Supply Chain Synchronization

New technologies and technology adoption is setting the stage for novel business models

Jacques Bughin, Angela Hung Byers, and Michael Chui of McKinsey have recently posted an article reminding us that "The history of recession is also the story of technology advances that overturned the existing competitive order."

While we have all been working through the worst recession in 60 years, it is during this time that the seeds are being sown that will create new winners in the "new normal" economy. Bughin, Byers, and Chui write: "Though companies are tempted during a downturn to manage for survival, recessions in fact reveal periods when the competitive pecking order changes dramatically. Research by our colleagues shows that nearly 40 percent of leading US industrial companies tumbled from the top quartile of their sectors during the 2000–01 recession....In the here and now, new technologies and technology adoption is setting the stage for novel business models that portend disruptions as great as those of past downturns."

For those working in the supply chain space, the recession has naturally brought renewed focus on reducing inventory, eliminating obsolescence, and increasing inventory turns. Those companies that are also reevaluating their supply chains to enable new business models and create new areas of value will be strongly positioned to disrupt their industries. The challenge, of course, is to focus on cost reduction while simultaneously making strategic investments that will generate revenue from new services and offerings.

Clarity Is Missing Link in Supply Chain

In the Wall Street Journal today, Prhed Dvorak writes an interesting piece highlighting the importance of clarify -- or visibility -- in the supply chain. He illustrates how the sudden changes in the market last fall created huge disruptions and discrepancies throughout global global supply chains.

Due to the increasing complexity of supply chains, demand visibility for most participants is many steps removed from the final product. This has lead to a disconnect, or mising link, in the supply chain that exposes these participants in new ways. Particularly in times of turmoil, the just-in-time supply chains that span the globe must react very quickly, but without true visibility to demand variation. 

The following diagram from Dvorak's article helps one to visualize why it is so difficult for each participant in a supply chain to gain accurate demand visibility: 

Dvorak's article nicely illustrates this phenomon and the importance of connecting the supply chain data stream from end to end for better clarity.

Here is an excerpt of Dvorak's article:

"For a man who sells the chip "brains" that power millions of TVs, cameras and other gadgets, Levy Gerzberg found himself surprisingly unplugged last fall. In just a few short weeks, business virtually stopped.

He still marvels at the speed of the collapse. "I think about it today, and ask, 'Why did it happen so fast?' " says Mr. Gerzberg, CEO of chip designer Zoran Corp.

The reason is now starting to become clear. The world's complex "just in time" manufacturing supply chains are making it increasingly tough for Zoran, and any other single link in the chain, to know what's going on just a few links away. Sometimes, Zoran itself doesn't even know how its own chips are used: One batch it thought was destined for DVD players instead turned up in digital picture frames.

The recession has exposed a harsh side effect of the supply-chain system. Because modern industry rewards suppliers with the leanest inventories and fastest reaction times, when economic crisis struck, tech companies up and down the line contracted as sharply as possible in hopes of being the ones to survive....

Forced to guess at demand for their products in a plummeting market, everyone hit the brakes, hard. An examination of the electronics supply chain -- from retailers all the way back to makers of factory machinery -- shows that, at almost every stage, companies were flying blind as they cut...

The cumulative result: The tech pullback may have been overdone. In March, Best Buy Co. said it could have sold more electronics equipment in the three months ended Feb. 28, but its suppliers' deep cuts made it tough to keep shelves stocked. Suppliers "all decided to build a lot less," says Best Buy merchandizing chief Michael Vitelli.

As the contraction raced down the supply chain, its effects became amplified. Rick Tsai, CEO of chip manufacturer Taiwan Semiconductor Manufacturing Co., has said that, in last year's final quarter, consumer purchases of electronics gear in the U.S. fell 8% from the prior year. But product shipments fell 10%, and shipments of the chips that go into the gear dropped 20%.

The speed of the cuts are a big change from previous economic slumps. As recently as the early 2000s, companies compiled orders only monthly or quarterly; now they often do it every week. Their quicker reflexes this time kept their inventories from swelling dangerously, as happened last time, supply-chain experts say....

Complexities in the global supply chain make it tough to divine broad market trends, says Randy Bane, an economist for Applied Materials Inc., which makes factory equipment used to build chips like Zoran's....

Just a decade ago, the supply chain had far fewer links, Mr. Bane says. Chip sales were driven largely by personal computers, and just a handful of companies were bellwethers for the industry. Today, everything has a chip in it, dramatically multiplying the complexity. Behavior is "much more difficult to predict," he says.

At one end of the information flow are retailers such as Best Buy. For the U.S. market, it sends orders to its suppliers once a week, along with private forecasts for the coming 52 weeks, based on sales at its 1,000 U.S. stores and broader economic data. Manufacturers scrutinize reports like these to decide what parts they need to order.

The system is geared to respond quickly to changes in consumer behavior. But that puts risk on suppliers' shoulders....

"Usually the guy at the rearmost end suffers the most," says Morris Chang, TSMC's chairman....

The complete article can be read at the Wall Street Journal.

Building a flexible supply chain for uncertain times

McKinsey has recently posted an article illustrating how the "bullwhip effect" is particularly relevant to the current economic climate and provides ideas on how to address the situation. Included are examples of how distortions in supply chain data propagate through the supply chain creating even larger distortions at every node in the network. Companies with the highest degree of flexibility -- obtained by the ability to rapidly make good decisions with good data, and then executing and iterating just as rapidly -- will be those that not only protect themselves, but ultimately use this as an opportunity to improves their supply chains.

Here are a few excerpts from "Building a flexible supply chain for uncertain times".

"The global downturn’s speed and severity have significant implications for the supply chains of global manufacturers.... the forecasting challenge is particularly acute because in many upstream industrial settings, as supply partners along the chain anticipate that demand will fall, the supply chain appears to be decoupling from downstream consumption—the focus of most forecasting models....

How should manufacturers respond? First, they must make supply chain decisions more quickly: in the face of unprecedented volatile demand, business-as-usual calendars for forecasting, budgeting, and planning won’t do. Companies that adhere rigidly to unrealistic plans may find themselves sitting on piles of inventory or fighting price wars.

Some companies are establishing supply chain “war rooms” to make fast decisions across functions. Populated by leaders from production, procurement, logistics, and sales—and furnished with the latest data on purchasing, production, orders, and deliveries—these teams meet weekly or even daily to devise near-term operational plans....

As companies rethink the way they plan, they must also learn how to act on the resulting decisions more quickly and flexibly....

Smaller but more frequent orders are often an easy way to reduce volatility in demand and therefore inventory levels....

Manufacturers should view today’s environment as an opportunity. Now they can make changes—renegotiating contracts, consolidating manufacturing and distribution networks, launching aggressive productivity programs—that might not have been feasible earlier and may soon be difficult again."

About the McKinsey authors: Christoph Glatzel is a principal in McKinsey’s Cologne office, Stefan Helmcke is a principal in the Vienna office, and Joshua Wine is an associate principal in the Tel Aviv office.

McKinsey report on management practices that drive supply chain success

In the current environment of heightened economic uncertainty, the risks of supply chain have become more apparent. Supply chains that have not been well-designed are breaking down and contributing to the challenges of large and small companies.

The importance of synchronizing and optimizing the supply chain to reduce inventory levels while maintaining targeted fill-rates has again caught the attention of many executives who typically do not get into the details of supply chain. 

For those executives starting to look more closely at their supply chain, a just released McKinsey report on management practices that drive supply chain success provides some helpful pointers.

Management practices that drive supply chain success

"Companies with high-performing supply chains differentiate themselves from ordinary performers through the superior application of six management practices, McKinsey research finds. As a result, these companies enjoy lower distribution and logistics costs, better service outcomes, and better inventory performance than others do."

"When [McKinsey] examined the relationship between the scores and performance, six broad practices emerged as significant":

1. Link supply chain strategy to company strategy; set clear aspirations
2. Segment the supply chain to master the product and service complexity that matters most
3. Tailor supply network to optimize service, cost and risk goals
4. Use lean tools to optimize supply chain from end to end
5. Create integrated/robust sales- and operations-planning (S&OP) processes
6. Find top talent; hold people accountable

"While no company [McKinsey] studied had mastered all six, organizations displaying strength across them appear to outperform competitors in service (the timeliness and completeness of customer deliveries), inventory (the ratio of inventory levels to cost of goods sold), and distribution and logistics costs. That finding belies the notion that trade-offs are inevitable in these areas."

"Top performers take a methodical approach to demand and production planning, as well. Using cross-functional teams empowered to make decisions ranging from revising inventory safety stocks to reallocating products to manage shortages, these companies tightly integrate forecasting, supply planning, and production-scheduling processes. They rigorously forecast performance across multiple dimensions—for instance, by customer group, product, or distribution channel. They are twice as likely as ordinary companies to use planning and performance information to adjust inventory levels and storage locations dynamically in order to minimize inventory holding costs without compromising quality of service, among other purposes.... Companies scoring among the top one-third of survey respondents in this area are 4.0 times more likely than low performers to be inventory leaders, 2.6 times more likely to be cost leaders, and 1.3 times more likely to perform strongly on service."

Read the complete article here.

From internal service provider to strategic partner

Large corporations can obtain significant cost reductions by leveraging their economies of scale to eliminate duplication. A poster child for this in the area of support services is P&G. Over the past ten years they have made a remarkable transformation that has saved over $600 million by consolidating all back-office functions. One notable characteristic of this transformation is that the support services are designed to flow across a complete business process even if part of that process is managed in-house and other elements are outsourced. The result is that all of the people managing the process work as one collaborative team.

My partners and I are consulting with a client to accomplish some of these same economies of scale on global supply chain processes that span forecasting, planning, procurement, and product information management.

The McKinsey Quarterly had an interview with the head of Global Business Services (GBS) at P&G. The following is an excerpt of that interview:

"It's all about innovation—at the operating level in the way GBS is structured and in the design of our work processes, as well as upstream, in the IT-driven solutions that we can offer to support P&G's brands." So says Filippo Passerini, president of GBS and P&G's CIO, when describing the transformation of support services into an important contributor to the company's growth.

The Quarterly: How did you go about changing the culture?

Filippo Passerini: It was a big cultural change. However, when we talk of cultural changes, we must keep in mind that we can't commandeer culture. It is the product of organizational design, of building skills and competencies, and of rewarding people when they do well. My own leadership philosophy is about launching breakthrough ideas and setting goals. It's about starting with the end in mind and forcing a pace to deliver on the goals. It is about creating support systems that enable the organization to perform, to feel motivated and good about itself. It's about raising the energy level.

The Quarterly: What's ahead for GBS?

Filippo Passerini: We are now moving into the third phase, which is about agility, flexibility, and being able to anticipate what will happen, so that we can respond more quickly. The background is the way the world is accelerating dramatically not just in our consumer-packaged-goods industry but in most other industries too. It is very important to stay flexible in this new world.

The article can be accessed here.

Open innovation through collaboration

So, what does open innovation have to do with supply chains? To start with open innovation requires the creation and facilitation of networks of suppliers and independent specialists so that they can interact and collaborate with each other. This is simply a variation of supplier enablement, but with more of a focus on community rather than on simple transactions. More advanced supplier enablement solutions already have planning capabilities to compliment the transaction capabilities, now it is time to add a layer of community to create knowledge hubs. These knowledge hubs can be used to innovate as well as to more effectively engage with trading partners.

The McKinsey Quarterly published an interesting article about the next step in open innovation. The article was written by Jacques Bughin, Michael Chui, and Brad Johnson.

Here is the introduction:

"The creation of knowledge, products, and services by online communities of companies and consumers is still in its earliest stages. Who knows where it will lead?

"Executives in a number of companies are now considering the next step in this trend toward more open innovation. For one thing, they are looking at ways to delegate more of the management of innovation to networks of suppliers and independent specialists that interact with each other to cocreate products and services. They also hope to get their customers into the act. If a company could use technology to link these outsiders into its development projects, could it come up with better ideas for new products and develop those ideas more quickly and cheaply than it can today? Suppose that a wireless carrier, say, were to orchestrate the design of a new generation of mobile devices through an open network of interested customers, software engineers, and component suppliers, all working interactively with one another."

To elaborate on this idea of a wireless carrier using open innovation, what if in addition to using this network to design a new mobile device, it also used this network to collaboratively forecast, plan, and fulfill demand? Could this be done on a global basis to provide entirely new levels of visibility into the supply chain? What if a handset manufacturer wanted to leverage the collaboration platform to provide higher value design services for the wireless carrier? What if a distributor leveraged this platform to offer order management and fulfillment services for the carrier?

You can access the article here.

Managing global supply chains

McKinsey has recently published a survey about supply chain strategies, such as entering new markets, increasing speed to customers, and lowering costs. McKinsey found that as supply chains are increasingly global and complex, the risk associated with them is rising dramatically. This risk is not being effectively managed with traditional supply chain management practices. As a result, most companies are not meeting strategic supply chain goals, and the risks continue to grow.

The following is the introduction to Managing global supply chains: McKinsey Global Survey Results.

“The [survey] results show that supply chain risk is rising sharply. Executives point to the greater complexity of products and services, higher energy prices, and increasing financial volatility as top factors influencing their supply chain strategies. Relatively few respondents, however, say that their companies are translating the importance they place on these factors into corporate action.

“Nor do executives express confidence that their companies are meeting the top strategic goals: reducing costs, improving customer service, and getting products to market faster. In addition, for all the public attention paid to environmental concerns, including global warming, executives report that such issues have little influence on supply chain strategies.

“What’s more, our results suggest that most companies tend toward centralization, not local management, in running their supply chains and that this tendency has increased in recent years.”

The complete article can be read here.

IT and Competition

This short interview with MIT Professor Erik Brynjolfsson touches on one of the key issues that supply chain executives are grappling with every day: How to create and replicate new business processes that cross traditional functional boundaries and extend across the enterprise. Brynjolfsson also advises companies that they must leapfrog the technology capabilities of their competitors. It is not enough to merely try to match them by utilizing the software applications of yesterday.

How to Tap IT's Hidden Potential

I was doing some research for a client and was referring back to an article from earlier this year. The article, How to Tap IT's Hidden Potential, does a nice job of summarizing some of the key issues that CXOs need to grasp with regard to IT and how it must be a central part of their strategy. It is critical that IT become an integral part of the executive dialogue so that it can be fully leveraged to remove artificial boundaries between business functions, and deliver value that moves the enterprise ahead of its competition.

Professor Amit Basu of the Cox School of Business at SMU lists five primary reasons for the existence of a “glass wall” between IT and the rest of an enterprise:

1) Mind-set differences between management staff and IT staff
2) Language differences
3) Social influences
4) Flaws in IT governance (defined as the specification and control of IT decision rights)
5) The difficulty of managing rapidly changing technology.

The following excerpt summarizes some of the key ideas for tearing down the glass wall:

“Costly Neglect: Most top executives fail to recognize the value of information technology. They think of IT as a basic utility, or as an expensive headache that they'd rather not deal with. They don't see its potential to transform a business and boost profits.

“The Separation: The reason for this is the wall that separates IT from the rest of the business at most companies. The wall is the result of differences in mind-set and language between management staff and IT staff, social influences, flaws in IT governance, and the difficulty of managing rapidly changing technology.

“Breaking Through: There are several steps that can be taken to shatter the wall so that IT's full value to a company can be realized. These include a commitment from top executives to effective IT management, the hiring of an IT leader who sees the big picture, better communication within the company, changes in management training, and a new approach to IT planning and spending.”

Here are a few more important excerpts from the article:

“[T]op executives at most companies fail to recognize the value of IT. It can help a company transform data from its operations, its business partners and its markets into useful competitive information. It can be the source of profitable innovations in the way a company interacts with its customers and suppliers. But there is still a tendency to think of IT as a basic utility, like plumbing or telephone service.

“In many industries, IT consumes a significant amount of capital expenditures and gross revenue. Though recent research has shown that managing IT well can significantly increase a firm's profits and deliver substantially higher returns on IT investments, its potential is overlooked, and even its workaday application is often mismanaged.

“The result isn't just missed opportunities -- it's also wasted money. Analysts estimate that hundreds of billions of dollars are blown every year on IT projects that fail to achieve the desired goals. “The reason for all this is the metaphorical glass wall that separates the IT group from the rest of the business at most companies. The wall prevents IT from being part of the discussion at the highest levels of company planning, robbing a firm of its full potential.

“Success in the digital economy of the 21st century demands a strategic role for IT. And for that to happen, the glass wall between IT and the rest of a company has to be shattered. There are several steps that can be taken to achieve this. But to implement them most effectively, it is important to first understand the origins of the wall and what sustains it. …

“The reality today, though, is that CEOs can't ignore IT and expect to succeed. Technology has accelerated the pace of change in business, making it crucial for companies to detect, assess and respond to every opportunity and every threat as quickly and as effectively as possible. And that kind of agility can only be achieved by fully embracing the operational and strategic importance of IT.

“CEOs who use obsolete metrics such as head count or benchmarking the competition to decide on the role and evaluate the performance of IT in their companies run the risk of being blindsided by competitors who take full advantage of IT innovations. Furthermore, IT is key to a company's ability to satisfy regulations such as the Sarbanes-Oxley Act on corporate governance, the Health Insurance Portability and Accountability Act and legislation in various states on the privacy of customer information.

“We believe that the following seven steps will help shatter the glass wall between IT and the rest of a company so that the information-technology function can be fully integrated into the company's business culture. This will clear the way for the realization of IT's greatest value.

1) Begin with IT literacy -- and commitment -- at the top
2) Hire an IT leader who sees the big picture
3) Create demand for IT solutions
4) Make sure nothing gets lost in translation
5) Rationalize IT spending
6) Create an IT portfolio by evaluating risks and returns”

You can read the entire article here.

Getting supply chain software right

With global markets charting uncertain territory and the economy shrouded in uncertainty, the conditions are ripe for companies to closely examine their supply chains to find areas for improvement. “Getting supply chain software right,” from The McKinsey Quarterly, offers some useful insight for those wanting a solid introduction to key supply chain concepts and to how software can help in this domain. Here are some excerpts:

“An urgent need to improve supply chain management can arise when product margins shrink, demand drops, customers ask vendors to manage inventory for them, or new products are introduced. … Because the costs of managing the supply chain — inventory, the warehouse and distribution center, and freight — can represent 10 to 15 percent of sales in most industries, the savings that effective supply chains bring have a genuine impact.

“…A supply chain, simply stated, comprises the flow of a company’s products, information about them, and the money that changes hands between the company and its suppliers and customers. When a company manages the processes that support these flows well, it can fill orders from customers quickly yet keep its inventory to a bare minimum. When it doesn’t, the supply chain breaks down. Customers place orders but hear that the products are out of stock, even when they might be available somewhere in the company. Raw materials fail to show up on loading docks, and shipments to customers arrive late. Factories run below capacity because customers cancel their orders. The result can be a quick drop in sales, lost margins, and inventory write-offs.

“…Managers often focus on automating transactions, something that might be important but typically fails to extract the greatest value from supply-chain-management software. The greatest value tends to come from harnessing its ability to improve decisions — how much of what product should be shipped to which warehouse, for example — by making forecasts more precise. Since decision support affects inventory turns and customer-service levels (avoiding stock-outs, for example), improving it has more impact than, say, migrating an order process from telephones or fax machines to computer systems, a change that at best reduces head counts.

“…The promise of real benefits rests on the potential for seamlessly integrating data flows and work processes across entire enterprises and even industries.  The primary benefits will come from their ability to speed up the flow of information and to make it available more widely — which alone can produce gains large enough to justify big investments.

“…When supply-chain-management software works, it can help cut inventory levels, improve delivery schedules, and ensure that supply meets demand—all of which should make customers more satisfied.

“…The performance of supply chain software depends not just on its features and quality but also on the way people use it. This is particularly true of forecasting and inventory planning solutions. Four guiding principles to consider when implementing supply chain software:

        1) fix only important broken processes
        2) promise only what you can deliver
        3) improve training
        4) make people accountable                     

“…The greatest improvements in supply chain management occurred when companies both improved their processes and correctly installed and used the software.”

Read the complete article here