Posts
In this latest guest post, Douglas Macbeth of the University of Southampton School of Management argues that western economies can no longer afford to pursue a strategy of relentless offshoring - the costs and the risks are far too high...
Let us start with a few propositions which, in my experience, describe the majority of our manufacturing organisations – as well as many others.
• Procurement isn’t well understood at board level;
• There are not enough CPOs who are able to influence board direction and strategy;
• Short-term financial myopia drives decisions;
• Manufacturing is no longer seen as core to western economies – services are more important.
For many years, western companies have been moving away from manufacturing and have chased the world to find the latest low-cost country from which to source everything from materials to complete products.
But why has this happened?
To some extent there is a certain logic – labour and social costs are initially much lower in developing countries. But does anyone really know how to calculate the total cost of acquisition (far less the total life-cycle cost) of anything? And if not, what data is the decision maker using? While the concepts might be easy to grasp, extracting meaningful data out of ERP or traditional accounting systems is enormously difficult. Add multiple divisions and legacy information systems, and the quest for the Holy Grail looks simple in comparison.
Add to this the fact that the proportion of total cost which is accounted for by labour tends to be very low, and it is slightly puzzling why the trend for low-cost sourcing is so prevalent.
The reality is that the difficulties of offshoring are now well recognised. There is often a shortage of appropriate skills in the target location; infrastructures for physical logistics and legal structures to conduct western-style business transactions may be in short supply; time zones, culture, behaviour and attitudes are likely to require careful consideration and it will often be necessary to pay the costs of ex-patriot managers to help in the start up phases at least.
The alternative to the latter is to train up locals – a form of technology transfer which can create competition much quicker than you would like. And while some companies try and limit this by only transferring some of their capabilities, the same supplier might be building up skills across multiple orders. Who, apart from the supplier managers (and in some cases their governments), would have any view over the whole supply chain to see this pattern?
When we add to this the experiences we have just been through with the global financial system meltdown and we have the makings of a real catastrophe which will challenge the perceived wisdom of offshoring.
One major lesson for me from the banking crisis is that not enough people saw how interconnected the world’s financial systems were. Equally, no one had the appetite to perform a proper due diligence and risk assessment on the nature of the assets that were supposedly underpinning the whole house of cards.
However, before we criticise the bankers too much, how many of us can define our extended networks of suppliers and customers and have done a detailed assessment of where the critical risks are located and what mitigations are needed?
Wwe seem to be in the midst of a perfect storm. Some organisations are replacing bank lending to suppliers with their own financial support just to keep transactions moving, there are issues around currency fluctuations which are difficult to hedge against and the recent threat to business credit insurance threatens to further restrict the fluidity of supply chains. Without trust – or at least, insurance – how can any trade function, especially across international borders?
In addition, while there is talk about avoiding the threat of protectionism in international trade, the levels of taxpayer investment, and therefore future taxation, is at mind-blowing levels. It is no surprise that politicians are trying to control the effects of their investments to derive local benefits.
In the midst of all this, the environmental message seems to be getting heard more clearly. One of the features of this, however, will be measurement and concerns about carbon footprints and the true costs of transportation.
The opportunity for procurement to take centre stage here is clear – no other function has the potential to contribute so much. Risk assessment has always been part of the procurement process, but now we have to extend its horizons beyond the suppliers we are directly contracting with and into our extended networks more explicitly. We also need to be involved in the redesign of products to meet the challenges of extended life, reuse and repurposing that the green agenda will drive.
The fundamental need is to restructure supply chains to support these networks, which might still be international in part rather than simply chasing headline price reductions. It might also be necessary to repatriate some activities closer to customers to reduce the risks and costs of international transportation – companies might have a mixed model with different supply solutions for different channels of customer service, for example.
So, this article started by focusing on manufacturing rather than services. Surely we must by now recognise that the reliance of an economy on invisibles is inherently flawed – we must rebuild a balanced portfolio of activities. Of course we still need an effective and reliable financial services sector but we also depend on goods producers, transportation providers, energy and water providers to live our normal lives.
While some of the information and entertainment industries may be less concerned with some of these aspects since their dependence on physical location is less critical, for the rest, physical location must be a mix of close to source and close to consumer. And let us do that in a more considered way, informed by a vision of a more interdependent future.
And while I’m not suggesting that we should head for a state interventionist system (although that seems to be what is happening) rather, we need to redefine and then persuade our societies’ stakeholders that we need a more enlightened model which recognises and can work with interconnectedness and diversity in a dynamic and entrepreneurial way.
Are procurement leaders up to the challenge?
Professor Douglas Macbeth is director of business development, MSc global supply chain management and supply chain research, as well as professor of purchasing and supply chain management, at the University of Southampton School of Management.
Showing posts with label global sourcing. Show all posts
Showing posts with label global sourcing. Show all posts
Wednesday, April 29, 2009
Tuesday, September 2, 2008
PLM - Product Life-Cycle Management
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.
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.
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."
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.
Monday, September 1, 2008
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 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....
Friday, August 29, 2008
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
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....
Subscribe to:
Posts (Atom)