Supply Chain Synchronization

Experimentation with customers and partners

Michael Chui, Pär Edin, and James Manyika of McKinsey have posted a new article making the case that "In the 'new normal' successful CIOs will search for value through experimentation with customers and partners."

The restructuring of the economic order now taking place is called by some the "new normal." According to the authors, key characteristics include: "persistent uncertainty, tighter credit, lower consumer spending, and greater government involvement in business."

In this environment, executives running large IT organizations will have to "make the IT function dramatically more productive, use IT more effectively to meet larger company goals, and embrace disruptive technologies that will shape the new economic terrain."

"First and foremost, CIOs will have to overcome hurdles that have limited IT’s performance in recent years:

• They must promote a much closer alignment between IT and the business units by embracing new organizational models that call for joint decision making. IT leaders will need better business skills, not just technical know-how.
• IT productivity efforts must leap beyond cost cutting at the margins. CIOs will have to make fundamental changes in the way IT operates and campaign for technological improvements that will transform cost structures and operating models throughout the enterprise.
• IT leaders must join with their business counterparts to seek out and implement technology-based innovations that will give companies long-term competitive advantages in a tougher economic climate.

In the past, IT performed satisfactorily if it made marginal progress in these areas. In the new normal, it must truly excel in all of them—the performance bar is higher, and the expectation that IT should contribute to corporate success is more insistent."

As CIOs adapt to the "new normal", my partners and I believe that supply chain synchronization will continue to gain in strategic importance. Supply chain synchronization goes beyond traditional supply chain management to break down data and process barriers between and across organizations. As this is accomplished, data flows in real time to those who need it and is presented in actionable formats. A key result is that organizations and their trading networks reduce costs while increasing customer service levels.

The transformation of a supply chain -- including both business processes and enabling technologies -- opens doors to support new business models and innovative services that were previously locked behind rigid and disconnected data and processes. When a supply chain has been synchronized, it often creates the best information available in a trading hub and has processes that can rapidly adapt to meet new requirements. As the McKinsey authors point out, disruptive technologies (often from smaller, innovative software firms) can help organizations experiment with customers and partners to achieve these types of results.

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.

McKinsey’s third annual survey on information technology strategy and spending

I've just finished reviewing McKinsey’s third annual survey on information technology strategy and spending. According to McKinsey, the survey "affirms the continuing importance of IT for strategic success."

In this survey, McKinsey "asked chief information officers (CIOs), chief technology officers (CTOs), and other C-level executives to think broadly about the impact of information and technology on their business: how IT can serve as a tool to help build competitive advantage, what risks arise as competitors use disruptive technology, how companies develop their IT strategies, and what challenges they face in implementing those strategies." The survey reached respondents in October, so their responses include their calculations of how the acredit crisis and deteriorating economic environment would impact their business.

Four items caught my attention:

1) While businesses are making cuts to spending, they are maintaining high-priority new investments such as supply chain management that support broader business goals.

2) Expectations for ease-of-use and availability of information from enterprise application have become much higher due to the proliferation of web applications and personal devices like the iPhone that pervade everyday life. Enterprise application companies with decades of legacy code will continue to struggle to meet these user expectations.

3) The individuals most intimately familiar with the capabilities of their companies IT capabilities -- notably CIOs -- recognize that they are much less prepared to respond to risks than non-IT executives who don't deeply understand the huge technology shift that is occuring.

4) The two biggest gaps between current IT priorites and ideal IT priorities are in the areas of reducing IT costs and creating new products or services. In the case of reducting IT costs, this is a much higher current priority than the respondants believed to be ideal. Contrarywise, the effort to create new products or services is a much smaller priority than the respondants believe is ideal. This indicates that rather than putting focus on growing value to the organization through new IT-enabled products and services, companies typically gravitate towards IT cost reduction which is easier to measure and seen as a less risky proposition. Although history shows that it is the new products and services that ultimately leads to transformational value creation. Here is McKinsey's chart:

Building better links in high-tech supply chains

Gautam Grover, Eileen Lau, and Vivek Sharma from McKinsey have just published an important article about the need for transformation in high-tech supply chains. In this article they explore how the increasing complexity of high-tech supply chains require enhanced collaboration between OEMs, supplier, and retailers.

The authors examine the following areas that significantly impact the ability to improve high-tech supply chain synchronization:

Roadblocks to better collaboration

1. Partner complexity and churn
2. Silos and forecasts
3. Poor quality of data
4. The mistrust spiral

Building bridges across the supply chain

1. Breaking down silos
2. Improving trust
3. Sharing assets
4. Joint product development and risk sharing

The article starts:

"The supply chains of high-tech companies are globe-spanning marvels. Over the past 20 years, looking for ready sources of components, lower-priced labor, and talented designers and engineers, these companies have ranged throughout the world. In a highly competitive and fast-moving marketplace, they have sought to maximize their strengths and flexibility as products change rapidly and prices continue to fall.

But the sprawl and complexity of such networks have made it harder to manage end-to-end operations smoothly. Many technology companies are grappling with volatility and disruptions across their supply networks, and eliminating waste from duplicative efforts is an ongoing challenge. As product life cycles shrink, we see inventory buildups in the supply chains of some companies, while others cope with rising distribution costs, on-time delivery problems, or delays in getting new products to market.

In fact, high-tech companies have let complexity undermine collaboration in their supply chains: they aren’t working as closely as they could with their supply chain partners—sharing information or streamlining processes—to smooth out volatility and eliminate waste. This failure is surprising. The high-tech industry creates products that promote collaboration, openness, and efficiency. We all know stories about companies in other industries such as retail and consumer-packaged goods that have improved their operations significantly by using technology to collaborate more closely with suppliers—yet high-tech companies have been slow to follow. For a host of reasons rooted in the way they are organized and compete, their executives have been less than enthusiastic about pursuing the benefits of collaboration with their supply chain partners.

This lack of enthusiasm is fast becoming more costly for OEMs. ..."

You can read the complete article here.

Sustained profitable growth includes supply chain

For supply chain leaders who are wanting to learn more about how to contribute to and sustain profitable growth the results from a five-year study of corporate growth conducted by Bain & Co. and published in Harvard Business Review provides helpful insights.

The research yielded two major conclusions:

"One was that most sustained, profitable growth comes when a company pushes out the boundaries of its core business into an adjacent space. [Bain] identified six types of adjacencies, ranging from adjacent links in the value chain to adjacent customers to adjacent geographies.”

These six adjacencies are:

1. Expand along the value chain.
2. Grow new products and services.
3. Use new distribution channels.
4. Enter new geographies.
5. Address new customer segments.
6. Move into the “white space” with a new business built around a strong capability.

The second finding was that companies "consistently, profitably outgrow their rivals by developing a formula for expanding those boundaries in predictable, repeatable ways. The average company succeeds only 25% of the time in launching new initiatives. Companies that have hit upon a repeatable formula have success rates of twice that, and some drive their rates up to 80% or higher. That’s because growing a business is normally a complex, experimental, and somewhat chaotic process. Repeatability allows the company to systematize the growth and, by doing so, take advantage of learning-curve effects."

What is so interesting for supply chain professionals is that much of what Bain identified that supports sustained profitable growth relates to and requires supply chain excellence. Supply chain leaders who understand this close correlation will help lead the charge.

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.

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

Managing IT in a downturn: Beyond cost cutting

The McKinsey Quarterly just published an article about the importance of carefully evaluating how IT can help a company improve its performance during an economic slowdown and help it be better prepared for a rebound.

In the article, Managing IT in a downturn: Beyond cost cutting, the authors specifically highlight the potential for significant return on investment by investing to improve supply chains and logistics during economic slowdowns. They also point out: “As IT becomes tightly integrated with processes, breaks in workflows often get built into systems and diminish productivity.” Simply by zeroing in on these broken workflows that have become embedded in legacy systems and correcting them with improved processes, a company can reap significant returns. IT investments that improve supply chains and improve business processes should be high on the priority list even during economic slowdowns.

The following are a few excerpts from the article:

“- As the economic slowdown intensifies, companies are looking for ways to cut costs, and IT budgets are a prime target.
- Rather than implement across-the-board cuts, managers should take a more integrated view of how IT is used throughout the business.
- Targeted IT investments can make operations more efficient and increase revenues, delivering returns larger than simple cost-cutting measures typically do.

“Economies around the world are slowing down, and companies are looking for ways to trim spending and improve the bottom line. Although information technology often represents a small fraction of the corporate cost base, senior executives inevitably turn their attention to IT budgets for substantial contributions. Yet in some instances, IT investments deliver more value to a company’s top and bottom lines—by creating new efficiencies and increasing revenues—than any savings gained from traditional IT cost cutting.

“…When business and IT executives jointly take an end-to-end look at business processes, the resulting investments can have up to ten times the impact of traditional IT cost reduction efforts. The trick is to scan for opportunities—such as improving the customer experience, reducing revenue leakage, and improving operating leverage.”

The article authors: James Kaplan, a principal in McKinsey’s New York office, leads the technology infrastructure practice for McKinsey's global IT group. Johnson Sikes is a consultant in the New York office. Roger Roberts, a principal in the Silicon Valley office, leads the firm’s IT strategy practice.

The complete article can be read here.