Supply Chain Synchronization

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.

Smart IT investments to manage inventory and manage logistics to generate revenue gains

Effectively managing inventory and managing logistics through smart IT investments are two of the areas that McKinsey identifies as generating "short- and medium-term revenue and efficiency gains that greatly exceed the savings from traditional cost-cutting efforts. The key is to have business and IT executives jointly take an end-to-end look at business processes and scan for opportunities such as improving the customer experience, reducing revenue leakage, and improving operating leverage.

The exhibit below illustrates the two fundamental ways for technology investments to have a substantial impact: developing new insights (for example, by comparing best practices across regions) or optimizing processes and systems, often with targeted work-arounds that generate value disproportionately."

 

McKinsey's February 2009 Chart Focus Newsletter.

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.

Poor quality of data

Our experience with clients is that poor quality data is a foundational cause of poorly performing supply chains. Supply chains are inherently data intensive, so when the data fails, the supply chain falters and fails.

Our client engagements typically start with a deep dive into the client's data. We use this data to model the supply chain and identify root causes. Once the sources of required data are identified, we then collect the data and analyze it. During this process it is not unusual to find that the data itself is inconsistent and incomplete. Our Synchronized Information Management (SIM) solution grew out of the need for our clients to cleanse their supply chain data as a first step towards transforming their supply chain. SIM allows clients to create, manage, edit, and publish consistent and complete data throughout their extended enterprise. Once this is accomplished, the transformation of forecasting, inventory planning, order management, fulfillment planning, and reverse logistics goes much more smoothly.

In a recent article, three McKinsey authors had this to say about poor quality of data:

"OEM forecasts often aren't granular enough to be useful to supply chain partners. Typically, OEMs set broad targets across a number of product lines rather than provide details on expected unit sales for specific products. That combined with rapid product obsolescence makes getting a fix on true demand difficult. Furthermore, the IT systems that capture data across supply networks often are incompatible, thereby walling off vital information and making information-based collaboration a struggle. The mobile-phone industry provides a notable example of poor data: OEM forecasts of consumer demand, provided only four months out from delivery dates, often misstate actual demand by 400 percent."

Our Evavi solutions power the supply chain of the world's largest distributor of mobile phones and accessories, so the challenge to create and manage great data in this industry is something that we are very familiar with. We envision that the great data that exists at places such as our client will eventually be propogated to other trading partners in the mobile phone supply chain through more effective collaboration and data hubs.

Silos and forecasts

In their McKinsey Quarterly article, Building better links in high-tech supply chains, Gautam Grover, Eileen Lau, and Vivek Sharma take a look at how silos negatively impact forecasts. This is a problem that our clients are regularly working to address, and that must be transformed in order to improve forecast accuracy and inventory planning. The solution to this challenge has more to do with the structure of an enterprise than with the enabling technology. Of course, the technology (such as Evavi's Synchronized Supply and Demand solution) must support properly aligned business processes, but the processes themselves must be designed into the structure of the enterprise. 

The McKinsey authors had this to say about silos and forecasts:

"OEMs in many industries organize themselves around functional units. But in high technology (and other assembly industries), units such as manufacturing, sales and marketing, and product development often send conflicting forecasts of demand and production to their partners. Not surprising, supply chain responses are often based on guesswork, and forward planning is difficult. In one variation of this problem, OEM sales reps provide "lowball" estimates of demand rather than a truer picture, so they can more easily beat internal goals. Alternatively, when components are in short supply, forecasts by manufacturing functions often are overly optimistic in a play to maximize the allocation of scarce products from suppliers."

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

ABC: An Introduction to Supply Chain Management - What are the roadblocks to installing supply chain software?

Ben Worthen, at CIO Magazine, has compiled ABC: An Introduction to Supply Chain Management. This compilation provides a good starting place for those wanting to learn about the basics of supply chain management.

One of the questions he looks into is: What are the roadblocks to installing supply chain software? His answer looks at three typical roadblocks that can be anticipated and should be preempted:

1) Gaining trust from your suppliers and partners.

“Supply chain automation is uniquely difficult because its complexity extends beyond your company's walls. Your people will need to change the way they work and so will the people from each supplier that you add to your network. … To get your supply chain partners to agree to collaborate with you, you have to be willing to compromise and help them achieve their own goals.”

The degree to which your people will need to change the way they work will be dictated by what business processes you are changing, and how flexible the software is to accommodate the elements that are unique to your business. Ideally you will transform business processes because they will improve your business, and not because the software dictates that you do things in a circuitous way. Supply chain solutions should only be considered that are flexible enough to model what is unique about your business, rather than forcing you to change those things that your customers already value. You should be able to tailor role-based workflows that perfectly fit the needs of the business, and that support adoption by end-users. This is a foundational concept of Supply Chain Synchronization that distinguishes it from simple Supply Chain Management.

2) Internal resistance to change.

“If selling supply chain systems is difficult on the outside, it isn't much easier inside. Operations people are accustomed to dealing with phone calls, faxes and hunches scrawled on paper, and will most likely want to keep it that way. If you can't convince people that using the software will be worth their time, they will easily find ways to work around it. You cannot disconnect the telephones and fax machines just because you have supply chain software in place.”

Without successful change management, most supply chain initiatives will flounder and may ultimately fail. Some clients I have worked with have forced supply chain solutions in without gaining the necessary consensus from the end-users. This normally results in additional time and money to cycle back after the implementation to train, cajole, and encourage the end-users to get on board -- much more effective to get this done at the beginning of the project.

3) Many mistakes at first.

“There is a diabolical twist to the quest for supply chain software acceptance among your employees. New supply chain systems process data as they are programmed to do, but the technology cannot absorb a company's history and processes in the first few months after an implementation. Forecasters and planners need to understand that the first bits of information they get from a system might need some tweaking. If they are not warned about the system's initial naiveté, they will think it is useless. … Once employees [understand] that they [are] merging their expertise with the system's increasing accuracy, they [will begin] to accept and use the new technology.”

The best supply chain software has the ability to be programmed in advance with as much of a company’s historical data as can be obtained. However, even when this is done, the system will take a while to reach equilibrium. Supply chain solutions are designed to be intelligent – they learn as they go. At the same time, most supply chain functions (such as forecasting and inventory planning) are not designed to run on autopilot. These solutions require regular monitoring and adjusting (though the best ones will automatically direct the end-user to the places that need the most attention). End-users need to understand that they are indeed merging their expertise with the system’s intelligence. Working in concert, the results can be spectacular.

ABC: An Introduction to Supply Chain Management - What is supply chain collaboration?

Ben Worthen’s compilation -- ABC: An Introduction to Supply Chain Management -- at CIO Magazine provides a good starting place for those wanting basics information about supply chain management. One of the questions he provides insights to is: What is supply chain collaboration?

There are many ways to describe supply chain collaboration. This can be done in areas ranging from forecasting and inventory planning to order management, and fulfillment planning. Worthen provides the following collaboration example from the world of consumer packaged goods to illustrate some of these basic concepts:

“If there are two companies that have made supply chain a household word, they are Wal-Mart and Procter & Gamble. Before these two companies started collaborating back in the '80s, retailers shared very little information with manufacturers. But then the two giants built a software system that hooked P&G up to Wal-Mart's distribution centers. When P&G's products run low at the distribution centers, the system sends an automatic alert to P&G to ship more products. In some cases, the system goes all the way to the individual Wal-Mart store. It lets P&G monitor the shelves through real-time satellite link-ups that send messages to the factory whenever a P&G item swoops past a scanner at the register.”

This example of supply chain collaboration benefits both parties. P&G benefits by knowing when to make, ship and display its products at Wal-Mart, and the invoicing and payments are automatically scheduled. P&G is able to reduce their inventory and their order-processing costs. Likewise Wal-Mart is assured of staying in stock on P&G products, while also receiving the best prices available.

Garbage In, Garbage Out

When working with clients, my partners and I often find that the migration from a supply chain based on spreadsheets to one using sophisticated supply chain software is as much about changing behavior as it is about the underlying technology. For example, forecasting and inventory planning solutions can have lots of intelligence built into them, but still they require ongoing human engagement in order perform to their potential. It is important to understand up front that the choice isn’t between manual Excel spread sheets or auto-pilot black boxes. Instead, it is the collaboration of human insight with powerful software that yields the greatest results. 

As Steve Matthesen, vice president and global leader for supply chain at BCG notes in Supply Chain Enterprise Systems: The Silver Bullet? "there are common mistakes people make in the IT space when managing their supply chain. On one extreme, they do everything manually with Excel spread sheets, and it's hard to have good, reliable data delivery that way. The other extreme is that they put in too much technology -- and expect it to do too much. In some cases, people have added layers of systems -- sometimes connected, sometimes not.

"You need a lot of human intervention for the forecasting technology to work," Matthesen continued. "My experience is that companies put a lot of money into IT systems and then need help figuring out how to use them better. For instance, how do you feed good data into the system? How do you update the information, so the system can recalculate the real math that is in there? A lot of these systems are set up and not tuned up on a regular basis, yet the software doesn't know that. Where you get into real problems is when it has been years [since you updated the data], or if several functions have since merged."