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2010

I think we’ve all been in meetings where somebody had to stop and draw a picture or diagram to explain something—whether they used a whiteboard, a legal pad or even a napkin to illustrate their point. And in many cases, that illustration prompted an “Aha” moment that words alone failed to create.

That’s why I was interested to see a new report from IDC Manufacturing Insights explaining the merits of using visually presented information. Research in the report, titled Methods and Practices: Visual Information for Effective Collaboration in Product Life-Cycle Management, shows (pun was intended) that organizations can improve and extend their decision-making abilities by using more product-related information presented visually.

Visualization is an effective method to synthesize different data sources and make them accessible to broader communities of decision makers for cross-disciplinary decisions--and even more so when experience, skills, culture or language differences may impede the decision-making process, says Joe Barkai, practice director of the Product Life-Cycle Strategies service at IDC Manufacturing Insights. Product-related information, presented in a rich visual context and shared across widely accessible and easily usable collaborative interfaces, can contribute to making more effective product-related decisions that can positively impact the complete product life-cycle--from concept to decommission, he says.

Central to the study is the realization that designers and manufacturers of complex products find it increasingly difficult to make effective product-related decisions. Growing technical complexity across engineering disciplines, elongated and dynamic supply chains, an increasing shortage of experienced workers, fast-paced schedules and budgetary restrictions all contribute to create an environment that challenges traditional decision-making methodologies, means and tools, Barkai says. However, manufacturers find that presenting complex, multidisciplinary information using visual methods helps level the playing field for decision makers of varying skills and across corporate disciplines, which, as would be expected, results in better and quicker decisions.

What’s interesting here is that use of visual information can add significant value to the decision-making process because it enables connecting knowledge workers and various corporate disciplines. In the past, these groups lacked a common platform for interaction. But by creating an environment that makes use of visual information, the organization will promote both better comprehension and effective participation from various stakeholders. The result will be an expanded decision-making population that includes groups once left out of product decisions so they can offer additional input.

The report goes on to caution that visual decision making is not an isolated activity. Instead, it should be augmented by the use of collaborative activities and use of decision-support tools such as social networking and business analytic tools, and that it should leverage organizational knowledge and best practices as well.

Whether it’s an internal design team working with accounting or purchasing, design engineers working with manufacturing engineers, or company representatives working with a contract manufacturer to determine if they can build the product as-designed, it’s easy to see how the use of visual information can streamline and even improve the decision-making process. Have you already adopted—or are you adopting—this practice?

I found an article that ran in IndustryWeek last week, IndustryWeekoffshoring, interesting because rather than looking at the impact of the recession on manufacturing, it examined the impact on logistics. Transportation costs for 2009 were down 20 percent, which, at first glance, seems like good news.

The problem, however, is that those costs were down because since manufacturers made fewer products, transportation companies had less freight to move. And since there was less freight to move, they consequently slashed their prices to secure what business they could.

In fact, U.S. business logistics companies as a whole saw revenues decline by $244 billion in 2009 alone, and by nearly $300 billion during the recession, says Rosalyn Wilson, senior business analyst with consulting firm Delcan. The logistics industry felt the negative effects of the recession more than most other industries because the downturn in each individual sector translated into a loss in shipment volume.

In The 2010 State of Logistics Report, which was written by Wilson for the Council of Supply Chain Management Professionals, and was released last month, CSCMPlogisticsreport, she explains that both major components of logistics costs--inventory carrying costs and transportation costs--were negatively impacted by the economy. Low interest rates helped push inventory carrying costs down 14 percent, and as companies worked through bloated safety stock, inventory on hand dropped nearly five percent.

The combination of lower volumes and increased price pressure effected the cost of all modes of transportation. For example, trucking, which comprises 78 percent of the transportation component, declined just over 20 percent. And while the cost for rail transportation was down 20.6 percent in 2009, water sector costs fell 21.6 percent.

There is good news, however. The recession in the supply chain appears to be over, Wilson says, noting that inventories have hit rock bottom, orders are being placed and commodities are moving again. Even so, manufacturers were slow to respond to the recession, taking much longer to respond to increasing inventories than they did during the 2001 recession, which proved to be of much shorter duration.

One of the problems has been that orders in the pipeline placed months earlier were fulfilled and delivered well into the recession despite market conditions at the time of delivery, Wilson says. Retailers responded the quickest, adjusting for falling consumer demand in early 2008. The flip side of the coin is that wholesalers and manufacturers did not begin to respond until mid-2008.

Looking forward, Wilson projects that transportation rates will rise as the need for carriers’ services picks up and they shift back to a “seller’s market” pricing metric. It would be in manufacturers’ best interest to be first at the table negotiating rates and capacity—such as working to guarantee a minimum level of business in return for guaranteed carriage or limited rate hikes for the next two to three years, she says. It also wouldn’t be a bad idea to offer more generous terms to weak links in your supply chain to ensure your suppliers survive as well.

What about you? Are you planning for future transportation costs?

While the U.S. economy remains worrisome and unemployment levels are expected to remain high, there are signs that things may be looking up.

An Associated Press story carried by The Washington Post last week, Washingtonpost, reported that after cutting budgets during the recession, companies are now increasing their spending on information technology. The story is driven in part by Intel’s quarterly report.

Intel, which produces technology used in nearly 80 percent of the world’s personal computers, posted its best-ever results--including its highest revenue and profit margins. What’s more, this comes at a time that is historically the low point of the year for technology spending.

It’s hard to say just what this means. It’s probably safe to assume that rather than expecting an increase in demand, manufacturers are instead simply upgrading information technology to boost productivity. That would make sense, especially for those companies struggling to improve employee productivity after having gone through a staff reduction.

But even so, Intel’s results offer encouragement for high tech companies, and business in general.

As for high tech companies, Intel isn’t the only one with good news. Semiconductor manufacturer Advanced Micro Devices recently reported its second quarter revenues are up 40 percent. 

Two other companies already say they are benefiting from that growth. Supplier of manufacturing systems and related services used by the semiconductor industry Applied Materials has reported orders for its second quarter were up 29 percent quarter over quarter. Additionally, ASML Holding NV, a leading provider of lithography systems used in the semiconductor industry, now expects 2010 sales to grow 10 to 15 percent above its historical peak sales. That level of growth is expected to continue into 2011 as well.

Positive earnings have been posted by electronics manufacturers as well. Indeed, industry leaders such as Apple, Cisco Systems, and Hewlett-Packard all finished the second quarter of this year well—and are encouraged by the results.

The larger picture is the role business spending on equipment and software plays in keeping the economic recovery alive. Market research firm Gartner forecasts worldwide IT spending to total $3.350 trillion in 2010, an increase of 3.9 percent from 2009 spending of $3.225 trillion, GartnerITspending. Gartner has lowered its outlook from the first quarter of this year when it forecast worldwide IT spending would grow 5.3 percent--primarily due to the devaluation of the euro versus the U.S. dollar since the beginning of the year.

This latest IT spending forecast reflects the fact that the global economic outlook is stable but vulnerable to shocks in key regions and industries, which means that IT spending decisions are still scrutinized for value, says Richard Gordon, research vice president at Gartner. The company’s research indicates that CEOs are targeting 2010 as a “return to growth” year, and to enable growth strategies, CFOs expect to increase IT spending. On the other hand, CIOs are seeing only marginal increases in budgets, and, consequently, they are constrained to essential enterprise IT spending--discretionary spending is still on hold, Gordon says.

What about you: Has your company increased its IT spending? Is 2010 a return-to-growth year for your company?

I think everyone has heard enough stories about companies cutting staff or closing business units as a way to survive in today’s challenging economy. Some of you may be in that situation right now.

On the other hand, several news stories over the past week or so have caught my eye for a different reason. They have been about companies seizing an opportunity to build new facilities, add on to existing facilities, and create jobs. What’s more, those companies are in a range of industries.

For example, the Missile Systems business unit of Raytheon announced plans (RaytheonNews) to build an all-up-round Standard Missile production facility in Huntsville, Ala.—and staff the facility with approximately 300 new employees. Groundbreaking for the 70,000-sq. ft. production facility, which will be built on the U.S. Army’s Redstone Arsenal site, is expected later this year.

Raytheon will use the facility for final assembly and testing of Standard Missile-3 and Standard Missile-6. SM-3 production is expected to increase substantially in the next 10 years, and SM-6 production is expected to begin in 2010. 

In other news, Emergent BioSolutions--a biopharmaceutical company focused on the development, manufacture and commercialization of vaccines and antibody therapies--recently held a ribbon cutting ceremony to mark the formal opening of its Emergent Manufacturing Operations Baltimore, EmergentBioSolutions.

The new facility, which consists of 56,000 square feet of manufacturing and office space, includes multiple manufacturing suites designed to support clinical and commercial manufacture of the company’s rPA, anthrax monoclonal, and tuberculosis product candidates, among others.

Vestas Wind Systems, a leading producer of high-tech wind power systems, just announced (Vestasnews) that it will hire more than 1,000 people at three Colorado plants that manufacture wind turbine components after receiving a surge of orders for the electricity generators in the U.S. and Canada.

A company spokesperson said that 850 of the jobs will be at two Colorado plants that make blades: one is already operating in Windsor and another is nearing completion in Brighton. An additional 167 new jobs will be created at a Pueblo, Colo. plant that makes towers for the turbines.

Vestas plans to hire the new workers over the next 18 months, bringing the company’s Colorado work force to about 2,200, said Denna Randall, director of finance and information technology for Vestas Blades America.

Finally, Volkswagen plans to use more locally acquired parts in its North American auto production, APnewsVolkswagen. CEO Martin Winterkorn recently said that it’s not enough to simply produce cars in North America, but that the company needs to get parts and components there as well.

Volkswagen is planning to make a Jetta developed for the U.S. that will sell for about $16,000, Winterkorn says. The company will hire 2,000 employees at its $1 billion plant in Chattanooga, Tenn., to begin building the new Jetta sedan starting in 2011.

Each of these stories offers good news for the companies’ local employees—as well as potential employees. What’s more interesting is the planning each company has taken to position themselves not only for the current business orders, but also for growth. It should be interesting to see how each of these stories play out.

Two recent product recalls have me thinking about supply chain visibility, supplier performance, and the business impact of product recalls. In both cases, the problem seems to be supplier-related.

Last month, Kellogg Co. announced it began a voluntary recall of 28 million boxes of its Apple Jacks, Corn Pops, Froot Loops and Honey Smacks nationally distributed cereals. They were recalled after about 20 people complained--including five of whom reported nausea and vomiting—about an uncharacteristic off-flavor and smell. And while the potential for serious health problems is low, consumers are urged to not eat the recalled products because there is potential for temporary digestive problems.

The company reports that the off-taste and smell is caused by a slightly elevated level of hydrocarbons. These chemicals are used in the liners of the cereal boxes.  

David Mackay, president and chief executive officer, Kellogg, has noted, Kellogs press release, that the company is working to remove the effected products from the marketplace. It also is working with its supplier to ensure the situation does not happen again.

The other recall really is a continuation of existing problems. Johnson & Johnson announced last week that it is expanding a recall of over-the-counter drugs--including Tylenol and Motrin IB—due to a musty or moldy smell.

The company’s McNeil Consumer Healthcare business is recalling 21 lots of over-the-counter drugs sold in the U.S., Puerto Rico, Fiji, Guatemala, the Dominican Republic, Trinidad and Tobago, and Jamaica. Those drugs include Benadryl, Children's Tylenol, Motrin IB, Tylenol Extra Strength, Tylenol Day & Night, and Tylenol PM.

This action is a follow-up to a large recall of those drugs that McNeil Consumer Healthcare originally announced on January 15, 2010, that was initiated following consumer complaints of a musty or moldy odor. About 70 people reported the smell, and some of them reported various digestive ailments as well.

The odor has been linked to the breakdown of a chemical applied to the wooden pallets used to transport and store the products’ packaging materials, and has been traced to a facility in Puerto Rico. The newly recalled lots apparently used packaging materials that had been shipped and stored on the same type of wooden pallet.

There’s a lot at risk here. Industry insiders have noted that the recall is turning into a public relations and potential brand identity problem. Indeed, an Associated Press story on various newswires McNeilnews states that sales of Johnson & Johnson pain relievers have tumbled as the string of recalls continues and seems to have made consumers wary. The recall has led to tens of millions of dollars in lost revenue--so far--along with a tarnished reputation for the company’s brands.

Recalls are part of business, and must be dealt with promptly. But what both of these recalls point out, is how closely suppliers and manufacturers are related. Does it matter to the end consumer that the problem is really with a supplier or shipper? No. All the consumer knows is that their cereal or medicine smells bad and has been recalled. Are they loyal enough to purchase that cereal or medicine again? That probably depends on the situation, but it certainly is something to think about.

I have a friend who works for a large consumer products manufacturer, and it’s fascinating (to me) to hear him talk about penalties from retailers. He rarely wants to talk about it though, because to him, it’s a pain in the neck.

These penalties, or chargebacks—which, of course, sounds better—occur when a retailer discovers that a vendor’s performance failed to meet agreed-upon criteria, e.g., labeling, advanced ship notices, on-time delivery and more. So, for example, when a supplier fails to deliver a shipment within a specified timeframe, the retailer applies a chargeback. What’s more, those fees may vary in amount depending on both what happened—or failed to happen—along with who the retailer is.

Those amounts can be significant too. For example, last February, Walmart announced that suppliers who fall below a 90 percent monthly threshold of delivering within a four-day window leading up to its must-arrive-by-date will incur an invoice deduction equal to three percent of cost of goods sold.

Walmart, obviously, isn’t the only company assigning chargebacks to suppliers. Its competitors like Target, and other companies such as Kohl’s, also assess penalties for early or late deliveries. Many manufacturers also have implemented a supplier chargeback program, where their suppliers are charged for the additional cost incurred by the manufacturer due to receiving non-conforming materials, out-of spec components, incomplete shipments and late deliveries. Proponents argue that the practice improves overall supply chain performance.

If products arrive at distribution centers earlier than expected, it increases storage costs for the manufacturer. On the other hand, if products arrive late, it often means product won’t be available for end-consumers. For some manufacturers, not receiving the right parts from suppliers on time and in the right quantity may mean a production line is slowed or even forced to stop. 

All of this naturally requires placing an emphasis on forecasting capabilities. Even so, there are times when leadership knows—based on prevailing manufacturing or supply chain conditions—that there may be a chargeback. For example, if business has unexpectedly become slow and all conditions indicate that it will remain so, a company may go through a staff reduction. If there is a sudden uptick in business, such as an unexpected large order from a key customer, the supplier knows it won’t be able to make the expected delivery requirements. Or perhaps the manufacturer’s primary supplier has a problem receiving shipments from one of its downstream suppliers.

The intriguing aspect is the role that analytics and supply chain visibility now play. If delivery can’t be met as expected, maybe the customer would be willing to change its delivery expectations. But if not, then what? Is it best to take the order knowing that delivery won’t be made on time and that there will be a fine? Should part—or even all—of the order be delivered via express shipping to avoid the late delivery? Is that extra cost worth not receiving a chargeback? Being able to ask those types of questions and see what impact various actions would have on the company are valuable capabilities—especially for companies that face long lead times, slim margins and fierce competition.

What about you? Is your company effected by chargebacks or penalties? Do you believe the supply chain has become more efficient in the long run as a result, or—as some people argue—are chargebacks just another means for additional revenue for retailers and large manufacturers? I’d like to hear your stories.

Even a cursory look at any newspaper offers a reminder that disasters--whether natural or man-made--have the potential to significantly disrupt supply chain performance.

For instance, the recent oil spill in the Gulf of Mexico and the widespread flooding in Tennessee aren’t the only events that have caused sudden and profound disruptions to supply chains. There also were the volcanic eruptions in Iceland that disrupted air traffic in Europe, and, consequently, the ability of businesses in Europe and the Baltic regions to both ship and receive goods.

It may still be too soon to say just how significant the impact of those events has been. However, Douglas Hales, associate professor of operations and supply chain management at the University of Rhode Island (URI), points out in a press release (click here URI) that—for example--seventy percent of the coffee shipped to the United States goes through the Port of New Orleans. He therefore expects coffee prices, among other items, to escalate if a solution isn’t found soon.

When Tennessee suffered from the heavy flooding, the impact wasn’t only felt by local home owners and local businesses. Indeed, Interstate 24 was also closed. The problem is that I-24 is a major route used to transport products from the south to northern states.

“I would estimate that $3 million to $5 million per day in freight operations were lost due to closures on I-24,” Hales said.

And while most of the summer goods transported by air made it into the United States and Europe before the huge ash cloud from the Icelandic volcano interrupted passenger and freight flights, there were major disruptions nonetheless.

Hales says airlines have estimated that the ash cloud caused $2 billion in passenger traffic interruption, but even more significantly, the interruption in airfreight traffic was probably two to three times that amount. There is a robust high-tech industry in Ireland and Northern Europe that had to cope with at least an additional two to three days of shipping time. And while that might not necessarily sound substantial to some industries, Hales points out that in the high-tech industry where new products are typically rolled out every three to six months, organizations surely were impacted.

The question then is this, How do you deal with those events when they do occur? Has your supply chain been affected by the oil spill in the Gulf? Did the flooding in Tennessee have an impact on your ability to deliver to your customers on time, or, conversely, receive shipments from your suppliers when you needed them?

Perhaps your organization wasn’t, or hasn’t been, effected by any of those events. But the point is that there are interruptions from time to time that are beyond your control. Do you use—or plan to use--what-if analytics to evaluate possible responses to a disaster in terms of how well the various responses not only meet corporate goals but also enable responding rapidly to the sudden challenges?

I read Trevor Miles’ blog post this morning, and found it quite insightful. The post can be read here What-if you had What-if for S&OP? Trevor recently took part in a webinar that featured Lora Cecere from the Altimeter Group speaking about “What S&OP capabilities matter most?” (click here to access the presentation  https://community.kinaxis.com/videos/1638,) and in his post, he wrote about parts of Lora’s presentation that really stand out for him.

For one thing, Lora pointed out that in 2009, the dominant challenge was that demand came to a rapid halt. Conversely, the main challenge for 2010 is to strive for supply to satisfy demand, considering the slight economic upturn. Indeed, as part of the webinar, a number of polls were conducted and their results not only confirm the growing importance of what-if capabilities, but also confirm that demand volatility is a key driver. More than 70 percent of the attendees—from various-sized companies in a range of industries--indicated that there has been a big increase in the importance of what-if capabilities in S&OP at their companies.

As Trevor points out in his blog, it’s important to realize that demand volatility is the primary driver for what-if capabilities, but there’s more to the situation than that. The basis for forecasting comes from creating a statistical forecast based upon past shipments—which works fine in a reasonably stable market when demand is basically predictable and it isn’t too cost prohibitive to maintain finished goods inventories to buffer against demand fluctuations.

What has caught everyone by surprise over the past two to three years, Trevor notes, is the rate of change. Demand volatility is no longer represented by historic demand patterns. Forecasting by looking solely at historic demand is the classic “driving by looking in the rear-view mirror” simile. Sure, it tells you where you’ve been, but it’s difficult to tell where you’re going if you only look at where you’ve been. That’s why the need for S&OP is growing: It’s all about looking far into the future when market drivers are very uncertain, demand is unknown and little is known about competitor activities.

Trevor went on to write that he can think of no better way of evaluating the effect demand uncertainty has on the supply chain than to use a robust what-if capability that begins with range forecasting. Instead of a single number forecast, arrive at a best estimate but also test upside and downside scenarios to evaluate and mitigate against risks. Consider, for example, whether it’s better to be left with excess and obsolete components or to lose market share because demand isn’t met. Another of his examples is to ask what impact it would have on the company if you sourced from a more expensive supplier who also offers shorter lead times and more flexibility on volumes? Is it worth the trade-off? Do you gain more than you stand to lose?

Those are intriguing questions, and ones that, I suspect, could lead to significant benefit. Answering those questions may not be easy, and it may also require changing some long-standing practices. On the other hand, considering market demand, supply and the current economy, it may be time to rethink some business practices.

What about you? How are you using what-if capabilities?

I was looking over the results of a new survey this morning, and while some of it was exactly what I expected, other parts were quite surprising.

The Cranfield School of Management and Solving Efeso, Cranfield University, Cranfield, U.K., conducted a survey of more than 180 senior global supply chain professionals to analyze the strategic development and implementation processes at some of the world’s leading organizations. The resulting report, titled “Supply Chain Strategy in the Boardroom,” can be read here: http://www.som.cranfield.ac.uk:80/som/boardroomsurvey

First, the encouraging news. The research found that supply chain management is now widely recognized as a vital part of the business, as roughly two-thirds of the respondents stated that their companies include senior supply chain representation in the boardroom. Additionally, alignment with corporate strategy and customer service were cited as the leading functional drivers of supply chain strategy. Furthermore, respondents indicated that the most important supply chain performance drivers were cost focus, customer lead-time and customer quality.

On the other hand, according to the survey results, the three main causes of software implementation failure were: company culture, lack of leadership and poor supply chain visibility. But that’s not really surprising either. In my conversations with manufacturers, company culture and lack of executive support are inevitably cited as implementation impediments.

I’ve seen it firsthand too. I remember when a company I worked for implemented a new software solution. Employees grumbled about having to implement different processes and also use the new difficult-to-use software system—but they did it. The problem, however, was that production fell while workers spent time using and becoming familiar with the solution.

That production dip—while certainly part of the learning curve--was unacceptable to management, who pressed hard for a return to previous production levels. To appease management, workers refocused on production, which meant they slowly but surely stopped entering data into the system. The implementation was eventually deemed a failure because the system’s data wasn’t up-to-date or even accurate.

I’ll bet many of you have had a similar experience.

With that kind of experience in mind, I expected some survey respondents to say an implementation hadn’t gone well. But I certainly didn’t expect to read that only two percent of the respondents indicated that their supply chain implementation ran smoothly, on-time and on-budget. In fact, Cranfield Visiting Professor Alan Waller, who also is vice president of supply chain innovation at Solving Efeso, said barriers to strategic success were predominantly people-related, rather than due to technical barriers.

The report goes on to conclude that successful implementations have top level support and use vision-led, quantitative modeling and risk management techniques. Success was also found to be higher when finance, marketing and IT departments were actively involved and accountable in the strategy development process.

But I keep coming back to the people issue. It makes me wonder, How many of you have been part of successful implementations that ran smoothly, on-time and on-budget? If the implementation was indeed deemed a success, how vital would you say company-wide support was to the project?