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2010

 

This afternoon, I tuned into the Kinaxis sponsored webcast that discussed the increasing importance of Sales and Operations Planning (S&OP) in so many industry settings today.  Both Lora Cecere and Trevor Miles did a great job of pointing out the importance of the horizontal nature of an S&OP process, and the critical role that technology can play in the timeliness and depth of the analysis of data.

 

In the Q&A portion, a question was raised regarding the organizational alignment challenges that go with implementing an effective S&OP process.  I was very pleased that this question was raised because in my view, too many organizations stumble on the organizational and change management factors related to this process.  More importantly, an S&OP process uncovers a broader issue related to supply chain organizational alignment.

 

Many surveys, the latest being 2010-2012 Global Supply Chain trends, sponsored by PRTM, note that existing supply chain organizations are not integrated and empowered.  In spite of all the rhetoric, organizational stovepipes still exist, particularly among supply chain operating and procurement teams.  While both clearly have critical roles, too often senior management of both report to different C-level executives with different expectations. 

 

A truly successful and effective S&OP process must take a horizontal view of anticipated demand, supply, inventory and capacity.  In many cases, sensitive information must be shared, tough decisions need to be made and consensus as to agreed-upon operating plan is essential. I often hear senior supply chain executives note that the key to the success of their firm’s S&OP process is the trust and comfort level placed among the participants. That is essential, but sometimes that notion of trust can imply a fine line of “no surprises” or “no bad news”.  While every firm is unique in some ways, my consul to clients regarding S&OP process enablement is as follows:

 

  • Include all of the various key stakeholders, (sales, marketing, finance, planning,operations) including sourcing and procurement.  External partners should also be included, when warranted.

 

  • Provide for a dedicated S&OP support team that reports to a senior executive with horizontal operations responsibility. In some cases that might be the COO, VP of Materials, or the actual S&OP executive. Worldwide scope, process knowledge and influence is a must.

 

  • An S&OP team should be afforded focused technology and information analysis support either by application or dedicated IT organizational support.  The team should include members that are skilled in information analysis and what-if scenario planning, with access to enterprise-wide information.

 

As industries emerge in the forthcoming business recovery, the ability to have an objective and effective S&OP process may well be the differentiator to market dominance.  Do not overlook the organizational factors involved.

 

What organizational alignment lessons has your organization encountered regarding the proper alignment of an S&OP process?

 

Bob Ferrari

 

While the intent is noble, the ranking of corporate supply chains can be a risky proposition and a slippery slope.  A lot has to do with ranking methodology, screening criteria and qualitative weighting factors.  An analyst can sometimes dread the final rankings since certain firms can take exception as to why they were not included or even considered in such rankings.

 

The AMR Research/Gartner Top 25 supply chains ranking seems to be that which captures the most interest among our supply chain community.  AMR’s noted criteria for ranking its Top 25 includes 50% weighting for financial performance (ROA, inventory turns, revenue and profit growth) and 50% qualitative, meaning individual analyst and peer industry nominations. Much dialogue and discussion can be made regarding who made or was not included in the ranking, and this commentary is not about such. In the end, I suppose we should be able to agree that the most important criteria in evaluating any firm’s supply chain is whether these capabilities helped that firm to be the best performing company in its industry.

 

Last week, I was reading Bloomberg BusinessWeek magazine and noted its cover article, the Annual Ranking of the 50 Best-Performing Companies. BW’s overall ranking has a context of delivering maximum stockholder value, which happens to be a rather important measure attributed to supply chain capabilities.  The ranking is further noted to be firms that have the top performance in the Standard and Poors 500 stock index over the previous five years. BW notes: “In a period of tremendous economic turbulence, these stocks returned an aggregate 222.3 percent to shareholders, including reinvested dividends.” We often communicate to senior management that the true benefits of supply chain capability do not necessarily come in any one year, but are a result of many months of building process competency and customer intimacy. Thus a five year horizon can be a meaningful benchmark measure.

 

In the interest of getting some constructive dialogue started, let’s contrast the top five firms listed on the BW ranking with the AMR ranking.  If one screens out non-manufacturing or supply chain centric firms, only two companies stand out: Intuitive Surgical (#2), and Apple (#4).  Apple ranks #1 within the AMR/Gartner ranking, while Intuitive Surgical revenues failed to make the threshold for the AMR/Gartner revenue screening criteria. Apple is no surprise to appearing on both rankings.

 

Now look at the 6 through 25 ranked firms, and the following manufacturing, retail, or supply chain related firms are noted in BW’s ranking:

 

Flowserve                             (#7)

FMC Technologies                (#8)

Cliffs Natural Resources        (#9)

Amazon.com                       (#10)

Titanium Metals                   (#11)

Cummins                            (#12)

Celgene                              (#13)

Precision Castparts             (#15)

Western Digital                    (#18)

Big Lots                              #19)

Cameron International          (#20)

Airgas                                (#21)

CSX                                   (#23)

Occidental Petroleum          (#25)

 

Within this BW grouping, the AMR/Gartner ranking only noted Amazon.com, concurring as #10.  Select names on the AMR/Gartner ranking such as Hewlett-Packard (AMR #15, BW #28) or McDonalds (AMR #11, BW #31) did not make the top twenty- five BW cut.

 

Are there some observations contrasting these two rankings?    I can note some.

 

Company size certainly stands out as a difference.  Is supply chain capability contributing to bottom-line performance just as pertinent to smaller vs. multi-billion dollar firms? Are smaller firms characteristically more agile in their ability to take advantage of market opportunities? Should differentiating based on company size be considered in ranking of supply chains? 

 

Specific industry needs and profile is another obvious consideration.  In times of global recession, certain industries fare better than others.  Companies that grew during the recession could invest in supply chain, while those that declined or were flat, most likely had to reduce costs or capabilities in supply chain.

 

What other observations or pointers do you observe from contrasting these two rankings?

 

Bob Ferrari

As a blogger and consultant on important matters related to global supply chains, I have to keep a constant eye toward business trends, particularly when mainstream business media begins to take note such trends. Over the last few weeks, there have been multiple stories noting critical supply shortages beginning to impact numerous industry supply chains. 

 

Perhaps your organization is dealing with these same challenges related to supply shortages.

 

Earlier in the month, The Wall Street Journal published a story (paid subscription may be required) noting that sales of telecommunications equipment to wireless carriers who are expanding their networks has been constrained by critical parts shortages related to electronic components. Component supply shortages among Alcatel-Lucent SA and Telefon AB L.M. Ericsson have hampered AT&T Inc.’s abilities to expand its wireless network   A recent posting on CNET notes that Apple Inc. is faced with a critical shortage of the single most costly component incorporated in both its recent iPad and iPhone4 products.

 

This week, the Journal featured a more in-depth article noting that many firms are grappling with supply chain ramp-up issues with demand surges for respective products. Many are uncertain as to whether current surges in customer demand are permanent or just a temporary re-stocking phase. Two examples noted include discrete manufacturer Timken Company, that is attempting to meet surges in the demand for its various bearings products without having to invest in additional resources in added capacity or labor, and Corning Inc., that has been caught off-guard when brisk sales of autos fueled demand for its emissions control filters and devices.

 

We have often noted on the Supply Chain Maters blog that in 2009, at the height of the global recession, companies were highly responsive in their efforts to rapidly cut inventories.  Ramping-up is a whole new set of challenges. I’m sure many in our community are already aware and trying to overcome these challenges.

 

Interesting enough, industry analyst firm Gartner has raised some negativity regarding the value of previous investments in advanced supply chain planning or analytics.  In our Supply Chain Matters Annual 2010 Predictions published in late 2009, we noted that business analytics and the ability to perform rapid scenario planning will become the key 2010 competency for aligning and responding to resource needs across global supply chains.  Within that prediction was the following notation: “Sales and operations planning teams will find themselves in constant analysis or interchange among sales, marketing, supply chain and product management teams to assess multiple options for increasing revenue, promoting products or dealing with negative events. Tradeoffs will need to be analyzed and information will change constantly”. 

 

As witnessed by the noted stories, these types of situations are indeed playing out in many settings. If there is any doubt as to value of supply chain advanced planning and analytical technology, it will surely come when the final results of 2010 manifest themselves in these industries.  Now more than ever, advanced planning and analytical capabilities coupled with what-if decision making are indeed core capabilities.

 

Bob Ferrari

 

In a recent Kinaxis Community posting, I made the observation that perhaps the endless success of Apple’s various products portends broader problems.  Apple’s outsourced supply chain has been long admired, but one has to wonder how much Apple’s executives and marketing teams want to put Apple’s value-chain to the ultimate test. 

 

On the heels of the very successfully hyped iPad product launch, where worldwide orders remain in various forms of backlog, Apple is now in the midst of a highly oversubsribed pre-launch of the new iPhone4 due later this month.  The company and its wireless carrier, AT&T, booked more than 600,000 pre-orders on June 15 alone, causing a suspension of sales because of the sheer volume of activity.  The number is the largest Apple has taken in a single day, ten times higher than the previous iPhone3 launch last year, causing a sellout of all designated product allocation. 

 

Adding insult to injury, partner AT&T experienced two embarrassing order entry failures, with some consumers placed in other people’s customer data. The company also had a recent embarrassing security breach exposing email addresses of pre-order iPad customers, including some very high profile individuals.  Both Apple and AT&T have felt compelled to apologize to consumers for this series of events. AT&T reported that its web site had in excess of 13 million visits on June 14 by consumers making inquiries as to whether their existing iPhone was eligible for upgrade to the new model.

 

Let’s attempt to put all of this activity into a supply chain capability perspective.  First, one would suppose that most of you reading this would be thrilled to have your firm’s products experiencing such an overwhelming consumer response as the cult of Apple consumers line-up to be the first to have the latest and greatest device.  Give credit where credit is due, Apple’s design and product marketing teams have the uncanny ability to come up with innovative products that fuel such demand.  However, as I noted previously, the pressure to execute again passes to Apple’s extended supply chain community.

 

With two products now under everyone’s looking glass, the news of each of the subsequent snafus spread fast through social media outlets.  Apple’s supply chain planners have to be under enormous pressure as they continue to scramble to align supply and fulfillment with consumer demands. Prime contract manufacturer Hon Hai Precision (Foxcon) just recently granted new wage concessions to stem the tide of worker suicides, and the pressures for production volume will certainly continue through the coming weeks. As we all know, increased production demands will surely cascade to component suppliers who may have to face difficult capacity and  workforce decisions. As previously noted, wireless partner AT&T is struggling to take orders, let alone add more subscribers to an already taxed carrier network.

 

In the last commentary, I posed the question: Has Apple introduced too much increased risk in too few value-chain partners?  I believe Apple has, and I predict more snafus to come.  The signs are unmistakable, and the pressures are building. Good process and the best technology can only take you so far. The rest comes down to the combined supply chain capability of partners. In the coming weeks Apple will have to demonstrate what being number one really means.

 

How do other community members view Apple’s situation?

 

Bob Ferrari

 

 

European based SCM World held its Chief Supply Chain Strategy Officer Virtual Summit (CSCO Summit) meeting this week, and an interesting research report, The SCM World Chief Supply Chain Officers’ Report 2010 (report registration sign-up required) was released to generate discussion and interest. The report itself was administered by Aberdeen Group, and was developed to draw-out the insights that drive C-level supply chain executives in their management activities in 2010.  Almost 400 global executives participated in this survey-driven report, 50 of which were reported to be C-level within Fortune 1000 organizations.

 

I found some of the results pointing to what I believe are brewing disconnects among top executives regarding needs, strategies and goals related to supply chain, and I was curious as to whether our Community feels the same.

 

Let me explain.

 

When C-level executives were polled as to their view of supply chain management, over 60% responded that supply chain is a market strategy and customer service competitive differentiator. That surely implies that supply chain capability is seen as strategic to business competitiveness.  Further, when asked as to what were the top three pressures driving companies to improve their overall SCM capabilities, 55% indicated escalating customer service demands, 40% indicated managing rising business complexity for managing global based activities, and coming in third was managing rising SCM costs with 29% of responses. At face value, these particular responses should not be too surprising. A view of SCM by organizations reinforces the above except for responses of SCM seen as a cost savings opportunity area, where only 19% of C-level, but 31% of SCM management responded in the affirmative. The implication here may be the response of the CFO vs. other C-level.

 

When it comes to the key actions being undertaken by supply chain professionals to address these stated business pressures, the top three were reported as:

  • Reduced inventory at all levels (58% of C-level respondents vs. 66% of SCM management respondents)
  • Restructuring the supply chain organization to increase efficiencies (54% of C-level, and 52% of SCM management)
  • Shifted focus from strategic to more tactical, short-term improvement projects (40% of C-level and 39% of SCM management)

 

To support these responses, the report notes that best-in-class firms are 50% more likely than others to have an executive position with end-to-end SCM responsibility.  AMR Research recently noted that 61% of firms now have supply chain reporting directly to the CEO, general manager, or president of the business segment.  However the SCM World reports further notes that even though 81% of best-in-class companies report having a centralized supply chain organization, only 34% of these companies have what may be noted as a Chief Supply Officer, mainly because of the need for a strong leader who can lead and orchestrate all SCM activities.

 

Taking a step back, what we have is the brewing disconnect regarding of what end-to-end SCM consists and who can best lead in integrating efforts.  Is it sourcing and procurement, the usual CFO report, supply chain operations or even supply chain centric IT? 

 

The answer obviously is dependent on the individual firm, industry, or other factors, but my sense is that the seeds of disconnect as to strategy and tactics are already embedded.  Inventory levels have been driven to all-time lows, suppliers are being measured more than ever, and costs and headcounts have been dramatically trimmed. 

 

Indeed while many C-level executives see supply chain as a strategic weapon, perhaps there are other motivations for executives in seeking the top supply chain role.

 

Are you sensing this dilemma and disconnect?

 

Bob Ferrari

 

Many increasing signs point to a sobering picture regarding the state of the overall workforce and supply chain professionals. Hiring managers had better pay close attention, since two conflicting viewpoints could lead to even more turmoil.

 

In late May, a Wall Street Journal article noted that as the job market begins to loosen-up, HR managers might be surprised with a flood of employees calling it quits.  In February, according to the U.S. Bureau of Labor Statistics, the number of employees voluntarily quitting surpassed the number being fired or discharged for the first time since October 2008. The article notes that recent sentiment indicates that the number of employees quitting could continue to grow further in the coming months.  In October of 2009, Supply Chain Matters commented on a survey conducted by supply chain specialty recruiting firm, TopGrading Solutions, that indicated large and building discontent in the supply chain workforce. Nine months later, the fires continue to smolder.

 

Recent conversations I’ve had with executive recruiters, as well as various other anonymous employee surveys, all reinforce this building trend of potential turmoil in the workplace.  Perhaps those of you in the community reading this posting might have harbored such thoughts?  But more importantly, I sense a large disconnect in expectations unfolding.

 

The reasons are many. Employees who survived recent headcount cutbacks find themselves with heavy workloads, and as supply chains are continually called upon to perform more with less, find their work and personal stress levels rising even higher.  Because of an enormous supply-demand imbalance, employers feel they have the leverage to pile on more work and responsibility, since replacements can be easily found. Many employers still fear a double-dip recession and are reluctant to increase hiring. The article also notes that convincing people to stay may be even more costly.  An April survey consisting of 5400 people by TheLadders.com, a job board listing positions that pay $100,000 or more, noted that more than 20% of responses indicated that it would take a raise in excess of $25,000 to convince them to stay with their current employers.  More than 50% of respondents indicated a figure of $15,000.

 

In stark contrast is the fact that those people who were previously let go are finding it increasingly difficult to secure a new position, regardless of skills. A recent Wall Street Journal article notes that nearly half of those unemployed have been out of work longer than six months, more than any time since the U.S. Labor Department began keeping track in 1948.  Over seven million Americans have been looking for work for 27 weeks or more, and 4.7 million have been out of work for a year or more.  

 

The new stigma among would-be employers is that hiring of workers who have not been employed for this long a time may be a risk, since many are labeled as “out of touch” or not equipped to deal with current demands of an endless multi-tasking workplace. That alone is cause for great concern. It points to some insularity as to what many will define as “the new normal” by employers of worker expectations. Some employers may argue that doing more with less is the new normal, and that technology will again boost the productivity curve.  On the other hand, existing workers are sending a ‘reality check’ signal. 

 

My contention is that increased breakdowns in supplier and in-house quality and control processes are leading to unprecedented levels of product recalls and increased risk.  Instead of wholesale labeling, perhaps employers should take a harder look at the required skills of tomorrow’s supply chain professionals, and sponsor incentives and training programs to maintain exiting employees and prepare the skilled and knowledgeable unemployed to make for a productive re-entry.

 

These comes a point where being too lean is detriment to supply chain agility and ultimately business profits, The other brute reality is that without an employed, content and productive workforce, there will be limited demand for more products and services.

 

How do you view current and future workplace needs?  What programs or actions would you suggest would go a long way toward bridging this disconnect?

 

Bob Ferrari

 

Apple Inc. announced highly enthusiastic consumer response to its international launch of the iPad tablet computer this past weekend, and that sales of this device had surpassed the 2 million mark in less than 60 days.  Late last week Apple released the iPad in 9 different countries, and again, consumers flocked to various Apple stores to buy all existing inventory.  This international launch was postponed for 30 days because of inventory availability and ramp-up issues.  The iPad is now sold out in many locations and Apple’s online store currently indicates a 7-10 day lag in availability. Yet in spite of these ramp-up challenges, the company continues with a very aggressive advertising campaign to pump-up demand.  There has not yet to date been a successful tablet computer.

 

In May, Apple's market cap exceeded that of Microsoft for the first time since 1989, and the Bloomberg Businessweek Tech 100 lists Apple as #2 behind battery maker BYD of China as tops in technology.  Each quarter, Apple’s supply chain spews out millions of units in products. In the recent April ending quarter, Apple shipped over 23 million units of Macs, iPhones, iPods and iPads. 

 

As we all know, success can come with a price.  Apple has long been noted for its iron-clad secrecy surrounding its entire supply chain. When a highly sensitive new design iPhone recently went missing and ultimately fell into the hands of a noted tech blogger, news spread across Silicon Valley that Apple placed enormous pressure on the local police to raid that bloggers residence to seize the phone.  Analysts tap any and all sources they can find in various tiers of Apple’s value chain to try to predict what the next Apple model will feature.  There is, unfortunately, big money in competitive intelligence. Lawsuits and counter-lawsuits surround Apple and the company goes to extraordinary lengths to protect its intellectual capital and thwart would be competitors.

 

There are, however, broader global supply chain issues for Apple to ponder. Apple’s prime contract manufacturer, Foxconn, has been in crisis dealing with a rash of worker suicides.  At a tech conference yesterday, Apple’s Chairperson, Steve Jobs, indicated that Foxconn is not a “sweatshop” but the company was troubled by this ongoing situation and will lend a helping hand.

 

At this juncture, I’m wondering if this endless success among Apple products portends broader problems.  Apple’s value chain strategy has been that of total outsourcing, to concentrate on a few key strategic suppliers as a means of influence and control, but one wonders if that strategy needs to be altered in light of increased supply chain risk. Apple’s product marketing teams can feel highly confident in their ability to hype consumer demand, but the pressure to execute continues to pass to Apple’s supply chain partners.  High volume can lead to quality snafu’s, and the visibility to any quality problem associated to an Apple product can be spread rather quickly across social media and the Internet.  Apple’s supply chain planning teams are either very, very, good, or perhaps adroit in quickly working through exceptions.

 

Do not get me wrong, I do not pen this commentary to knock an extraordinary record of accomplishment.  Here’s the real question: is it good business strategy or is Apple supply just that good in its supply chain capabilitites?

 

Has Apple introduced too much increased risk in too few value-chain partners?

 

Chime-in community!

 

Bob Ferrari