Supply Chain Synchronization

Data centers: How to cut carbon emissions and costs

Green has become the new mantra for many businesses. For those in the IT business it is an area that can burnish a company's reputation and reduce operating costs so that more is available for strategic IT projects.

As William Forrest, James M. Kaplan, and Noah Kindler point out in their recent McKinsey Quarterly article: "The demand for data center capacity worldwide has led to a sharp rise in IT costs and a steady increase in carbon emissions. A new efficiency metric provides companies with a clear yardstick for measuring progress.

The modern corporation runs on data. Data centers house the thousands of servers that power applications, provide information, and automate a range of processes. There has been no letup in the demand for data center capacity, and the power consumed as thousands of servers churn away is responsible for rising operating costs and steady growth in worldwide greenhouse gases.

Our work suggests that companies can double the energy efficiency of their data centers through more disciplined management, reducing both costs and greenhouse gas emissions. In particular, companies need to manage technology assets more aggressively so existing servers can work at much higher utilization levels; they also need to improve forecasting of how business demand drives application, server, and data center–facility capacity so they can curb unnecessary capital and operating spending.

Data center efficiency is a strategic issue. Building and operating these centers consumes ever-larger portions of corporate IT budgets, leaving less available for high-priority technology projects. ..."

Read the entire article here.

'You Can't Manage What You Can't Measure': Maximizing Supply Chain Value

'You Can't Manage What You Can't Measure': Maximizing Supply Chain Value is an article by supply chain experts from Wharton and The Boston Consulting Group. It is a part of their special Creating the Optimal Supply Chain report.

'You Can't Manage What You Can't Measure': Maximizing Supply Chain Value makes the case that supply chain management is a mission-critical element of business, and that it must be a priority of the CEO in order to be successful. The article also mentions fragmenting customer needs, increased cost pressures, and increasingly complex business models are three major factors diving the importance of supply chains.

The introduction states: “In the face of increasing complexity in global supply chains, more companies are realizing that supply chain management (SCM) is a mission-critical element, and no longer simply the domain of the warehouse manager or logistics director. But even as companies adopt SCM strategies in an effort to keep up, experts from Wharton and Boston Consulting Group (BCG) report that many still lag when it comes to measuring how well they are doing, and balancing the trade-offs involved in keeping service levels high and costs low.

“'The major trends in business right now -- low-cost country sourcing, outsourcing, customization, globalization and more -- all create tremendous complexities in a supply chain,’ says Steve Matthesen, vice president and global leader for supply chain at BCG. ‘In most cases, however, companies have not changed how they manage this critical part of the business.’

“According to Matthesen, that's largely because most company executives don't have a supply chain background, and they tend to view the supply chain function as "a black box" that they don't understand or have limited visibility into. 'CEOs feel that their supply chain costs too much and doesn't work very well. They're quick to ask, 'How hard can it be to get the products to the right place at the right time?' Well, it can be pretty hard,' he says, citing three major factors that have dramatically increased the stress on supply chains:

1. Fragmenting customer needs, resulting in a broader selection of SKUs (stock keeping units) aimed at specific consumer segments, different price points, shorter product life-cycles, and less predictable demand patterns;

2. Increased cost pressures based on global competition and shareholder demands to reduce working capital;

3. A new level of complexity brought on by more complicated distribution models, increased outsourcing, and ‘new technologies that promise efficiency but can increase complexity.’

“While supply chains are getting more difficult to manage, the competitive environment means that most companies need to further reduce costs.  In such an environment, successful SCM 'means getting better results with the same, or fewer, resources,' according to Gerald P. Cachon, Wharton associate professor of operations and information management.”

The article continues with sections on “Knowing What to Measure”, “The Trade-offs Between Service and Costs”, and “Companies on the Frontier.”

Companies on the Frontier

Steve Matthesen, vice president and global leader for supply chain at BCG is right on when he talks about “the bulk of the benefit [in supply chains] comes when you break down the functional silos and better coordinate across the entire business, and your suppliers and customers." This is what Supply Chain Synchronization is all about.

In the article, 'You Can't Manage What You Can't Measure': Maximizing Supply Chain Value, Matthesen lists the key priorities to transform a supply chain as:

1) aligning the supply chain with company strategy
2) aligning incentives across functions and with external parties
3) arming people with the right data ‘so they can make holistic decisions’
4) building flexibility to quickly respond to demand, rather than relying on forecasts.

"CEOs need to engage with their management teams to understand how their supply chain works today -- how it supports the business and how it prevents success.  Together, they need to evolve the strategy and supply chain to move the business to a position where the supply chain supports and enables a winning strategy. This cannot be accomplished by the head of supply chain alone," Matthesen says.

The pay-off is substantial. "A fully aligned supply chain and strategy delivers a superior business model," Matthesen adds. "Given the difficulties of achieving this, the benefits are often sustainable and create real advantage. Your competitors are likely to want to copy pieces of your strategy without realizing how the entire strategy and supply chain work together -- and they will not be able to match your performance."

Getting the right supply chain alignment, and enabling and supporting this alignment with the right technology, can be a challenging task. It requires the leadership and support of the CEO and other senior executives. It is not a task that can be accomplished by only the supply chain team or the technology team. The supply chain touches every element of a business, and supply chain transformation requires the sustained support of a broad coalition of senior executives in order to succeed. When it does succeed, it unlocks hidden value and helps to propel the company forward.

The Trade-offs Between Service and Costs

A concept called the "efficient frontier" is a useful way to gage the capability of a supply chain to provide the right products in the right amounts to the right place at the right time at the right cost.

As explained in 'You Can't Manage What You Can't Measure': Maximizing Supply Chain Value, “For any business function, an efficient frontier can be found by plotting points along a trade-off curve between two or more performance metrics. Applied to supply chain performance, ‘the efficient frontier is a two-dimensional space, with service level and costs along the two axes,’ says Mark D. Lubkeman, a senior vice president in BCG's Los Angeles office. ‘At one end, you have terrific, wonderful service at a huge cost. Or you could have lower costs and slow delivery times. The question is, where do you want to fall on the graph?’"

The goal is to maintain a position on the efficient frontier that protects a company’s own interests and acknowledges the interests and needs of its customers. "It's dangerous for any company to say, 'We have one frontier,'" Lubkeman advises. "That doesn't make sense in any business, so why should it in a supply chain?"

Morris A. Cohen, Wharton professor and Co-Director Fishman-Davidson Center for Service and Operations Management adds that it is difficult to provide different levels of customization in a supply chain. “How do you ration your resources and prioritize when facing streams of demand from different customers for the same item, customers who have paid a different price and to whom you have made different promises? ‘It is inefficient to chop up the supply chain for different customers, but exploiting those things keeps you on the efficient frontier,’ he counsels. ‘Keeping the supply chain flexible is key.’"

Getting to the efficient frontier can be challenging. As BCG's Steve Matthesen points out, “most companies are not getting the full value from their supply chain investments. ‘Your infrastructure investments will have been made based on a trade-off between service level and cost, but in many cases, companies are actually off the efficient frontier -- meaning they are getting lower performance and higher costs -- because of how they operate.’” This means that before pursuing the efficient frontier companies need to transform business processes so that they properly align operations with the needs of the client. Cohen adds, "You may not be managing processes correctly, not using the right technology; there are a variety of reasons to explain why some companies are not on it and others are."

Gerald P. Cachon, Wharton associate professor of operations and information management, says, "Making it to the efficient frontier involves the application of optimization techniques which require careful data collection and generally customization to the firm's particular environment. … As supply chains become more complex, they have more participants, more locations, and are geographically more dispersed. The amount of information needed to find the efficient frontier appears to grow exponentially.”

Knowing what to measure

Everyone is familiar with the dictum: “you can manage what you can’t measure.” As the article 'You Can't Manage What You Can't Measure': Maximizing Supply Chain Value makes clear, this is particularly applicable to building and managing supply chains.

In this article from Wharton and The Boston Consulting Group, Steve Matthesen, vice president and global leader for supply chain at BCG, makes the point that the difficulty is in measuring the right things. “Most operations groups track a ton of metrics. The issue is whether they are tracking the metrics that will identify how they are meeting the strategic needs of the company and what is relevant to their customers.”

Morris A. Cohen, Wharton professor and Co-Director Fishman-Davidson Center for Service and Operations Management, notes that more companies are beginning to realize that they need end-to-end visibility in their supply chain management efforts. "SCM is about more than just sensing and responding," he explains. "Companies need to anticipate demand, since it takes time to respond to demand-side changes. They're learning, but there's still plenty of room for improvement."

Matthesen further comments that “there is an inherent trade-off in meeting that demand: ‘How much service level can I give my customers before everyone screams about what it costs?’ But cost is only one lens, Matthesen argues. ‘The goal is to maximize overall value.  You want to have low costs, but first you need to have a strategy that will let you win in the marketplace.  Sometimes that strategy requires spending more cost to get a much higher margin.’

“To determine this, Matthesen says companies need to make sure they have a ‘crystal-clear view’ of what their customer really wants -- what minimum service level is required to meet their needs, and what they will be willing to pay for superior service. Service level here includes all attributes of the supply chain as experienced by customers: in-stock rates, delivery time, product assortment, etc. … Companies have two gaps, he says: a true understanding of their current performance, and a deep understanding of what their customers need -- and are prepared to pay for.

"’Every company has metrics that track performance,’ he says. ‘The key question is whether these metrics really provide visibility to performance as viewed by the customer.’”