John Thorn, co-editor of Total Baseball, statistics are not just a cold-blooded means of dissecting profit and loss reports in order to examine a company's performance; rather, statistics are a vital part of the supply chain. The supply chain may be appreciated without statistics, but it cannot be understood without them.
To continue the sports analogy, back in the spring of 2001, the only event in which athletic footwear and "Just Do It" icon Nike seemed to be excelling was poor planning. Philip Knight, Nike's CEO, had to explain why the company's shoe sales were 24 percent less than expected, which led to an earnings shortfall of approximately $100 million. Much like a beleaguered baseball manager explains away a loss by pointing to a key player's failure to lay down a bunt in the late innings, so too did Knight point his finger at a convenient scapegoat: He blamed it on his supply chain plan.
Specifically, Knight singled out the problems Nike had implementing a new supply chain planning system. Those implementation problems, he explained, were what led to unforeseen product shortages and excesses. The installation of the software had been rushed (Knight didn't dwell on his role in making that decision, much as a baseball manager tends to gloss over whether a player was rushed to the big leagues before he was ready), and that led to conflicts between Nike's legacy order management system and the new demand and supply planning software. As a result, the company made too many of one style of shoe and too little of another, building up inventories of shoes few people wanted while experiencing shortages of more popular brands.
Simply put, Nike was having major league problems matching the right orders to the right customers. And Wall Street responded promptly, as Nike's share price dropped 19 percent when the glitch was announced.
More on this soon....
To paraphrase John Thorn, co-editor of Total Baseball, statistics are not just a cold-blooded means of dissecting profit and loss reports in order to examine a company's performance; rather, statistics are a vital part of the supply chain. The supply chain may be appreciated without statistics, but it cannot be understood without them.
To continue the sports analogy, back in the spring of 2001, the only event in which athletic footwear and "Just Do It" icon Nike seemed to be excelling was poor planning. Philip Knight, Nike's CEO, had to explain why the company's shoe sales were 24 percent less than expected, which led to an earnings shortfall of approximately $100 million. Much like a beleaguered baseball manager explains away a loss by pointing to a key player's failure to lay down a bunt in the late innings, so too did Knight point his finger at a convenient scapegoat: He blamed it on his supply chain plan.
Specifically, Knight singled out the problems Nike had implementing a new supply chain planning system. Those implementation problems, he explained, were what led to unforeseen product shortages and excesses. The installation of the software had been rushed (Knight didn't dwell on his role in making that decision, much as a baseball manager tends to gloss over whether a player was rushed to the big leagues before he was ready), and that led to conflicts between Nike's legacy order management system and the new demand and supply planning software. As a result, the company made too many of one style of shoe and too little of another, building up inventories of shoes few people wanted while experiencing shortages of more popular brands.
Simply put, Nike was having major league problems matching the right orders to the right customers. And Wall Street responded promptly, as Nike's share price dropped 19 percent when the glitch was announced.
More on this soon....
Friday, August 29, 2008
Strategic Sourcing and Commodity Teams - Part 1 - A "Force Multiplier"
Much has been written lately about companies using Stategic Sourcing, and the term Commodity team is often thrown around as if every one understands the concept. So let's step back a minute and discuss Commodity Teams and how they can be an integral part of a Strategic Sourcing plan within a company. One term that I've often used to describe Commodity teams is a military term, "force multiplier."
According to wikipedia, "Force multiplication, refers to a combination of attributes or advantages which make a given force more effective than another force of comparable size. A force multiplier refers to a factor that dramatically increases (hence "multiplies") the effectiveness of an item or group." Let's face it, the analogy that business is war is apt, but we need to make sure that we take the fight to our competition, not on our suppliers or internal funtional silos.
In 1999, Motorola Network Infrastructure Group's Strategic Sourcing orgainization, then lead by Trevor Munden, instituted commodity teams across a wide range of commodities, and it paid handsome dividends. The teams typically consisted of a Commodity Manager (who had responsibility for the commercial aspects of the supplier relationship), Supplier Development Engineers (who owned the technical relationship with the suppliers), Development Engineers (both Mechanical and Electrical, who represented the interests of the programs that they were assigned to work on), Buyers (who placed purchase orders and expidited shipments), and Supplier Quality Engineers (who owned the quality portion of the supplier interface).
These teams usually brought dozens of years experience to bear, and discussed current suppliers, future technology needs, industry trends, etc. The 1-2 hours spent every two weeks acted as a force multiplier in the regard that it aligned the needs of cost, quality, delivery and technology, and ensured that the team was all rowing in the same direction. When these team meetings aligned the needs of engineering with the needs of the strategic sourcing organization, they discovered lead to two key benefits:
1. Buy-in from all departments involved - this eliminated the perception that "sourcing is forcing us to use XYZ supplier just to save a few bucks," as well as its counterpart, "the engineers just want to use this supplier because they always used them, and the sales rep takes them out to lunch a lot."
2. It presented a consistent message to the suppliers. No longer could a supplier work in secret with engineering to get designed in without being brought to the table at a commodity team meeting. Suppliers benefitted by getting consistent messages regarding schedule, price and design expectations.
More on this later....
Site Selection – Part 4 – Weighing the Intangibles
When retail giant Wal-Mart decided it needed a food distribution center to serve the U.S. Northwest, several site selection criteria had to be weighed before it eventually chose Grandview, Washington, as the location for its 800,000-square-foot facility. For instance, it was advantageous that the land had been zoned for light industrial use and environmental reviews had already been completed. Although the land had to be annexed into the city of Grandview, relatively few people lived in the area, so the vote went in Wal-Mart's favor.
Grandview is situated near an interstate highway, 1-82, and the land chosen was flat, which were important considerations for the retailer. The city is centrally located within 200 miles of three major cities: Seattle, Spokane, and Portland. More than 60 local trucking companies serve the outlying area, as well as two railroads and nine air freight operators. Nearby, the Port of Pasco, located at the convergence of the Yakima and Snake Rivers, offers barge service on the Columbia River to the Port of Portland for containerized cargo.
In Grandview, Wal-Mart (not exactly known for paying top wages) found a populace with the lowest median wage in the area for warehouse workers—$8.11 per hour, more than $2.00 lower than the $10.58 Seattle pays. What's more, the average hourly wage for truck drivers in Grand-view is $14.02, considerably lower than the $17.62 they earn in Seattle.
And then there were the intangibles that no index or study can accurately categorize, but that played a huge part in Wal-Mart ultimately opting to go with Grandview. One of those intangibles is that the community was anxious to attract Wal-Mart's business and the jobs that went with the new DC. Other companies that had chosen Grandview as a distribution site—notably retailer Ace Hardware, which operates a 500,000-square-foot DC there—spoke positively of the area's capabilities. Even the mayors of surrounding communities came forward to support Grandview as the best site for the DC.
Yakima County, where Grandview is located, offered hiring and training support, and hooked Wal-Mart up with the state employment services agency, WorkSource Washington. The agency screened more than 6,000 applicants for the 400 jobs at the DC, and then sent the best candidates to Wal-Mart for final interviews. Overall, while labor costs and logistics capabilities made Grandview an attractive site for a DC, Wal-Mart's site selection best practices demonstrated a willingness to explore the qualities of a community that aren't necessarily published in a government report.
QUALITY OVER QUANTITY
Sometimes, having just one DC is plenty, even when a company has gotten too big for its current facility. That describes The Container Store's situation, a retailer of storage and organization products. Thanks to a 20 percent annual growth rate, the Dallas-based company outgrew its 300,000-square-foot DC, so it added a 155,000-square-foot satellite facility nearby That still wasn't quite sufficient, though, so it also arranged for space for 5,000 pallets under a third-party contract.
Even when the retailer reached the point where it had more than 30 stores throughout the United States, it still determined that one centrally located DC would be enough. "We looked into our whole network and asked whether it was time to do store replenishment out of our DC and direct customer fulfillment out of a different site," explains Amy Carobillano, The Container Store's vice president of logistics and distribution. The retailer decided that keeping to a single site worked to its advantage. For instance, all of the inventory is in one place, with corporate headquarters directly attached to the DC. That central location works well for the company's logistics network, which imports from Asia through the U.S. West Coast and from Europe through the Gulf of Mexico at the Port of Houston.
So the retailer opted to remain in Dallas, but to expand into a new 1.1-million-square-foot DC in another part of town. Not all of that square footage is currently being used, since The Container Store's master distribution plan calls for taking over the entire facility in stages. "If we're where we want to be, we'll need a conveyor in 2007 because that's when we'll have enough of our products conveyable to justify the expense," Carobillano says. In the meantime, the retailer focused its layout on its present needs. "Once you know what the vision is, you can buy part oi it now and develop the solution in phases." A lot of things will change before they take over the entire DC, she notes.
Even though The Container Store was staying in the Dallas area, it recognized that a move of any distance could affect some of its workers, so it sought their input throughout the site selection process. "We took out a map of the Dallas-Fort Worth metroplex and put a pin where every single employee lived," Carobillano explains. Then the retailer looked for a site that would allow it to retain its employee base. "We talked to the employees who lived farthest away and would have the longest commutes," Carobillano notes, and offered to help them find a different way to get to work or to hook up in carpools. As a result, the company didn't lose a single warehouse or office worker after it relocated. "Nobody knows your business or cares about your business like you do," she points out.
When moving day arrived, The Container Store shut down its old DC over a four-day weekend and opened the new facility, and then began moving the merchandise from the old DC to the new one. The entire process took about eight weeks, at which point the retailer began receiving inbound merchandise at the new DC.
Focusing on its employees is definitely a best practice for The Container Store, where the corporate philosophy of "one great employee is worth three good ones" has fostered an environment conducive to developing great people. That kind of thinking pays off, as the company is consistently listed on Fortune magazine's list of "Best Places to Work."
Grandview is situated near an interstate highway, 1-82, and the land chosen was flat, which were important considerations for the retailer. The city is centrally located within 200 miles of three major cities: Seattle, Spokane, and Portland. More than 60 local trucking companies serve the outlying area, as well as two railroads and nine air freight operators. Nearby, the Port of Pasco, located at the convergence of the Yakima and Snake Rivers, offers barge service on the Columbia River to the Port of Portland for containerized cargo.
In Grandview, Wal-Mart (not exactly known for paying top wages) found a populace with the lowest median wage in the area for warehouse workers—$8.11 per hour, more than $2.00 lower than the $10.58 Seattle pays. What's more, the average hourly wage for truck drivers in Grand-view is $14.02, considerably lower than the $17.62 they earn in Seattle.
And then there were the intangibles that no index or study can accurately categorize, but that played a huge part in Wal-Mart ultimately opting to go with Grandview. One of those intangibles is that the community was anxious to attract Wal-Mart's business and the jobs that went with the new DC. Other companies that had chosen Grandview as a distribution site—notably retailer Ace Hardware, which operates a 500,000-square-foot DC there—spoke positively of the area's capabilities. Even the mayors of surrounding communities came forward to support Grandview as the best site for the DC.
Yakima County, where Grandview is located, offered hiring and training support, and hooked Wal-Mart up with the state employment services agency, WorkSource Washington. The agency screened more than 6,000 applicants for the 400 jobs at the DC, and then sent the best candidates to Wal-Mart for final interviews. Overall, while labor costs and logistics capabilities made Grandview an attractive site for a DC, Wal-Mart's site selection best practices demonstrated a willingness to explore the qualities of a community that aren't necessarily published in a government report.
QUALITY OVER QUANTITY
Sometimes, having just one DC is plenty, even when a company has gotten too big for its current facility. That describes The Container Store's situation, a retailer of storage and organization products. Thanks to a 20 percent annual growth rate, the Dallas-based company outgrew its 300,000-square-foot DC, so it added a 155,000-square-foot satellite facility nearby That still wasn't quite sufficient, though, so it also arranged for space for 5,000 pallets under a third-party contract.
Even when the retailer reached the point where it had more than 30 stores throughout the United States, it still determined that one centrally located DC would be enough. "We looked into our whole network and asked whether it was time to do store replenishment out of our DC and direct customer fulfillment out of a different site," explains Amy Carobillano, The Container Store's vice president of logistics and distribution. The retailer decided that keeping to a single site worked to its advantage. For instance, all of the inventory is in one place, with corporate headquarters directly attached to the DC. That central location works well for the company's logistics network, which imports from Asia through the U.S. West Coast and from Europe through the Gulf of Mexico at the Port of Houston.
So the retailer opted to remain in Dallas, but to expand into a new 1.1-million-square-foot DC in another part of town. Not all of that square footage is currently being used, since The Container Store's master distribution plan calls for taking over the entire facility in stages. "If we're where we want to be, we'll need a conveyor in 2007 because that's when we'll have enough of our products conveyable to justify the expense," Carobillano says. In the meantime, the retailer focused its layout on its present needs. "Once you know what the vision is, you can buy part oi it now and develop the solution in phases." A lot of things will change before they take over the entire DC, she notes.
Even though The Container Store was staying in the Dallas area, it recognized that a move of any distance could affect some of its workers, so it sought their input throughout the site selection process. "We took out a map of the Dallas-Fort Worth metroplex and put a pin where every single employee lived," Carobillano explains. Then the retailer looked for a site that would allow it to retain its employee base. "We talked to the employees who lived farthest away and would have the longest commutes," Carobillano notes, and offered to help them find a different way to get to work or to hook up in carpools. As a result, the company didn't lose a single warehouse or office worker after it relocated. "Nobody knows your business or cares about your business like you do," she points out.
When moving day arrived, The Container Store shut down its old DC over a four-day weekend and opened the new facility, and then began moving the merchandise from the old DC to the new one. The entire process took about eight weeks, at which point the retailer began receiving inbound merchandise at the new DC.
Focusing on its employees is definitely a best practice for The Container Store, where the corporate philosophy of "one great employee is worth three good ones" has fostered an environment conducive to developing great people. That kind of thinking pays off, as the company is consistently listed on Fortune magazine's list of "Best Places to Work."
Site Selection – Part 3 – Match Your Network to Your Business Strategy
However, Gillette's theoretical analysis ended up taking a backseat to a practical consideration: The company was locked in to significant lease commitments with its current warehouses, which made it prohibitively expensive to just pack up and leave. So the question became: How can Gillette deliver much better customer service without changing its physical infrastructure?
"The goal was, at a minimum, to have a warehouse on the East Coast that carried all of our products," Knabe says. Ultimately, Gillette ended up keeping both its Massachusetts and Tennessee DCs, but what changed was how they functioned in terms of what products they carried and who they shipped to. Both warehouses now stock all Gillette products.
So far, so good. Gillette discovered it could improve its customer service without having to invest in new infrastructure. However, as Knabe discovered, carrying all products in both warehouses would have significantly increased inventory levels, which was a no-no. To get past this potential sticking point, the company conducted a statistical safety stock analysis to optimize its distribution network. Gillette made some process changes to set its safety stock targets, which made it possible to hold inventory constant while improving customer service.
"Your distribution network should be a function of what your business strategy is," Knabe emphasizes. "If your business strategy is to be the low-cost provider, you set up one kind of a network. Wal-Mart, for example, sets up its distribution network to be as cost efficient as possible. If your business strategy is to be as responsive as possible, you set up a different network. For Boston Scientific, a maker of surgical equipment, it's not about the cost of its distribution network, it's about having the right product at the right place instantly."
In the end, by adhering to best practices in configuring its distribution network, Gillette was able to maximize its use of truckload shipments while improving its on-time deliveries to its customers. As a result, its goal of "excellent customer service at least cost" became a reality.
HOW MUCH IS TOO MUCH?
So how do you know if you're spending too much on your distribution network? Using the Site Selector index of the most logistics-friendly cities, location consulting firm The Boyd Company developed a comparative cost model that identifies how much it costs, on average, to operate a warehouse in the top 50 markets.10
Boyd's comparative model focuses on a hypothetical 350,000-square-foot warehouse employing 150 nonexempt workers. This hypothetical warehouse serves a national distribution network that delivers products to 10 destination cities. Not surprisingly, New York City is the most expensive city in which to own a warehouse, in terms of annual operating costs, which Boyd estimates to be $15.8 million. Of the cities studied, the least expensive is Mobile, Alabama, at $10.4 million.
The most expensive city in which to lease a warehouse is San Francisco ($14.5 million), while Mobile again ranks as the least expensive ($9 million). Overall trends play out pretty much as you'd expect: Cities in the Southeast tend to be the least expensive, those in the Northeast and on the West Coast are the most expensive, and the Midwest places in the middle.
Boyd also looks at a hypothetical outbound shipment model that assumes a volume of freight in 30,000-pound truckload shipments costing $1.46 per mile to move. This model indicates that it costs the most to serve a national market from Portland, Oregon ($4.1 million), while the most economical city for outbound shipments is St. Louis, Missouri ($2.4 million).
According to Jack Boyd, principal of The Boyd Company, companies now prefer to build their own warehouses rather than lease them. The trend today is also toward building fewer but larger facilities, often including nonwarehousing corporate functions within the buildings to save on costs. In effect, this involves moving white-collar workers into blue-collar locations. You're locating to a warehouse where real estate costs $5 per square foot versus the $20 or more per square foot you would pay in an office building, Boyd points out. "Staffing requirements for warehouses have been elevated over the years as companies become more information technology intensive," Boyd explains. "There are greater labor and skill set demands, and it does require more labor cost analysis as part of the mix in terms of where these warehouses should be located."
"The goal was, at a minimum, to have a warehouse on the East Coast that carried all of our products," Knabe says. Ultimately, Gillette ended up keeping both its Massachusetts and Tennessee DCs, but what changed was how they functioned in terms of what products they carried and who they shipped to. Both warehouses now stock all Gillette products.
So far, so good. Gillette discovered it could improve its customer service without having to invest in new infrastructure. However, as Knabe discovered, carrying all products in both warehouses would have significantly increased inventory levels, which was a no-no. To get past this potential sticking point, the company conducted a statistical safety stock analysis to optimize its distribution network. Gillette made some process changes to set its safety stock targets, which made it possible to hold inventory constant while improving customer service.
"Your distribution network should be a function of what your business strategy is," Knabe emphasizes. "If your business strategy is to be the low-cost provider, you set up one kind of a network. Wal-Mart, for example, sets up its distribution network to be as cost efficient as possible. If your business strategy is to be as responsive as possible, you set up a different network. For Boston Scientific, a maker of surgical equipment, it's not about the cost of its distribution network, it's about having the right product at the right place instantly."
In the end, by adhering to best practices in configuring its distribution network, Gillette was able to maximize its use of truckload shipments while improving its on-time deliveries to its customers. As a result, its goal of "excellent customer service at least cost" became a reality.
HOW MUCH IS TOO MUCH?
So how do you know if you're spending too much on your distribution network? Using the Site Selector index of the most logistics-friendly cities, location consulting firm The Boyd Company developed a comparative cost model that identifies how much it costs, on average, to operate a warehouse in the top 50 markets.10
Boyd's comparative model focuses on a hypothetical 350,000-square-foot warehouse employing 150 nonexempt workers. This hypothetical warehouse serves a national distribution network that delivers products to 10 destination cities. Not surprisingly, New York City is the most expensive city in which to own a warehouse, in terms of annual operating costs, which Boyd estimates to be $15.8 million. Of the cities studied, the least expensive is Mobile, Alabama, at $10.4 million.
The most expensive city in which to lease a warehouse is San Francisco ($14.5 million), while Mobile again ranks as the least expensive ($9 million). Overall trends play out pretty much as you'd expect: Cities in the Southeast tend to be the least expensive, those in the Northeast and on the West Coast are the most expensive, and the Midwest places in the middle.
Boyd also looks at a hypothetical outbound shipment model that assumes a volume of freight in 30,000-pound truckload shipments costing $1.46 per mile to move. This model indicates that it costs the most to serve a national market from Portland, Oregon ($4.1 million), while the most economical city for outbound shipments is St. Louis, Missouri ($2.4 million).
According to Jack Boyd, principal of The Boyd Company, companies now prefer to build their own warehouses rather than lease them. The trend today is also toward building fewer but larger facilities, often including nonwarehousing corporate functions within the buildings to save on costs. In effect, this involves moving white-collar workers into blue-collar locations. You're locating to a warehouse where real estate costs $5 per square foot versus the $20 or more per square foot you would pay in an office building, Boyd points out. "Staffing requirements for warehouses have been elevated over the years as companies become more information technology intensive," Boyd explains. "There are greater labor and skill set demands, and it does require more labor cost analysis as part of the mix in terms of where these warehouses should be located."
Site Selection – Part 2 - A Site for Sore Eyes
When you get right down to it, all logistics (like all politics) is local. HP maintains 88 distribution hubs throughout the world. IBM Corp. has at least one major logistics site on every continent in the world except for Africa, and 28 in all. The Gillette Co. has four distribution centers in the United States and 60 total worldwide. In the United States alone, retail behemoth Wal-Mart has 128 distribution centers strategically located in 38 states.
And yet, there's a feeling that the site selection process is more art than science, more luck than strategy. Determining exactly where in the United States a company should locate its logistics and distribution centers requires a study of many factors beyond just transportation costs (although transportation is a major factor in the decision).
For many years, Expansion Management, a magazine that specializes in site selection, has teamed up with Logistics Today to produce the Site Selector—a tool that offers an objective ranking of the 362 major U.S. cities (i.e., metropolitan statistical areas, as defined by the U.S. Office of Management and Budget).
FINDING THE RIGHT PLACE
The Site Selector was designed to help companies find the right city or region for their distribution needs. Because virtually every company uses motor carriers at some point in its distribution network, access to good roads is an important factor, but it's not the only factor. The city of Trenton, New Jersey, for instance, was ranked at number one (the highest rating) for road infrastructure in the 2005 study, which is not too surprising given the city's proximity to major highways and turnpikes. Trenton is also strategically sandwiched between two major metropolises—Philadelphia, Pennsylvania, and New York, New York.
However, the condition of its roads is not very good at all. Trenton's rank in that category was number 355 out of 362. Taking a look at some of the other categories, we find that Trenton placed well for taxes and fees (number 30), and fair-to-middling for rail access (number 151) and transportation and distribution industry (number 154). All things considered, Trenton finished nationally at number 68, which puts it just inside the top 20 percent.
But because most site selection decisions focus on a region of the United States rather than the entire country, it's also helpful to identify how well a city does compared to other cities within the same region. Trenton, for instance, ranks as the 15th most logistics-friendly city within the U.S. Northeast. The condition of its roads is far less of a factor for companies with supply chains in the Northeast because, frankly, none of the roads in that part of the country are in very good shape, relatively speaking. The one-two punch of congestion and Mother Nature accounts for the perpetual epidemic of orange cones on highways in the Northeast. As a result, road condition is almost a nonfactor for companies making site selection decisions centered on the Northeast.
Chicago Consulting undertook a study to determine the best warehouse networks in the United States, with best indicating the lowest possible transit lead times to customers, based on population patterns. Using that criterion, the best place for a company managing one distribution center would be Bloomington, Indiana. The average distance to a customer would be 803 miles, with an average transit time of 2.28 days. For a company operating two DCs, the optimum locations would be Ashland, Kentucky, and Palmdale, California.
When The Gillette Co., a manufacturer of personal care products, batteries, and other consumer packaged goods, launched its North American Network Study in 2002, the goal was straightforward: Identify the best distribution network that would allow the company to deliver excellent customer service at the least cost. As solutions manager for the company, Louise Knabe's job was to figure out how many DCs Gillette should have and where they should be. Least cost was an important consideration, Knabe points out, because if Gillette's goal had been simply to provide the best possible customer service, the network study could well have suggested putting a distribution center in every state.
"From a logistics and distribution perspective, Gillette measures customer service by order cycle time (time from when the customer places the order until they receive the order) and on-time delivery performance (percentage ol shipments that arrive on time)," Knabe explains. "The strategic DC network design affects the order cycle time because the location of the DCs affects the transit time to the customer."
At the time of the network study, Gillette had two DCs located on the East Coast, one near Boston, Massachusetts, and the other near Chattanooga, Tennessee. The Tennessee warehouse stocked only Duracell batteries, while the Massachusetts warehouse stocked everything else. Neither warehouse carried all of Gillette's products.
So why was this a problem? "Our project analysis revealed that this situation made it difficult to deliver top-quality customer service," Knabe points out. "Let's say I was a customer based in Virginia. That meant I was getting a shipment from Tennessee of batteries and shipments from Massachusetts of everything else. So I've got two trucks showing up with Gillette products on it, which was a bit of a nuisance."
The bigger issue for Gillette, though, was that because neither warehouse had all of the company's products, many customer shipments had to be delivered by less-than-truckload (LTL) carriers, a more expensive transportation mode than truckload. The transit times were longer and the reliability was lower than it would have been if Gillette had been able to get all products loaded onto the same truck. Gillette concluded that in order to deliver top-quality service, it needed to find a way to convert as many of those LTL shipments into full truckload as possible.
That's when Gillette got to work on its site selection best practices, with the goal of developing a network that would locate the DCs close to the customer and make it possible to regularly ship by truckload.
COST VERSUS SERVICE
To answer the questions of how many warehouses it needed and where they should be, Gillette conducted a complete theoretical analysis to identify the best locations. The company factored in such considerations as the location of its manufacturing plants and its sourcing points. Equally important, Gillette looked at where its customers were located, and specifically at who ordered what, and in what volume. "You take those two things and then ask: How do I marry them up and how do I figure out where my warehouses should be?" Knabe says.
"In terms of distribution cost, we looked at the freight cost of going from the plant to the warehouse, and then we also looked at the freight cost of going from the warehouse to the customer," she explains. Using an optimization software tool to evaluate every possible scenario, Gillette asked questions such as: If we had three warehouses, where would they be to minimize our freight costs? The company looked at other distribution costs, including real estate, labor, and taxes, and utility costs, such as electricity ("That ruled out Manhattan pretty fast," Knabe notes). Inventory carrying costs were also factored into the plan.
On the service side, the question Gillette asked was: How can we impact customer service when we're designing our distribution network? According to Knabe, there were two ways. The first way was to set up the distribution network so that Gillette could maximize its use of truckload, which meant stocking all products in all warehouses.
The second part of the answer involves order cycle time. "The location of our warehouses affects transit time to the customer," Knabe says, "so we looked at how many warehouses we needed if we had to be able to get to every customer within 48 hours. And then we asked: How many warehouses would we need if we only had to get to 85 percent of our customers within 48 hours? We looked at our network from both of those angles—cost and service—and figured out what made the most sense."
And yet, there's a feeling that the site selection process is more art than science, more luck than strategy. Determining exactly where in the United States a company should locate its logistics and distribution centers requires a study of many factors beyond just transportation costs (although transportation is a major factor in the decision).
For many years, Expansion Management, a magazine that specializes in site selection, has teamed up with Logistics Today to produce the Site Selector—a tool that offers an objective ranking of the 362 major U.S. cities (i.e., metropolitan statistical areas, as defined by the U.S. Office of Management and Budget).
FINDING THE RIGHT PLACE
The Site Selector was designed to help companies find the right city or region for their distribution needs. Because virtually every company uses motor carriers at some point in its distribution network, access to good roads is an important factor, but it's not the only factor. The city of Trenton, New Jersey, for instance, was ranked at number one (the highest rating) for road infrastructure in the 2005 study, which is not too surprising given the city's proximity to major highways and turnpikes. Trenton is also strategically sandwiched between two major metropolises—Philadelphia, Pennsylvania, and New York, New York.
However, the condition of its roads is not very good at all. Trenton's rank in that category was number 355 out of 362. Taking a look at some of the other categories, we find that Trenton placed well for taxes and fees (number 30), and fair-to-middling for rail access (number 151) and transportation and distribution industry (number 154). All things considered, Trenton finished nationally at number 68, which puts it just inside the top 20 percent.
But because most site selection decisions focus on a region of the United States rather than the entire country, it's also helpful to identify how well a city does compared to other cities within the same region. Trenton, for instance, ranks as the 15th most logistics-friendly city within the U.S. Northeast. The condition of its roads is far less of a factor for companies with supply chains in the Northeast because, frankly, none of the roads in that part of the country are in very good shape, relatively speaking. The one-two punch of congestion and Mother Nature accounts for the perpetual epidemic of orange cones on highways in the Northeast. As a result, road condition is almost a nonfactor for companies making site selection decisions centered on the Northeast.
Chicago Consulting undertook a study to determine the best warehouse networks in the United States, with best indicating the lowest possible transit lead times to customers, based on population patterns. Using that criterion, the best place for a company managing one distribution center would be Bloomington, Indiana. The average distance to a customer would be 803 miles, with an average transit time of 2.28 days. For a company operating two DCs, the optimum locations would be Ashland, Kentucky, and Palmdale, California.
When The Gillette Co., a manufacturer of personal care products, batteries, and other consumer packaged goods, launched its North American Network Study in 2002, the goal was straightforward: Identify the best distribution network that would allow the company to deliver excellent customer service at the least cost. As solutions manager for the company, Louise Knabe's job was to figure out how many DCs Gillette should have and where they should be. Least cost was an important consideration, Knabe points out, because if Gillette's goal had been simply to provide the best possible customer service, the network study could well have suggested putting a distribution center in every state.
"From a logistics and distribution perspective, Gillette measures customer service by order cycle time (time from when the customer places the order until they receive the order) and on-time delivery performance (percentage ol shipments that arrive on time)," Knabe explains. "The strategic DC network design affects the order cycle time because the location of the DCs affects the transit time to the customer."
At the time of the network study, Gillette had two DCs located on the East Coast, one near Boston, Massachusetts, and the other near Chattanooga, Tennessee. The Tennessee warehouse stocked only Duracell batteries, while the Massachusetts warehouse stocked everything else. Neither warehouse carried all of Gillette's products.
So why was this a problem? "Our project analysis revealed that this situation made it difficult to deliver top-quality customer service," Knabe points out. "Let's say I was a customer based in Virginia. That meant I was getting a shipment from Tennessee of batteries and shipments from Massachusetts of everything else. So I've got two trucks showing up with Gillette products on it, which was a bit of a nuisance."
The bigger issue for Gillette, though, was that because neither warehouse had all of the company's products, many customer shipments had to be delivered by less-than-truckload (LTL) carriers, a more expensive transportation mode than truckload. The transit times were longer and the reliability was lower than it would have been if Gillette had been able to get all products loaded onto the same truck. Gillette concluded that in order to deliver top-quality service, it needed to find a way to convert as many of those LTL shipments into full truckload as possible.
That's when Gillette got to work on its site selection best practices, with the goal of developing a network that would locate the DCs close to the customer and make it possible to regularly ship by truckload.
COST VERSUS SERVICE
To answer the questions of how many warehouses it needed and where they should be, Gillette conducted a complete theoretical analysis to identify the best locations. The company factored in such considerations as the location of its manufacturing plants and its sourcing points. Equally important, Gillette looked at where its customers were located, and specifically at who ordered what, and in what volume. "You take those two things and then ask: How do I marry them up and how do I figure out where my warehouses should be?" Knabe says.
"In terms of distribution cost, we looked at the freight cost of going from the plant to the warehouse, and then we also looked at the freight cost of going from the warehouse to the customer," she explains. Using an optimization software tool to evaluate every possible scenario, Gillette asked questions such as: If we had three warehouses, where would they be to minimize our freight costs? The company looked at other distribution costs, including real estate, labor, and taxes, and utility costs, such as electricity ("That ruled out Manhattan pretty fast," Knabe notes). Inventory carrying costs were also factored into the plan.
On the service side, the question Gillette asked was: How can we impact customer service when we're designing our distribution network? According to Knabe, there were two ways. The first way was to set up the distribution network so that Gillette could maximize its use of truckload, which meant stocking all products in all warehouses.
The second part of the answer involves order cycle time. "The location of our warehouses affects transit time to the customer," Knabe says, "so we looked at how many warehouses we needed if we had to be able to get to every customer within 48 hours. And then we asked: How many warehouses would we need if we only had to get to 85 percent of our customers within 48 hours? We looked at our network from both of those angles—cost and service—and figured out what made the most sense."
Site Selection -Part 1 - Location, Location, Location
On-time delivery is a fundamental premise behind supply chain management, and it's a key benchmark on the road to achieving the perfect order. Although same-day delivery is available from several logistics providers, any company relying on the fastest and most expensive transportation options to fulfill its delivery obligations isn't going to be in business very long. The old adage, "Build a better mousetrap and the world will beat a path to your door," is now hopelessly out of date. It's no longer good enough to build that better mousetrap—you also have to build a better distribution network from which you can optimally service your customers. According to a study undertaken by consulting firm ProLogis Global Solutions, the number-one challenge for supply chain professionals is to create a distribution network that can deliver on customer demands while still keeping costs in line.
High-tech manufacturer Hewlett-Packard Co. operates one of the largest supply chains in the world, as well as one of the most sophisticated distribution networks. Its 88 distribution hubs serve more than 1 billion customers worldwide, in 178 countries. HP's supply chain also includes 32 manufacturing plants, 700 suppliers, and 119 logistics partners, and all told in 2005 the supply chain group managed $51 billion—or 64 percent—of the company's total spend.
The company credits much of its success to its adaptive supply chain—a product-agnostic supply chain portfolio that allows multiple supply chains. After direct materials, logistics is the company's main cost driver, according to Robert Gifford, HP's vice president of worldwide logistics and program management. It is "an absolute necessity to consider logistics activity" when deciding where to source products and where to build factories, he emphasizes.
"We don't just say, 'We're going to put up a factory here,' and then figure out how we'll move product," Gifford notes. Instead, HP relies on collaboration across its entire supply chain to design the optimum distribution network to bring a given product to a specific marketplace.
Where once upon a time HP, like other high-tech companies, relied on design for manufacturability strategies to build products as efficiently and inexpensively as possible, the company recently has adopted a best practice known as design for supply chain. This relatively new concept looks at all of the costs throughout a product's life cycle, even past the point of its functional use. By its very nature, design for supply chain requires the involvement of multiple departments when a product is being designed.
"Design for supply chain includes not only research and development type people but also people involved with logistics and packaging, and people who are focused on the environment," explains Greg Shoemaker, HP's vice president of central direct procurement. "When we design for logistics enhancements, for instance, we make sure we've got the right size box that'll lit on the right size pallet to optimize our shipping costs. When we design for tax and duty reduction, we may manufacture in certain places in the world in order to reduce our taxes or duty."-
The applications of design for supply chain are seemingly limited only by a company's imagination, as well as its ability to effectively pull together disparate functions. Design for postponement, which is also popular with the apparel industry, allows a company to wait until the last minute to finish making a product, pushing off configuration or a value-added feature until the product is as close as possible to the end customer. HP also engages in design for commonality and reuse, which involves using similar or identical components in different products. HP's designs for take-back and recycling efforts are supplemented by its own recycling operation plant, which has recycled more than 4 million pounds of computer hardware.
"What we're really working on and making a lot of progress in is making sure that the development teams get a good view and understanding of all the supply chain variables that can be affected by their design, depending on what the particular sourcing strategy is," Shoemaker explains. "So we try to identify all those needs up front, even where the product is going to be manufactured, so that the designers can spend a good amount of quality time creating the best package."
STRIKING THE PROPER BALANCE
A well-run supply chain depends on having a streamlined distribution network to receive raw materials and deliver product to the end user, and that network needs to use the least number of intermediate steps possible. Developing such a network where total system-wide costs are minimized while system-wide service levels are maintained involves studying and weighing numerous factors. The ultimate goal of this network planning is a supply chain that is properly balanced between the competing considerations of inventory, transportation, and manufacturing.
"The objective of strategic distribution network planning," according to Dale Harmelink, a partner with supply chain consulting firm Tompkins Associates, "is to come up with the most economical way to ship and receive products while maintaining or increasing customer satisfaction requirements; simply put, a plan to maximize profits and optimize service."
Distribution network planning determines how many warehouses or distribution centers a company requires to satisfy its customer base, as well as where those warehouses should be located.
A distribution network plan, Harmelink suggests, should answer the following questions:
How many distribution centers (DCs) do you need?
Where should the DCs be located?
How much inventory should be stocked at each DC?
Which customers should be serviced by each DC?
How should customers order from the DC?
How should the DCs order from suppliers?
How often should shipments be made to each customer?
What should the service levels be?
Which transportation methods should be used?
Depending on the market needs of a company and its overall supply chain mission, the answer to question 1 may necessitate adding one or more DCs to the network, or conversely, it may require consolidating several DCs into a single regional distribution hub.
High-tech manufacturer Hewlett-Packard Co. operates one of the largest supply chains in the world, as well as one of the most sophisticated distribution networks. Its 88 distribution hubs serve more than 1 billion customers worldwide, in 178 countries. HP's supply chain also includes 32 manufacturing plants, 700 suppliers, and 119 logistics partners, and all told in 2005 the supply chain group managed $51 billion—or 64 percent—of the company's total spend.
The company credits much of its success to its adaptive supply chain—a product-agnostic supply chain portfolio that allows multiple supply chains. After direct materials, logistics is the company's main cost driver, according to Robert Gifford, HP's vice president of worldwide logistics and program management. It is "an absolute necessity to consider logistics activity" when deciding where to source products and where to build factories, he emphasizes.
"We don't just say, 'We're going to put up a factory here,' and then figure out how we'll move product," Gifford notes. Instead, HP relies on collaboration across its entire supply chain to design the optimum distribution network to bring a given product to a specific marketplace.
Where once upon a time HP, like other high-tech companies, relied on design for manufacturability strategies to build products as efficiently and inexpensively as possible, the company recently has adopted a best practice known as design for supply chain. This relatively new concept looks at all of the costs throughout a product's life cycle, even past the point of its functional use. By its very nature, design for supply chain requires the involvement of multiple departments when a product is being designed.
"Design for supply chain includes not only research and development type people but also people involved with logistics and packaging, and people who are focused on the environment," explains Greg Shoemaker, HP's vice president of central direct procurement. "When we design for logistics enhancements, for instance, we make sure we've got the right size box that'll lit on the right size pallet to optimize our shipping costs. When we design for tax and duty reduction, we may manufacture in certain places in the world in order to reduce our taxes or duty."-
The applications of design for supply chain are seemingly limited only by a company's imagination, as well as its ability to effectively pull together disparate functions. Design for postponement, which is also popular with the apparel industry, allows a company to wait until the last minute to finish making a product, pushing off configuration or a value-added feature until the product is as close as possible to the end customer. HP also engages in design for commonality and reuse, which involves using similar or identical components in different products. HP's designs for take-back and recycling efforts are supplemented by its own recycling operation plant, which has recycled more than 4 million pounds of computer hardware.
"What we're really working on and making a lot of progress in is making sure that the development teams get a good view and understanding of all the supply chain variables that can be affected by their design, depending on what the particular sourcing strategy is," Shoemaker explains. "So we try to identify all those needs up front, even where the product is going to be manufactured, so that the designers can spend a good amount of quality time creating the best package."
STRIKING THE PROPER BALANCE
A well-run supply chain depends on having a streamlined distribution network to receive raw materials and deliver product to the end user, and that network needs to use the least number of intermediate steps possible. Developing such a network where total system-wide costs are minimized while system-wide service levels are maintained involves studying and weighing numerous factors. The ultimate goal of this network planning is a supply chain that is properly balanced between the competing considerations of inventory, transportation, and manufacturing.
"The objective of strategic distribution network planning," according to Dale Harmelink, a partner with supply chain consulting firm Tompkins Associates, "is to come up with the most economical way to ship and receive products while maintaining or increasing customer satisfaction requirements; simply put, a plan to maximize profits and optimize service."
Distribution network planning determines how many warehouses or distribution centers a company requires to satisfy its customer base, as well as where those warehouses should be located.
A distribution network plan, Harmelink suggests, should answer the following questions:
How many distribution centers (DCs) do you need?
Where should the DCs be located?
How much inventory should be stocked at each DC?
Which customers should be serviced by each DC?
How should customers order from the DC?
How should the DCs order from suppliers?
How often should shipments be made to each customer?
What should the service levels be?
Which transportation methods should be used?
Depending on the market needs of a company and its overall supply chain mission, the answer to question 1 may necessitate adding one or more DCs to the network, or conversely, it may require consolidating several DCs into a single regional distribution hub.
Thursday, August 28, 2008
Open your Mind
I just saw this quote by the Dalai Lama & thought I'd share...it is equally applicable to business & personal relationships, I think....
Training Review - Kevin Hogan 2008 Influence Bootcamp
What can I say besides - I am impressed.
Kevin Hogan, one of my favorite authors & researchers on the topic of persuasion and negotiation, has done it again. Every time Kevin releases a new book, I immediately order it from Amazon, as I know that it will contain at least one insight or piece of research that will help me either in my business career, at home, etc.
This Bootcamp was several days of Kevin, and several other world renowned speakers in the area of influence, persuasion, branding, marketing & sales. Now some people believe that if you are in strategic sourcing that it is the other guy who is doing the selling...I believe that we sell our position & ideas every day regardless of our title. How do we sell the supplier on the idea that it is in his/her best interest to provide excellent service, impeccable quality & a great price, so that both of our businesses can shine? How do we "sell" our senior management on the right course of action regarding supply chain planning? How do we influence and lead our employees toward a shared vision of success?
Influence, persuasion, negotiation...they are all components. And the bootcamp addressed many of those issues. One in particular that I found very interesting is the concept of influence vs. manipulation. Dave Lakhani, another well known author & speaker, draws the distinction based upon your intent. If you intend to mislead, betray or influence a person without their best interests in mind, then you are manipulating them. And he adds, manipulation will almost always be found out & resented.
More on this later...
Kevin Hogan, one of my favorite authors & researchers on the topic of persuasion and negotiation, has done it again. Every time Kevin releases a new book, I immediately order it from Amazon, as I know that it will contain at least one insight or piece of research that will help me either in my business career, at home, etc.
This Bootcamp was several days of Kevin, and several other world renowned speakers in the area of influence, persuasion, branding, marketing & sales. Now some people believe that if you are in strategic sourcing that it is the other guy who is doing the selling...I believe that we sell our position & ideas every day regardless of our title. How do we sell the supplier on the idea that it is in his/her best interest to provide excellent service, impeccable quality & a great price, so that both of our businesses can shine? How do we "sell" our senior management on the right course of action regarding supply chain planning? How do we influence and lead our employees toward a shared vision of success?
Influence, persuasion, negotiation...they are all components. And the bootcamp addressed many of those issues. One in particular that I found very interesting is the concept of influence vs. manipulation. Dave Lakhani, another well known author & speaker, draws the distinction based upon your intent. If you intend to mislead, betray or influence a person without their best interests in mind, then you are manipulating them. And he adds, manipulation will almost always be found out & resented.
More on this later...
Planning and Forecasting 5 – The First Shall Be First
Not surprisingly, technology has a lot to do with defining best practices within IBM's supply chain planning processes. By integrating demand fulfillment capabilities with its enterprise resource planning (ERP) system, IBM can schedule an order throughout its supply chain within milliseconds, says Joe DiPrima, manager of supply chain planning and optimization with the ISC group. "That is a best practice because you can have the best planning tools m the world, but if you can't pull the data into the planning tools with integrity so that people trust the data and know that it's current, you're not going to use the planning tool," DiPrima observes. It took a while to convince people that the planning tools were accurate, he admits, but the sheer speed of the forecasts has won over those skeptics who were still relying on their trusty spreadsheets.
Enterprise resource planning (ERP) software ties together manufacturing, sales, distribution, and finance by collecting data from each area and using it to plan a company's resource use—everything from employees to raw materials.
IBM used to manually schedule orders, which became a problem when the company began to dread the arrival of unexpected orders. In normal circumstances, getting new business is good news, but IBM's visibility into its supply lines was less than ideal. There was a fear within some quarters that a new order would divert supply from a high-priority customer that hadn't actually placed its order yet but was expected to. "We didn't want to schedule a lower-priority customer in the hopes that a high-priority order would come in," DiPrima remembers.
To get past that mindset, IBM has done away with those manual processes and replaced them with new processes and new tools based on streamlining the order receipt to delivery time. In the past, order entry to delivery could take anywhere from 15 to 20 days; that process is now down to 5 to 10 days.
How did IBM pull that off? As DiPrima explains, the company instituted a business policy of first in, first out (FIFO). "Orders are now scheduled FIFO. If a customer wants supply, they need to get their orders in first. Very simple. We have exception processes that we invoke occasionally, but if a product is deemed to be FIFO—and over 95 percent of our products are FIFO—they're scheduled first in, first out."
Additionally, IBM has enabled direct shipment to customers from suppliers as they've gone global. "We've outsourced manufacturing to China, Eastern Europe, and Mexico," DiPrima observes, "and as a result, we've enabled these companies to direct ship on behalf of IBM. It looks like an identical order whether we ship it to the customer from our warehouse or whether the manufacturer ships it." This postponement strategy includes some subtle back-office processes such as enabling the outsourcers to print invoices with the IBM logo. The goal, DiPrima says, is to postpone the building of the product until an order is received from a customer.
"From a demand planning standpoint," he continues, "we used to have to be able to forecast each end item a customer would buy." That was no small task since IBM had tens of thousands of end items. "If a customer wanted to buy a standard ThinkPad, but with his corporate logo on the start-up screen, that was a new model number. So while we might only have 300 or 400 core models, it would turn into tens of thousands of models when we actually built them. We used to forecast demand that way, and it was extremely difficult to do. It was never accurate. We would always be chasing and remixing supply from what we had forecast to what actually got ordered."
IBM's solution was to move to a sales building block model, based on a best practice known as attach rate planning. "We have tens of thousands of components and tens of thousands of end items," DiPrima states, "but if you look at the sales building blocks, we only have several hundred to a couple thousand of those. So we find the pinch-point in the development of a product by asking: Where can I have the fewest planning items in the plan, not only because it's easier, but also because I'll get all the advantages of risk pooling by doing it at that level? So we went to a forecast attach rate approach."
IBM's forecasting accuracy at the sales building block level is 80 to 90 percent, a marked improvement from the 50 to 60 percent accuracy it had when it was planning at the end item level. "We always knew how many units in aggregate we would sell, but where we would get it wrong was in trying to figure out the mix," he says. "Now that we know what the percentage mixes are, the planning process is a lot simpler."
Another best practice at IBM has been moving from a monthly planning cycle to a weekly S&OP process. "We also have an ad hoc process running daily to share our demands, including orders, with our suppliers via the web, so they can respond back to us with their capabilities every day," DiPrima explains. "We used to only share that information with a supplier once a week. Now they see it every day, which is critical when you're trying to bring your order and delivery cycle times down below 10 days. We're a lot more collaborative today with our suppliers. Our supply chain is not limited to what happens within the four walls of manufacturing, or even inside of IBM. We extend it out to our suppliers, and even our suppliers' suppliers, so we can have Tier 2 visibility as well."
A HAPPY ENDING
Improving its supply chain visibility has proven to be the key to Cisco Systems' rebound from its forecasting nightmares, which were described at the beginning of these articles. The company's turnaround began with a dramatic paring back of suppliers (from 1,300 down to 600) and the concurrent outsourcing of logistics, subassembly manufacturing, and materials management. All suppliers and distributors can now tap into the same supply chain network, dubbed eHub, and as a result everybody has access to the same forecasts and is working off the same demand assumptions.
Not only does eHub save Cisco millions of dollars by eliminating paper-based purchase orders and invoices, but it also has improved on-time shipment performance. And by applying "analytical rigor" to its supply chain plan, the company can make better decisions sooner in the process, such as what to do if a key supplier can't meet its commitments. By optimizing its supply chain plan, "we find you can remove emotions and bias from decision-making processes," explains Jim Miller, Cisco's vice president of manufacturing operations. "Supply chain has become a science now."
Enterprise resource planning (ERP) software ties together manufacturing, sales, distribution, and finance by collecting data from each area and using it to plan a company's resource use—everything from employees to raw materials.
IBM used to manually schedule orders, which became a problem when the company began to dread the arrival of unexpected orders. In normal circumstances, getting new business is good news, but IBM's visibility into its supply lines was less than ideal. There was a fear within some quarters that a new order would divert supply from a high-priority customer that hadn't actually placed its order yet but was expected to. "We didn't want to schedule a lower-priority customer in the hopes that a high-priority order would come in," DiPrima remembers.
To get past that mindset, IBM has done away with those manual processes and replaced them with new processes and new tools based on streamlining the order receipt to delivery time. In the past, order entry to delivery could take anywhere from 15 to 20 days; that process is now down to 5 to 10 days.
How did IBM pull that off? As DiPrima explains, the company instituted a business policy of first in, first out (FIFO). "Orders are now scheduled FIFO. If a customer wants supply, they need to get their orders in first. Very simple. We have exception processes that we invoke occasionally, but if a product is deemed to be FIFO—and over 95 percent of our products are FIFO—they're scheduled first in, first out."
Additionally, IBM has enabled direct shipment to customers from suppliers as they've gone global. "We've outsourced manufacturing to China, Eastern Europe, and Mexico," DiPrima observes, "and as a result, we've enabled these companies to direct ship on behalf of IBM. It looks like an identical order whether we ship it to the customer from our warehouse or whether the manufacturer ships it." This postponement strategy includes some subtle back-office processes such as enabling the outsourcers to print invoices with the IBM logo. The goal, DiPrima says, is to postpone the building of the product until an order is received from a customer.
"From a demand planning standpoint," he continues, "we used to have to be able to forecast each end item a customer would buy." That was no small task since IBM had tens of thousands of end items. "If a customer wanted to buy a standard ThinkPad, but with his corporate logo on the start-up screen, that was a new model number. So while we might only have 300 or 400 core models, it would turn into tens of thousands of models when we actually built them. We used to forecast demand that way, and it was extremely difficult to do. It was never accurate. We would always be chasing and remixing supply from what we had forecast to what actually got ordered."
IBM's solution was to move to a sales building block model, based on a best practice known as attach rate planning. "We have tens of thousands of components and tens of thousands of end items," DiPrima states, "but if you look at the sales building blocks, we only have several hundred to a couple thousand of those. So we find the pinch-point in the development of a product by asking: Where can I have the fewest planning items in the plan, not only because it's easier, but also because I'll get all the advantages of risk pooling by doing it at that level? So we went to a forecast attach rate approach."
IBM's forecasting accuracy at the sales building block level is 80 to 90 percent, a marked improvement from the 50 to 60 percent accuracy it had when it was planning at the end item level. "We always knew how many units in aggregate we would sell, but where we would get it wrong was in trying to figure out the mix," he says. "Now that we know what the percentage mixes are, the planning process is a lot simpler."
Another best practice at IBM has been moving from a monthly planning cycle to a weekly S&OP process. "We also have an ad hoc process running daily to share our demands, including orders, with our suppliers via the web, so they can respond back to us with their capabilities every day," DiPrima explains. "We used to only share that information with a supplier once a week. Now they see it every day, which is critical when you're trying to bring your order and delivery cycle times down below 10 days. We're a lot more collaborative today with our suppliers. Our supply chain is not limited to what happens within the four walls of manufacturing, or even inside of IBM. We extend it out to our suppliers, and even our suppliers' suppliers, so we can have Tier 2 visibility as well."
A HAPPY ENDING
Improving its supply chain visibility has proven to be the key to Cisco Systems' rebound from its forecasting nightmares, which were described at the beginning of these articles. The company's turnaround began with a dramatic paring back of suppliers (from 1,300 down to 600) and the concurrent outsourcing of logistics, subassembly manufacturing, and materials management. All suppliers and distributors can now tap into the same supply chain network, dubbed eHub, and as a result everybody has access to the same forecasts and is working off the same demand assumptions.
Not only does eHub save Cisco millions of dollars by eliminating paper-based purchase orders and invoices, but it also has improved on-time shipment performance. And by applying "analytical rigor" to its supply chain plan, the company can make better decisions sooner in the process, such as what to do if a key supplier can't meet its commitments. By optimizing its supply chain plan, "we find you can remove emotions and bias from decision-making processes," explains Jim Miller, Cisco's vice president of manufacturing operations. "Supply chain has become a science now."
Planning and Forecasting 4 – The Truth Plays Out
As Campbell's Soup learned, no matter how capable and experienced its planners are, their plan is only as good as the information that feeds it. The big "a-ha!" moment at Campbell's Soup came when the S&OP process illustrated exactly how broken many of the company's processes were throughout the organization—from finance to commercialization to label design, custom pack planning, and transportation. S&OP provides a heightened level of transparency to the extent that, over time, as Mastroianni puts it, "the truth plays out." By bringing all of Campbell's business plans into a single, integrated set of plans—the end game of an S&OP initiative—the company was ultimately able to fix a dozen or more major processes.
Sales and operations planning (S&OP) aligns all of a company's business plans (customers, sales and marketing, research and development, production, sourcing, and financial) into a single, integrated set of plans. The end goal is a plan that more accurately forecasts supply and demand.
For instance, Campbell's has improved by as much as 50 percent the weekly accuracy of the item-level signals sent to its manufacturing plants, which resulted in an immediate benefit: The company can now better plan how many trucks it needs to replenish its distribution centers with product. That increased level of accuracy has also paid off by reducing how often Campbell's has to use expedited shipping to make up for not having the right products at its customers at the right time.
Taking it a step further, Campbell's has leveraged its precision of accuracy to provide improved visibility to its warehouses and manufacturing plants. The company has used its long-range planning capabilities to prebuy transportation with some of its carriers. It's also used those forecasts for labor management, specifically in determining when to add extra crews to its warehouses and when to cut back.
There's one last benefit to the best practices Campbell's uses for its supply chain planning: "It makes me sleep real good at night," Mastroianni says. "It's no fun getting your head handed to you."
END-TO-END INTEGRATION
The key to Campbell's S&OP program was being able to integrate all of those different departments and processes into one central plan, and that strategy can be applied in any company in any industry. At computer giant IBM Corp., for instance, integration is not only a key best practice for the company, it's included in the very name of its supply chain organization, the Integrated Supply Chain (ISC).
In 2003, IBM completed an end-to-end integration project that connects all of its business processes and supporting systems into the ISC, an organization employing 19,000 people at more than 50 locations worldwide. The ISC comprises manufacturing, procurement, logistics, distribution, customer ordering, and planning and scheduling— the whole nine yards of supply chain processes.
"There are many factors in supply chain planning," observes Rich Hume, vice president of operations and strategy with the ISC. "Every proposed idea or change at IBM must meet certain criteria. Initiatives must improve customer satisfaction, increase the flexibility of the supply chain, improve economics, and improve functional excellence. Proposals must be executable and include measurable economic results."
Most of IBM's supply chain planning is done internally, involving such departments as logistics, fulfillment, manufacturing, and manufacturing engineering, as well as functional experts in the company's business consulting and business transformation groups.
"In other companies, these professionals are typically aligned with corporate functions like procurement or logistics," Hume notes. "Having them in one organization allows us to take advantage of their expertise within each function, while also benefiting from their integration across the supply chain."
Sales and operations planning (S&OP) aligns all of a company's business plans (customers, sales and marketing, research and development, production, sourcing, and financial) into a single, integrated set of plans. The end goal is a plan that more accurately forecasts supply and demand.
For instance, Campbell's has improved by as much as 50 percent the weekly accuracy of the item-level signals sent to its manufacturing plants, which resulted in an immediate benefit: The company can now better plan how many trucks it needs to replenish its distribution centers with product. That increased level of accuracy has also paid off by reducing how often Campbell's has to use expedited shipping to make up for not having the right products at its customers at the right time.
Taking it a step further, Campbell's has leveraged its precision of accuracy to provide improved visibility to its warehouses and manufacturing plants. The company has used its long-range planning capabilities to prebuy transportation with some of its carriers. It's also used those forecasts for labor management, specifically in determining when to add extra crews to its warehouses and when to cut back.
There's one last benefit to the best practices Campbell's uses for its supply chain planning: "It makes me sleep real good at night," Mastroianni says. "It's no fun getting your head handed to you."
END-TO-END INTEGRATION
The key to Campbell's S&OP program was being able to integrate all of those different departments and processes into one central plan, and that strategy can be applied in any company in any industry. At computer giant IBM Corp., for instance, integration is not only a key best practice for the company, it's included in the very name of its supply chain organization, the Integrated Supply Chain (ISC).
In 2003, IBM completed an end-to-end integration project that connects all of its business processes and supporting systems into the ISC, an organization employing 19,000 people at more than 50 locations worldwide. The ISC comprises manufacturing, procurement, logistics, distribution, customer ordering, and planning and scheduling— the whole nine yards of supply chain processes.
"There are many factors in supply chain planning," observes Rich Hume, vice president of operations and strategy with the ISC. "Every proposed idea or change at IBM must meet certain criteria. Initiatives must improve customer satisfaction, increase the flexibility of the supply chain, improve economics, and improve functional excellence. Proposals must be executable and include measurable economic results."
Most of IBM's supply chain planning is done internally, involving such departments as logistics, fulfillment, manufacturing, and manufacturing engineering, as well as functional experts in the company's business consulting and business transformation groups.
"In other companies, these professionals are typically aligned with corporate functions like procurement or logistics," Hume notes. "Having them in one organization allows us to take advantage of their expertise within each function, while also benefiting from their integration across the supply chain."
Thursday, August 21, 2008
Planning - Part 3 - Soup and S&OP
So how does a company overcome the inherent bias that seems to trip up even the best-laid plans? When Mike Mastroianni joined Campbell Soup Co. in 2001, he saw many of the same cultural inhibitors to good forecasts that had stymied Cisco's planners. Brought in to oversee a sales and operations planning (S&OP) initiative at the world's leading soupmaker, he found a supply chain that had become complacent, focused too much on managing internal costs and not enough on customer service.
"For Campbell's, like a lot of companies, manufacturing was king," explains Mastroianni, vice president of North American planning and operations support. Manufacturing was in a position to second-guess the forecasts, thanks largely to the fact that some people had worked in that department for 30 years and had a historical perspective on how the market fluctuated. Mastroianni's mission, however, was to realign the supply chain to facilitate the introduction of new products. "We had become complacent," he says, and to turn things around, forecast accuracy had to get a lot better.
The average error rate of forecasts in the consumer packaged goods industry is about 50 percent, but Campbell's wasn't going to get too far if it merely maintained the status quo. "We decided to focus in on forecast accuracy, which meant we had to change the behavior of bias," Mastroianni explains. "People used to get their heads handed to them" for missing their numbers, so they tended to over-forecast. As a result, they drove inventories up, as well as the costs of obsolescence, warehousing, expedited shipping, and everything else that was affected by overly optimistic forecasts.
How is a forecast created? No, they're not made up out of the thin air, as some wags have observed. Campbell's, like many other companies, uses a traditional S&OP consensus process, which triangulates between sales, marketing, and demand planning. These three groups get together to agree on a number. That forecast number ultimately ends up going to the general manager for endorsement.
"Instead of aiming for a single demand figure, progressive companies have turned to forecasting a range of potential outcomes," explains Yossi Shefli, director of the MIT Center for Transportation & Logistics. "They estimate the likely range of future demand, and use the low end and high end to guide contracting terms and contingency plans." The goal of this range forecasting is to get companies to widen their planning horizons.
Even after consensus planning, though, the odds are pretty good that a company is not going to hit that number, which makes it all the more important that a system of open and ongoing dialogue is in place.
NO TIME LIKE THE REAL TIME
One element driving Campbell's need for better forecasts is its collaborative planning, forecasting, and replenishment (CPFR) efforts with key retail customers. "We were forecasting at a very high level, based on history," Mastroianni says, but to get to a truly collaborative relationship with its customers, the company had to be able to restate its history more frequently than once a month. Because CPFR requires manufacturers and retailers to share point-of-sale data over the Internet in real time, inaccurate forecasts only hasten the distillation of bad information.
"What fuels S&OP is facts," he observes. That meant Campbell's needed to put Key Performance Indicators (KPIs) in place to hold people accountable, as well as measure improvements in forecast accuracy. Mastroianni's team turned to a real-time forecasting tool capable of creating daily, short-term forecasts with 52 weeks of live data. Being able to forecast in real time allows Campbell's to track patterns that used to go undetected. The system might say, for instance, "Forget about the order today as it relates to your forecast. You need to be thinking about the next seven to fourteen days because, based on this current pattern, your next month is going to look like this," he explains. "Or it might say, 'You're holding on to a forecast that just isn't going to happen. So let it go, and produce to this lower number.'"
At National Semiconductor, the production group meets with the demand planning group weekly to review the forecast. "We gauge the effectiveness of forecasting at a high level rather than on each of our 15,000 chips," notes Si Gutierrez. "We also look at how we're scheduling orders compared to how customers requested them and fix any mismatches." Like Campbell's, National Semiconductor looks at a number of KPIs (e.g., how close the company's production matches up with the forecast) and then analyzes the difference between forecast and performance.
National's supply chain planning starts with an annual plan, and once that's in place, the staff looks at forecasting for each month, planning six months ahead, Gutierrez explains. "Sometimes we're surprised. Something we thought would do just okay goes like gangbusters. So we monitor the plan weekly and can revamp it weekly. Each day, we plan factory starts based on what happened the previous day. This allows us to maximize customer service and optimize inventory to maintain customer service levels."
To be continued tomorrow....
Wednesday, August 20, 2008
Planning and Forecasting - Part 2 - A Bias Against Smart Planning
Cisco's supply chain planning suffered from a common malady that afflicts many companies—bias. It's a pattern of behavior within a company where different departments focus on their own individual priorities, often disregarding the overall health of the company in favor of propping up their own fiefdoms. A good supply chain plan will fail every time, for instance, if employees are being given incentives to avoid stock-outs, and as a result keep building up the safety stock. Because employees are not being penalized for making too much—in some companies, the only unpardonable sin is to be caught short—the importance of the overall supply chain plan ends up taking a backseat to the size of one's weekly paycheck. When it comes to protecting and keeping their jobs, employees learned long ago that management will rarely punish those who tell them what they want to hear.
In Cisco's case, forecasting growth had been the right answer for more than 10 years, so it seemed the most natural thing in the world to keep going forward, even when it started to look like the boom days were over.
"There's a growth bias built into the business of forecasting," explains Ajay Shah, a former director of Solectron Corp., one of Cisco's major suppliers and one of the companies that got caught up in the undertow when too many unwanted electronics products started to flood the marketplace. "People see a shortage and intuitively they forecast higher." That kind of growth bias leads to the unwritten rule of forecasting demand that says, "Err on the side of needing more, not less."
Forecasts need to make sense, adds Si Gutierrez, vice president of central planning and production control with chipmaker National Semiconductor Corp. A big part of forecasting at National involves an analysis of general economic conditions. He uses the cell phone industry as an example: "If the forecast says we'll need 20 percent more chips, we ask, 'Does that make sense, given current market conditions?' Everyone can agree that's a reasonable expectation for total market growth. The challenge comes in meeting with major players in the industry. Everyone wants to win and everyone's planning for success, so they add 30 percent. But not everyone wins. If you add up all the players in the industry, you might double a realistic forecast," he explains.
Ultimately, in the wake of the economic downturn in 2001, Cisco ended up with far more products than it could ever sell. How much more? The company wrote off $2.2 billion worth of unsaleable, unusable inventory and reported a $2.6 billion quarterly loss. Although Cisco had gained the reputation of being the supply chain poster child for the New Economy, it reacted to the supply chain glitch in a typically Old Economy fashion: The company laid off 8,500 employees.
More to come tomorrow...
Planning and Forecasting - Part 1 - Headed for the Future
Every supply chain program, good or bad, launches from a plan. It's the ability to forecast and analyze product demand, consumer buying patterns, and economic trends that separates the winners from the losers. In reality, any kind of a forecast is going to involve the mystical black arts of predicting the future, a process that inevitably will result in some errors even under the best circumstances. It's not an issue of what happens if a forecast goes wrong—it's more an issue of by how much.
Although the history of supply chain management is fairly recent, it includes some notoriously bad plans—plans so far off the mark that they've become legendary in the "what were they thinking of?" category. The bigger the company, the more spectacular are its supply chain glitches since the ripple effects can extend well past the four walls of the company to include suppliers and customers.
The main reason companies struggle with their forecasts is the fickleness of the marketplace. Try as hard as they might—and they've been at it for centuries—manufacturers and retailers still haven't been able to consistently figure out exactly how much of something consumers are going to buy. Accurately forecasting product demand is probably the single most important—and most challenging—measure of a company's supply chain proficiency. Improving forecast accuracy has gotten a lot of attention, but as meteorologists have always known, you can be right most of the time, but it's the one time you're wrong that gets a lot of people upset.
When analyst firm AMR Research Inc. studied forecast accuracy at several dozen manufacturers, it turned out— not surprisingly—that errors are very much a fact of life within the supply chain. Forecast errors at bulk chemical producers, for instance, range from 10 percent to 24 percent, for a median error rate of 11 percent. That's actually pretty good, though, since consumer goods companies get it wrong from 14 percent to 40 percent of the time, or an average 26 percent error rate. Consider that for a minute: One time out of every four the forecast is wrong. It's even worse in the high-tech arena. The error rate ranges from an outstanding 4 percent to a horrific 45 percent rate (with a median rate of 28 percent). That's right—at some high-tech companies, they're getting it wrong nearly half of the time.
Supply chain planning coordinates assets to optimize the delivery of goods, services, and information from supplier to customer, balancing supply and demand. Supply chain planning solutions allow companies to create what-if scenarios that weigh real-time demand commitments when developing forecasts.
Case in point: A few years ago, Cisco Systems Inc. had a royal doozy of a glitch, centered squarely on the failure of its supply chain plan. As the leading manufacturer of networking routers and switches, Cisco was one of the most influential companies driving the dot-com boom of the late 1990s. In the spring of 2001, Cisco was riding as high as any high-tech company had ever ridden, having reported a profit for 40 quarters in a row. With a culture that literally knew nothing but growth, naturally enough Cisco's planning systems—which were considered state of the art—kept forecasting more of the same.
Unfortunately, the inevitable bursting of the dot-com bubble happened to coincide with a severe slump in the telecom industry, both of which had a direct impact on Cisco's business. The decade-long uptick had finally peaked, and demand for Cisco's products began to slow. Problem was, the company's supply chain didn't seem to recognize "make less this month than we did last month" as a viable plan. Instead, the planners kept following the system's advice to "make more."
Think about what kind of havoc that can play, not only on Cisco's system inventory but on that of its suppliers as well. Cisco had helped popularize the concept of virtual manufacturing, meaning that outsourced (or contract) suppliers were building the routers and switches and then shipping them direct to Cisco's customers. Now, all of a sudden, Cisco's customers didn't want or need any more networking equipment—in fact, they already had too much. But Cisco's supply chain plan kept steadily insisting, "make more." The most important test of a supply chain plan is accuracy, and it became clear that Cisco was flunking that test.
More on this topic to come....
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