Skip navigation
2015

When we say supply chain planning is always the key to having a successful supply chain, we don’t mean the planning around what to buy and when to buy it on a SKU by SKU basis. Instead, we mean the planning that goes into the underlying systems and methods that will inform the day-to-day decision-making processes.

 

Consistently Failing to Reach Your Objectives? Check Your Planning.What you want v What youre getting.png

 

If your company or supply chain is consistently failing to meet its strategic objectives, you can be pretty sure that the problem lies in the underlying theory and plans that presently guide execution efforts. Chances are, close inspection of the underlying theory and planning will reveal that two key elements are not being effectively accounted for in either the guiding theories or the planning for implementation. (In fact, in many organizations with into which we are first invited, if we ask about “the theory” that underlies their supply chain strategies and tactics, we are met mostly with blank stares—so, don’t feel alone if this is your case, too.)

 

So, what are these two key elements for which every good theory and plan fully account in order to achieve consistent success?

  1. Complexity, and
  2. Uncertainty

Complexity

 

Complexity should be dealt with by first coming to grips with the reality of the complexity that exists in your organization and supply chain. We use the term “the reality of the complexity,” to distinguish this complexity from theoretical or merely product-based complexities. The important complexities that need to be fully comprehended are those that have to do with the realities found in the causes and effects of the chain of dependent activities and actions that must transpire as goods and services flow from their sources to the consumer.

Your company or supply chain may be faced with hundreds of thousands of such interactive dependencies every single day. It is impossible to detail them all.

 

However, by asking the simple question, “What is keeping us from making more money tomorrow than we are making today?” many of the critical points of failure in the chain of dependencies will likely surface out of the wealth of “tribal knowledge” held by the workers, managers and executives involved in the supply chain.

 

Using the feedback from such a simple question, we would suggest that you create (or get assistance in creating) a Current Reality Tree (CRT) that describes in logical and simple terms the key underlying complexities that are most significantly affecting your ability to reach your objectives.

 

Uncertainty

 

One of the great benefits of uncertainty—especially when coupled with complexity—is that, coming to comprehend how much uncertainty is in our present system (read: company or supply chain), and where the uncertainly lies, also helps us starkly outline what we do not know (and, what, in most cases, cannot be known).

 

By definition, uncertainty cannot be controlled.

 

However, we can manage for uncertainty. We can take proactive steps to keep the effects of uncertainty in one part of our chain of dependent events or activities from propagating up or down our supply chain. When supported by a proper operating theory, we can plan for and create time, capacity and / or inventory buffers that are specifically designed to stop the propagation of waves of variability (the expression of uncertainty in real-life activities) up or down our supply chain.

 

We can, in many cases, even make simple changes that dramatically reduce or even eliminate sources of variability in our supply chains and organizations that may be presently self-induced.

 

Getting Above the Noise Level in the System

 

Sometimes we find that companies and supply chain managers have no idea if they are achieving the goals and objectives their plans at all.

 

Why?

 

Because they have been troubled for so long in attempts to reach challenging goals, their goals and objectives have been whittled back time and time again.

 

Perhaps, in their ambitious days—just out of college, or taking on a new challenge in a new company—they set a goal to reduce stock-outs by 15 percent over twelve months. However, due to lack of an effective theory and practice for achieving such an ambitious goal, they failed. In fact, they repeatedly failed.

 

So, now they set more “achievable” goals—say, reducing stock-outs by five percent over 12 months.

 

The problem is, when analyzed, “the noise” in the system is creating fluctuations in stock-outs year-over-year of 6.4 percent. In such a case, the noise in the system is drowning out any possibility of knowing if the actions the firm is taking is having any effect whatsoever in reaching the target stock-out levels.

 

Absence of a Theoretical Basis

 

In the absence of a clear theory upon which to base plans and actions, everything naturally tumbles down to a single common denominator: trial and error. Sometimes actions seem to have a positive effect; but, other times the very same actions seem to have no effect at all, or even a negative outcome.

 

Ask yourself this question: “Do we have an underlying theoretical basis for how we have designed our supply chain operations—whether internal or across our broader supply chain?”

 

If you can answer, “Yes,” to that question, then ask this: “Can we articulate in two or three sentences the guiding theory for our supply chain operations?”

 

If the answer to that question is, “No,” then chances are you are in denial about your answer to the first question.

 

As someone wisely observed: “If you cannot describe what you are doing in a few succinct sentences, then it’s not a process.”

 

Allow me to give you an example of an answer to the above questions regarding “an underlying theoretical basis” for supply chain design:

 

“We have an established method for determining stock quantities for each stock position we take. This method takes into consideration both lead-time and variability for each stock position. Our stock positions are strategically selected to absorb variability and / or decouple lead-times, and we can calculate the estimated ROI of each stock position we hold based on the underlying principles.”

 

 

How are you doing in achieving your objectives? Are the objectives you set above your system’s noise level, so that you can actually know if you achieving success? How does your supply chain management theory account for the factors of complexity (as described above) and uncertainty?

 

We would be delighted to hear from you. Please leave your comments below.

 

Follow us on Twitter: @RKLeSolutions and @RDCushing
LIKE us on Facebook: RKL eSolutions and GeeWhiz2ROI

Inc. Navigator CEO Brent Sapp points out, “Leadership consistency is a second-stage challenge that impacts nearly all companies as they move through the no-man’s-land from startup to the middle market.” (“BUILD: A Game Plan for Alignment.” Inc. Magazine, November 2013)FIG T-I-OE v NP-ROI-CF.jpg

 

These findings are entirely consistent with a study done more than a decade ago and published in the Harvard Business Review, where it was found that a great many companies struggled, and even foundered, in the uncharted waters between the strong (typically) singular leadership and vision of one person, during the early days of a startup, and the team leadership demanded as a business begins to move into enterprise status in the middle market.

 

Entrepreneurial “Analytics”

 

Even without being (necessarily) able to articulate the matter in these precise terms, entrepreneurs spot an opportunity in the marketplace and make some very quick calculations—often calculating in very round numbers and doing so in their heads. Again, without necessarily using these terms, their calculations are generally along these lines:

 

P = (R – TVC) – OE

Where, P = Profit
R = Revenue
TVC = Truly Variable Costs
OE = Operating Expenses

 

In the early stages, in many cases, this calculation is made all the easier because their operating expenses (OE) are zero or near zero. So, the calculation for any given period of time into the future becomes P = R – TVC, period.

 

If some not insignificant investment is involved, this calculation—still simple enough to be done in the coffee shop on a napkin—becomes:

 

ROI = ((R – TVC) – OE) / I

Where, I = Investment

 

(See more on Throughput accounting here.)

 

Alignment for Rapid Improvement and Growth

 

When faced with new opportunities for growth or improvement (better profits on existing business), these same entrepreneurs can rapidly adjust this formula for calculating the benefit of a potential change in operations. This formula becomes, then, over any given period of time into the future:

 

ROI = ((delta-R - delta-TVC) - delta-OE) / delta-I

Read as: ROI (on the proposed change) = (estimated change in R – estimated change in TVC – estimated change in OE) / (estimated change in I)

 

Here again, for those operating in entrepreneurial mode, these calculations can frequently be done very rapidly—scratched out on a napkin, or even done in their heads. Somewhat more complex scenarios may call for invoking the aid of Microsoft Excel or some other tool. But, most entrepreneurs operate unencumbered by some desperate and vain attempt to make the forecast numbers accurate to the dollar or the penny. Instead, they may be satisfied with numbers that are “approximately right,” being rounded to $1,000s or $10,000s.

 

Amazingly, these off-the-cuff, approximations guide the company successfully through its embryonic stages and beyond. Oftentimes, decisions made on these guess-timates lead to huge leaps in growth and the leveraging of outstanding opportunities for improved profits.

 

Relevance Lost

 

As a company grows from its entrepreneurial roots into the midmarket, it becomes necessary to have a more comprehensive accounting system and people to manage it. As more and more data become available, the management team tends to move away from the simple factors that guided their decisions in the past. Now, suddenly, they feel compelled to start categorizing what used to be OE into “fixed” and “variable”—even though it most of it (perhaps, all of it) is not truly variable with changes in revenues at all.

 

As Johnson and Kaplan articulated so well: “[A]n ineffective management accounting system can undermine superior product development, process improvement, and marketing efforts. Where an ineffective management accounting system prevails, the best outcome occurs when managers understand the irrelevance of the system and by-pass it by developing personalized information systems. But managers unwittingly court trouble if they do not recognize an inadequate system and erroneously rely on it for managerial control information and product decisions.” (Johnson, H. Thomas, and Robert S. Kaplan. Relevance Lost - The Rise and Fall of Management Accounting. Boston, MA: Harvard Business School Press, 1991.)

 

The emphasis here is on “the best outcome occurs when managers understand the irrelevance of the system and by-pass it by developing personalized information systems.”

 

Continue with What Works

 

Instead of trying to improve the accuracy and finiteness of their “estimates” regarding actions they might take for improvement or to leverage new opportunities, they should by-pass the complexity of their ERP system’s calculations (which are great for GAAP-compliant reporting) and continue to use “approximately right” numbers that are close enough to gauge whether a new opportunity for profit or improvement is likely to yield a solid ROI.

 

If, based on well-considered estimates rounded to $1,000s or $10,000s (or higher, in some cases) are predicated on sound strategies and tactics that can be clearly articulated by the team, then if the P (Profit) or ROI (Return on Investment) is positive and significantly positive, it is probably an opportunity worth pursuing.

 

On the other hand, if the value of P or ROI is very low—near zero or only marginally above zero—then it makes sense for the management team to look elsewhere for opportunities for growth and improvement, rather than risking its precious commodities of management time and attention, energy and capital on what will likely produce marginal positive results—if any.

 

Conclusion

 

Entrepreneurs build a successful enterprise based on calculations that are big, bold and based on “approximately right” estimates of R, TVC, OE and I. When they attempt to leap the chasm from entrepreneurial to enterprise, they frequently become encumbered with attempts to make precise calculations that will, in any event, end up being “precisely wrong.” Typically, these mid-market management teams struggle to make these calculations based on the details and numbers available to them from the ERP systems.

 

Unfortunately, “Today's management accounting systems provide a misleading target for managerial attention and fail to provide the relevant set of measures that appropriately reflect the technology, the products, the processes, and the competitive environment in which the organization operates.” (Johnson and Kaplan, ibid)

 

Moving back to the simplicity of easy-to-calculate and reliable round numbers will actually deliver more reliable predictions of the outcome of opportunities for growth or improvement than the “precisely wrong” calculations made using complex systems.

 

Let us know your thoughts on these matters. If you have questions, do not hesitate to contact us. Leave your comments below.

 

Follow us on Twitter: @RKLeSolutions and @RDCushing
LIKE us on Facebook: RKL eSolutions and GeeWhiz2ROI

Number 1: Decide on a goalTop10Things.jpg

One of the things that would help many supply chains and supply chain participants is simply settling on a goal. Too many executives and managers find themselves tossed back and forth between the goal of making more money and cost-cutting. Generally, they don’t see these as being contrary to one another, but a focus on making more money drives efforts to increase throughput and flow; whereas, a focus on cost-cutting will frequently result in larger process and transfer batch sizes, slashing inventories everywhere, and similar actions. This kind of oscillation is very damaging to the morale of middle managers and production workers.

 

Number 2: Let go of your ego and wrong-thinking

If this is your fourth or fifth (or fortieth or fiftieth) cycle through all of the various standard approaches to cost-cutting, expediting, fire-fighting and so forth, then it is probably time to start looking in a new direction. This is especially true if you have tried and re-tried all of the typical approaches and you have seen no significant improvement from where you were two, three or more years ago.

 

Number 3: Start reading (a lot)

If you’re involved in supply chains, here are some books I would recommend you read that will give you immediate insights from a new perspective:

  1. Orklicky’s Material Requirements Planning – Third Edition (only the third edition; and read chapters 1 through 4 and 22 through the end of the book)
  2. Demand Driven Performance Using Smart Metrics
  3. Lean RFS (Repetitive Flexible Supply)
  4. Profit Beyond Measure
  5. Throughput Accounting

Number 4: Stop trying to imitate others

“Best practices” have very little applicability in the long run. At best, they will lead to mediocrity. All of the best paths—the paths leading to the greatest successes—will come from breakthrough thinking and will be untried. They will be, to some extent, unique to your company, your supply chain, your position in the market, your position in the supply chain, and dozens of other unique factors. (Read more here.)

 

Number 5: Start focusing on your goal

See Number 1 above. If you have decided that your goal is to make more money, then do not allow yourself to become diverted into cost-cutting. Instead, focus on ongoing improvement that improves flow and drives up Throughput (defined as revenues less only truly variable costs).

 

Number 6: Start building a healthy organization and supply chain

A truly healthy organization is one where everyone from the shop floor all the way down to the CEO have learned to thinking about their entire organization and, even, their supply chain as a “system.” They no longer think about silos, functions and departments. Instead, they have learned to think about the impact of every action—and every improvement—in terms of its impact on the Throughput or flow across the entire system (i.e., the entire company or supply chain).

 

Number 7: Start asking the right questions

A good starting point for “right questions” is this: What are the top five or ten things that are keeping our company (or, our supply chain) from making more money tomorrow than we are making today. “Right” questions lead to system thinking about improving Throughput and flow. “Wrong” questions are questions about local (e.g., departmental) efficiencies and cost-cutting.

 

Number 8: Stop tolerating waste that impedes flow

Benefits (read: profits, among other benefits) accrue in your enterprise and its supply chains through the flow of relevant information and relevant materials. The flow of irrelevant information (such as faulty forecasts—and they are always faulty) or irrelevant materials (such as materials not actually demanded by end-user consumption) is waste. Lean identifies seven forms of waste that can impede the flow of relevant information or materials:

  1. Transportation waste – moving information or materials that are irrelevant to the processing necessary to satisfy the customer
  2. Inventory waste – storing and maintaining information or materials that are irrelevant to the satisfaction of the customer
  3. Motion waste – the movement of people, equipment or inventories more than is required to satisfy the customer
  4. Waiting waste – time spent by people, equipment or inventory waiting for the next step in the process of satisfying the customer
  5. Overproduction waste – producing materials that are irrelevant to the satisfaction of actual customer demand
  6. Over-processing waste – irrelevant steps in the process of producing goods or services to satisfy actual customer demand
  7. Defect waste – efforts involved in inspecting for and rectifying defects in other processes in the flow

Number 9: Discover the recipe for “cooking up” a durable competitive advantage

Stop trying to win in your market by cutting prices. Price-cutting is the easiest thing for your competition to copy—and there’s no end to it. You need to take time to truly hear “the voice of your customer” in order to find out where you can deliver increased value that will be difficult for your competitors to duplicate. Frequently, a truly durable competitive advantage has nothing to do with price, or even product features. In many cases, it is the mode of delivery, terms of delivery, or services surrounding the product that lead to a durable competitive advantage. (See “mafia offers.”)

 

Number 10: Don’t let inertia set in

Stop trying to improve by implementing the latest fad in management. And, putting out fires will never lead to real improvement. Real improvement, and a growing competitive advantage, can be yours (and your supply chain’s) through dedication to a process of ongoing improvement (POOGI). A relentless pursuit of improvement is what your supply chain needs. Never let inertia set in because, when it does, you will be moving backwards, not forwards.

 

Do any of these things strike home for you? What have you tried? What has worked? What has not worked for you?

Let us know. We would like to hear from you. Thanks.

 

Follow us on Twitter: @RKLeSolutions and @RDCushing
LIKE us on Facebook: RKL eSolutions and GeeWhiz2ROI

Today’s “best practices” lead to dead ends; the best paths are new and untried. Peter Thiel*Innovation.jpg

 

For those of you who may not know, Peter Thiel is co-founded PayPal with Max Levchin and Elon Musk (the so-called PayPal Mafia) and served as its CEO. He also co-founded Palantir, of which he is chairman. He was the first outside investor in Facebook with a 10.2% stake acquired in 2004 for $500,000, and sits on the company's board of directors. I think he is well-qualified to make such an observation, based on the successes of which he has been a part.

 

Several times a year I may receive a request from some executive or high-level manager in one of the companies we server to “come talk to us about ‘best practices,’ because we know we need to improve.”

 

About ‘Best Practices’

 

In today’s world of constant and rapid change, I am not at all certain that the term ‘best practices’ can have any real applicability.

 

Consider cybersecurity ‘best practices,’ as an example: by the time you have brought your company up to what was defined as ‘best practices’ at the time you engaged for the services and software, those ‘best practices’ are probably out-of-date. If you and your company are not constantly evolving and staying up-to-date with the latest threats to cybersecurity, then there is a good chance your enterprise is vulnerable to some degree or other.

 

Let’s consider an example where ‘best practices’ might find some value—say, in back-office accounting. Yes, there are probably some best practices in how a firm handles cash, cash receipts, bank deposits, cash applications, cash disbursements, and so forth.

 

However, even those best practices will need to be adapted to the size of your enterprise and even the number of levels in the management hierarchy. What’s good for General Mills as a ‘best practice,’ is probably not applicable for Mom and Pop’s Donut Shop or a midmarket manufacturing operation.

 

What Will ‘Best Practices’ Get You?

 

If you implement ‘best practices,’ what will your company gain?

 

My guess is—very little.

 

Unless your back-office is a real mess, sales and operations planning is entirely dysfunctional, or your shop floor is totally out of control, then an effort to discover and apply ‘best practices’ is likely going to be a fruitless exercise. There is very high likelihood that the best practices implementation will make one not 0.01 percent change in your operations bottom-line profitability.

 

Still Stuck Thinking about Imitating the Success of Others

 

As Thiel says, all “the best paths are new and untried.”

 

But, sadly, most small to mid-sized enterprises with which we engage are still stuck thinking about imitating the success of others through ‘best practices.’ Executives and managers in these companies seldom have opportunity to think deeply about the future and innovations because they are mired down in the day-to-day routine of quenching the inevitable fires that are constantly disrupting their business.

 

Lacking a Toolset for Guided Discover and Innovation

 

And, even if they do have some time to think about the future, they don’t have a toolset that will help them guide their management teams through the process of discovering and innovating new paths to a new and brighter future.

 

This is where the Thinking Processes (Theory of Constraints) can be so very effective. Not everyone can be a Peter Thiel to cut through the haze and see innovative ways to new profits and growth. However, the Thinking Processes have demonstrated their ability—in competent hands—the help organizations of every size achieve breakthroughs in thinking that lead them toward dramatically improved profits by revealing untapped potential both within the company’s four walls and without—in their marketplace.

 

The Paradox

 

“The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative.” (Thiel, ibid, p. 2)

 

Every innovation is unique. That is precisely why we, as consultants, do not arrive at your doorstep with cookie-cutter solutions and the goal of instituting ‘best practices.’ We arrive with an open mind and a toolbox of methods to help you and your organization unlock the storehouse of tribal knowledge you already have. This is the key to effective discover and innovation in your enterprise.

 

What have you done to truly innovate lately? Let us know by leaving your comments here, or feel free to contact us directly.

 

NOTES:

* Thiel, Peter; Masters, Blake (2014-09-16). Zero to One: Notes on Startups, or How to Build the Future (p. 1). The Crown Publishing Group. Kindle Edition.

 

Follow us on Twitter: @RKLeSolutions and @RDCushing
LIKE us on Facebook: RKL eSolutions and GeeWhiz2ROI

Demand-driven supply chains do not evolve out of traditional supply chains, simply because there must be radical changes in the underlying thinking about how supply chains and enterprises work and achieve return on investment (ROI) before the necessary moves will be made.

Supply Chain Strategy.jpg

Creating a truly demand-driven* supply chain has demonstrated again and again, in a broad array of industries, that it leads to better balanced growth, dramatic improvements in system efficiencies (when measured by the Throughput / Operating Expense ratio), significantly improved customer service and satisfaction levels, while reducing demand for working capital. Additionally, demand-driven supply chains are more agile and faster in responding to the markets they serve.

 

Supply chains that become truly demand-driven are able to sense changes in their market faster, and align their actions more quickly and more accurately to the market changes. This faster, more accurate, alignment enables substantially better customer service with significantly lower investments in inventory. Additionally, there are lower levels of waste in the system, in general; and working capital requirements are trimmed markedly.

So, What’s Keeping Supply Chains from All These Benefits?

 

The thing—or things (depending upon how you look at it)—that is (or, are) keeping most supply chain participants from reaping all the benefits of becoming truly demand-driven is the nearly complete change in thinking and corporate culture that undergirds demand-driven approaches that really work. Most managers and executives look at the dramatic changes that are required with some trepidation—mostly because some of the required thinking goes against deeply held beliefs they have about how businesses and supply chains produce profits. This cost-world thinking holds them captive and causes them to repeatedly attempt the same improvement actions and methods that have failed for them again and again in the past. They simply cannot seem to liberate themselves from these traps.

 

To keep your supply chain from becoming demand driven

  1. Sales Incentives – Keep paying your salespeople and rewarding your channel only for the volume of product sold into the market, rather than the volume of product sold to the end-user. In this way, actual consumer demand will have little impact in actions taken across the supply chain. We call this kind of thinking about incentives “sell-into” thinking, instead of “sell-through” thinking.
  2. Restricted View of the “Supply Chain” – Keep seeing your supply chain as being limited to your immediate suppliers and immediate customers. This will assure that actual consumer demand is muted and delayed (by differing stock policies, sales polices, purchasing policies, and potentially dozens of other factors) except at the very tail-end of the supply chain. Typically, more than 90 percent of companies operate under supply chain models that consider only their immediate customers and immediate suppliers. Avoid any efforts to build stronger and broader supply chain collaborations.
  3. Leadership – Be sure that your executive and management team stick to the trying and retrying the same methods that have been tried, and failed, before. Retry the same old methods being processed faster by new computers and new software—perhaps doing the wrong things faster will make things better.
  4. Focus – Try making your forecasts more and more granular (in the vain hope that more data managed by faster computers will lead to improvement). The more granular your data and the more complex your algorithms, the more management’s focus become diffused and swamped by the mere volume of data it must sift through for decision-making. This approach offers the illusion of “focus,” while actually creating an environment where management attention is entirely diffused and lost in the complexity.
  5. Reward silo-based performance – Reward your supply chain managers based on cost-reductions; reward your purchasing department folks based on lowest-cost purchases; reward logistics based on on-time shipments and lowest delivered cost; reward sales for “sell-into,” and reward marketing for market share. This should keep the arguments between silos well-supplied with ammunition to use against the other departments. It will also keep each silo, and your executive management team, from clearly recognizing that it is FLOW that makes money for the supply chain—because they will be stuck in the cost-world thinking about how to improve their particular year-end bonuses.
  6. Improve transactions, not relationships – Put all your efforts into getting the upper-hand in every transaction with your supply chain partners. After all, you can always find another supplier or another customer after you’ve taken all you can from the one you have today. Make sure every transaction is about the flow of products and cash, not the flow of relevant information and relevant materials for current market demand.

If you will diligently follow the steps above, you can be certain that your supply chain will never become truly and effectively demand-driven.

 

Good luck!

 

 

* NOTE: We emphasize truly demand driven in order to distinguish what we are saying from all of the industry hype about “demand driven” being little more than attempts to improve forecasting through activities and technologies focused on demand sensing, demand shaping and similar activities. When we say “truly demand driven,” we do not mean becoming a make-to-order supply chain. But, we do mean that, while planning may incorporate elements of forecasting, all execution actions are driven by actual demand signals flowing through the supply chain.

 

Follow us on Twitter: @RKLeSolutions and @RDCushing
LIKE us on Facebook: RKL eSolutions and GeeWhiz2ROI

It seems to me that the most effective way to improve supply chain performance is not better software, but better thoughtware*.Thoughtware New.jpg

 

For me, the evidence is plain. Hundreds—perhaps, thousands—of companies have invested in more and better software for forecasting, planning, integrations, ERP systems, and more. Most of those companies have not experienced dramatic improvement in the performance of their supply chains. And, of those that have, even they would confess that the majority of the benefits did not flow from the technologies themselves. Instead, the really dynamic and effective changes stemmed from changes in their thinking about their supply chains should and could operate.

 

Only New Thoughtware Can Help Overcome Many Supply Chain Challenges

 

Only by learning new ways of thinking can companies and supply chains overcome many of the seemingly irreconcilable arguments in which managers and executives find themselves engaged time and time again.

 

Examples of these arguments will not be at all strange to many of you:

 

  • Batch sizing: Should we run larger batches to reduce costs and maximize efficiencies, or should we run smaller batches in order to achieve higher rates of flow?

  • Equipment maintenance: Should we service our production equipment only as needed (to reduce costs), or should we do advanced maintenance to prevent unexpected breakdowns that impede flow rates?

  • Volume buying: Should we buy in large volumes to keep unit costs down, or should we buy only in the quantities required to sustain flow in order to minimize inventories and the drain on cash?

  • Pricing models: Should we hold our prices in order to keep margins up, or should we reduce prices to increase flow volume?

  • Build-to-stock versus build-to-order: Should we build to stock in order to keep lead times as short as possible, or should we build to order to keep inventories and other expenses down?

  • Ship complete versus partial shipments: Should we ship only complete orders, in order to keep shipping expenses down; or should we ship partial orders in order to best meet ship-date promises?

  • Overtime conundrum: Should we allow overtime to meet promise-dates on orders, or should we reduce labor costs by keeping overtime to a minimum?

Each of the supply chain team members involved in these controversial discussions is seeking something good for the companies they serve: namely, improved profits. But, only new thoughtware can help companies and supply chains break away from the management oscillations (read: flip-flopping!) that typically stem from these irreconcilable differences.

 

Coaching, Not Just Consulting

 

We have found that “consulting,” in its traditional role of merely providing advice, is seldom sufficient when it comes to really installing new thoughtware. Instead, we have embarked on a new program of supply chain “coaching” based on demand-driven principles.

 

Here is an overview of our approach to supply chain coaching:

 

  1. Helping the executive and management team understand their current reality and its constraints – Getting the whole management team on the same page begins with understanding and modeling the current environment in a way that makes sense to everyone. We help the team find consensus without compromise, building on the basis of a goal of sound financial results (return on investment)
  2. Guiding the development of targets and standards for strategic inventory positioning in the supply chain – Helping the team understand thoroughly how to determine which inventory positions provide solid return on investment through decoupling of lead times and the absorption of variability affecting capacity-constrained resources.
  3. Assisting with the development and creation of dynamic adjustments that keep your supply chain attuned to the constant changes in the market – Explaining how dynamic adjustments and buffer management are the keys to producing to actual demand and sustaining flow in environments where make-to-order is out of the question
  4. Teaching the team how to develop and use demand driven planning tools – Supplying a new vision of how responsiveness to actual demand keep inventories low while improving customer service levels
  5. Supporting the design and development of key performance metrics (KPIs) that facilitates and accelerates the flow of relevant information and relevant materials across the entire supply chain – Aiding in the development of tools and methods that lead to high levels of visibility and collaborative execution across internal and external supply chain components

So, has your company discovered the need for new thoughtware, yet? Have you struggled with management oscillation and had to make the same decisions over and over again, and then reverse them (or, partially reverse them) when the results were not what you expected?

 

Tell us about your experiences by leaving your comments here, or feel free to contact us directly, if you prefer.

 

NOTES:

* More about the concept of new thoughtware—especially as it relates to supply chains—can be found here: Smith, Debra, and Chad Smith. Demand Driven Performance: Using Smart Metrics. New York, NY: McGraw-Hill Education, 2014.

 

Follow us on Twitter: @RKLeSolutions and @RDCushing
LIKE us on Facebook: RKL eSolutions and GeeWhiz2ROI

Not a few have cited, over the years, the failure to assess customers’ real requirements as a leading cause for failure in the deployment of new technologies in business or across supply chains. Of course, the crux of the matter lies in the definition of “failure” versus “success” when deploying new technologies, doesn’t it?

 

Think about this

 

When “project success” is defined as completing the deployment of technology on time, within budget, and meeting quality expectations, then what are the things that prevent this from happening?

 

Sometimes the issues are technical. But, in my experience, the more frequent cause is the endless head-scratching and wandering around that seems to occur when some contingent of “customers” (read: users) for the new technology complain that they expected one thing and got another. Frequently, this complaint is accentuated with the cry: “We can’t use this!”

Many times, these expectations were about matters like how screens should look, feel or function; how many mouse-clicks should be required to execute this task or find that data; or how to difficult it is to fetch a particular piece of data (especially when contrasted with the technology being replaced).

 

Much of this dissatisfaction stems from an expectation set—often unintentionally—during a process undertaken very early in the project. That process is frequently called “requirements gathering.”

 

Requirements gathering run amuck

 

Somebody contributing at Wikipedia gotten this definition right. Wikipedia defines “business requirements” as describing “in business terms what must be delivered or accomplished to provide value.” (Wikipedia.org 2007)

 

Unfortunately, in many technology projects today, the so-called “requirements gathering” process has almost nothing to do with “business requirements.” The “requirements lists” that are assembled are, quite often, little more than a list of functions that various staff members are used to in their existing application and are virtually never related to providing business value. Other elements in the “requirements list” are simply “nice to haves” and “wish-list” items from the users of the existing technology.

 

Now, it is certainly true that certain functionality may be essential and, therefore, cannot be lost in transitioning from one technology to another.

 

However, inadvertently setting the expectation that the user’s concept of how a function should work—as they expressed it in the “requirements document”—is the way the new technology will (or, should) actually function leads to a high likelihood that some folks are going to be disappointed when they have opportunity to work with the new technology.

 

Get a professional to do it

 

Clearly, allowing rank amateurs, who may know little or nothing about “business value,” to involve themselves in writing “requirements” is a bad idea. One ought to leave such matters to the professionals. Here are some clear (real-life, by the way) examples:

 

Prepared by Amateurs

Prepared by Professionals

We need to be able to import and export data from the new software

Need ability to import and export data in a meaningful way…. Ability to export meaningful data to the reporting database

We need to have a flexible chart of accounts

Flexible chart of accounts, such as multiple levels of accounts

We need to be able to print production reports

Production reporting capabilities must exist

 

Despite the clear “value-add” of engaging a professional in writing such requirements (tongue firmly in cheek), what is lacking from either the professional’s or the amateur’s list of “requirements” is any hint of the “business value” provided by having these requirements fulfilled by the new technology.

 

What “business requirements” ought to look like

 

Genuine, effective business requirements—requirements that will lead to real business value and rapid ROI (return on investment)—should look something like this, we believe:

 

Business Requirement

Business Value to be Delivered

Implement a supply chain integration and visibility solution directed at reducing stock-outs in the top 20 percent of SKUs (ranked by Throughput) to fewer than 5 per month within 120 days without any increase in our total dollar investment in inventory

Increase Throughput by 12.5 percent where 9.5 percent (over the first 9 months) of the increase comes from recapturing what would have been “lost sales” and the remaining 3 percent (over the first 6 months) comes from Sales Management’s commitment to regain customers previously lost due to what customers deemed to be our lack of reliability as a supplier for these  SKUs

Implement a business intelligence (OLAP) solution to provide the Sales and Marketing Teams with visibility to sales data by customer, salesperson, sales manager, region, product line, SKU, and other demographics for the express purpose of establishing viable market segmentation for use in the development of “irrefusable offers” by market segment (down to a single customers, if required)

Increase Throughput by 22 percent (over 12 months) in accordance with estimates and concepts outlined by the Sales and Marketing Teams without increasing Operating Expenses

Eliminate paper-based picking, packing and shipping in the warehouse with the goal of being able to accurately pick, pack and ship 16 average orders (~117 lines) per hour in order to support increasing Throughput without increasing Operating Expenses

Hold the line on Operating Expenses while increasing the capacity of the our warehouse shipping function to an average of 16 orders per hour with greater than 99 percent accuracy

 

Creating these kinds of “business requirements” sets a much higher standard—and, a measurable standard—for VARs and technology vendors to reach. Product demonstrations become proof-of-concept modeling environments and the vendors are prohibited from throwing out “rules of thumb” about your company’s supposed success, should you buy their technologies.

 

Not only so, but creating this kind of “business requirements” list means your cross-functional “technology selection team” is focused on business results that matter, not what modules should be acquired, what screens should look like, or how many mouse-clicks are counted. This is the kind of thinking that brings real and rapid return on investment (ROI).

 

 

What do you think business requirements should look like? Why?

We would be delighted to hear from you on this topic. Please leave your comments below.

 

Follow us on Twitter: @RKLeSolutions and @RDCushing
LIKE us on Facebook: RKL eSolutions and GeeWhiz2ROI