Skip navigation
2015

Dear Reader: If you wish to get the most out of this article, we strongly suggest that you take time to find and read Parts 1, 2 and 3 in sequence. Then this last portion will make far more sense to you.SupplyChainMgt CRT 1C DeadlyEmbrace.jpg

 

In working with our clients and helping them come to grips with the reality of what is working—and, more importantly, what is failing to work—in their enterprises and supply chains, we employ one of the Thinking Process tools known as the Current Reality Tree (CRT).

 

The CRT is a logical effect-cause-effect structure that we help our clients’ management team build from what they know about what is happening in their organization and across their supply chains. A portion of such a CRT is in the accompanying figure.

 

The Deadly Embrace

 

Not infrequently, as we discuss the logic cause-and-effect in a firm’s CRT, the team is somewhat startled to discover that there exist in their operations one or more negative feedback loops. We call such a negative feedback loop a “deadly embrace.”

 

When we read through a couple of these examples, I think you will readily see why.

 

Deadly Embrace Number 1: Entities 3 and 13

 

Let us take a moment to read through the logic presented in the deadly embrace between Entities 3 and 13 in the accompanying figure:

IF [13] we frequently get into a jam and rob inventory from one order to satisfy another [order], THEN [3] we frequently find it difficult to determine effective actions and priorities; AND IF [3] we frequently find it difficult to determine effective actions and priorities, THEN, it is likely that [13] we will frequently get ourselves jammed up and end up having to steal inventory from one order to satisfy another, more pressing, order.

 

I think you can readily see why this is called a “deadly embrace.” Once you start down this path, where effective actions and priorities are uncertain, then any action can be justified and rationalized to put out the most pressing “fire” at this moment.

 

But, I think you can also see that there is no answer to this dilemma. This cycle will repeat itself until something gets fixed that actually prevents us from ending up in this downward spiral.

 

Deadly Embrace Number 2: Entities 2 and 4

 

Another common failure is exposed in this deadly embrace. Here is a read-through from the CRT:

IF [2] we have significant variability in our deliver performance, THEN [6] we must expedite inbound and outbound shipments too frequently. AND IF [6] we are frequently expediting inbound and outbound shipments (with limited resources), THEN [8] chances are we are constantly having to shift priorities and take corrective actions based on spur-of-the-moment expediencies, rather than based on unshakeable principles. AND IF that is true, THEN [4] it is likely that our lead times are frequently—or, at least, regularly—longer than our customers’ tolerance for delivery (at least on given line items on any given day). AND IF [4] our customers are intolerant of our delays in shipping, THEN [6] we must expedite frequently to keep our customers reasonably happy.  BUT ALSO IF [8] our priorities are constantly being shifted about by today’s “emergencies,” THEN [2] we will always have significant variability in our delivery performance.

 

What a mess!

 

Nevertheless, I can say with reasonable certainty that most of you who have to deal with supply chains, and even internal sales and operations planning (S&OP), have experienced this frustration. In fact, you have probably experienced such frustrations, even without being able to logically articulate just why the whole situation was so darned frustrating to everyone involved.

 

Toward Improving the Whole System—and Making More Money

 

This, then, is the power of the Thinking Processes revealed: this kind of diagram (the CRT) helps everyone see the real challenges being faced by “the system,” not by individual departments and functions. Blaming and finger-pointing can fall by the wayside and everyone can begin working on things that will really help the whole system improve.

 

It is those things—those few things—that will help the whole system get better meeting its systemic goals—indeed, that will help the company and supply chain participants make more money!

 

-------------------------------------

 

We would like to know how you go about identifying “deadly embraces” and systemic goals (versus departmental goals) and metrics. Please leave your comments and questions below. We would be delighted to hear from you.

NOTE TO READERS: In order to gain the greatest benefit from this article, please find and read Parts 1 and 2 in this series before proceeding.

SupplyChainMgt CRT 1D Roots.jpg

Management Oscillation

 

In Part 2 of this series, we discussed some of the various “problems” that lead to longer lead times and poor on-time delivery performance in enterprises and supply chains. But, as we are seeing in our Current Reality Tree (CRT), these are not really “problems.” Instead, they are the Un-Desirable Effects (UDEs) of something deeper and more systemic than the “problems” themselves.

 

The fact that they are UDEs rather than the real, core issues, explains why we can never get them to go away. We can sometimes quell the symptoms for a while through our firefighting efforts, but we never seem to be able to sustain the kind flow we would really like in our supply chain.

 

In fact, because a “solution” in one area seems to produced undesired results in another area (another metric), we find ourselves as managers and executives constantly wavering between different—and, sometimes, totally opposite—decisions and actions.

  • Sometimes we run large batches in production in order to help keep “costs” down. But, when push comes to shove, we will direct production to break set-ups and run smaller batches in favor of the FLOW necessary to get products out the door at the end of a month, end of a quarter, or may just when a key customer demands action.
  • Sometimes we encourage our buyers to buy at the lowest possible price—once again, to keep “costs” down. But when the burden of excess inventory begins to negatively affect our cash-flow, or we find the warehouse running out of storage space, we are just as likely to issue an order to stop all excess purchasing. “Buy only what we need for production and sales in the near-term,” we decree.
  • Sometimes we put down our executive “foot” and place hard and firm limits on overtime “costs,” only to reverse ourselves a few weeks later because we absolutely “must” get some delayed orders out the door and into customers’ hands, or we need to get more shipments out the door now so that revenues can be recognized in this month or quarter.

 

What are we seeing?

 

We are seeing the unmistakable manifestation of UDE number 8: “Actions and priorities are constantly changing.”

 

Expediting

 

While, on the one hand, managers and executives expend large amounts of time, energy and money seeking “efficiencies” in their operations and supply chains, they appear to be, all the while, content to also spend considerable time, energy and money on one of the least efficient exercises in their whole operations. That operation is, typically, expediting.

 

As some have wisely observed, expediters spend half their time running around trying to figure out what needs to be done to meet the fickle demand of the present situation, and the other half of the time running around trying to get those things done.

 

Somehow, just reading that description, there seems to be an air of inefficiency just coursing through the whole concept.

 

So, why do we sustain the role of “expediter”?

 

The answer is simple!

 

He or she is our chief fire fighter. We see no alternative other than to let the whole place “burn to the ground.”

 

Variability

 

Interestingly, by the time we get to the “roots” of our Current Reality Tree, there are really no surprises at all.

What is stirring up all the commotion and giving rise to all the other UDEs on our shop floors and in our supply chains?

 

It is our well-known nemesis: variability.

 

So, the question really needs to be asked: Why don’t we deal more effectively with these root causes, if they are so well known?

 

Is Variability Our Unbeatable Foe?

 

While we can all be 100 percent certain that it is—and always will be—impossible to eliminate all variability from our operations and supply chains, the advocates of demand-driven supply chain management methods have amply demonstrated over dozens of implementations that it is possible to create a strategic and tactical system that will allow variability to be effectively tamed through proper recognition and management.

 

The keys to managing variability include:

  1. Strategically positioning and sizing buffers of time, capacity and inventory in order to stop variability from being passed on to capacity constrained resources or resources that are outside your control
  2. Dynamically managing buffers sizes in order to keep them in tune with the dynamic changes in supply and demand
  3. Using forecasts for long-range planning and buffer adjustments, while using actual demand data to drive actions in production and your supply chain
  4. Employing metrics that provide for the flow of relevant information in a way that also supplies what is needed for fast, accurate decision-making and setting of priorities for actions

 

If variability—as the root cause of so many fires being fought day-after-day—is attacked directly in using these principles, so many thing (up in the CRT) will go away. Undesirable effects will be transformed into desirable effects. A great many companies have proven this is so.

 

IMPORTANT NOTE: Becoming “demand-driven” does NOT mean becoming make-to-order.

 

--------------------------------------

 

Let us know your experiences along these lines. We would be delighted to know what you have tried and what has worked, or failed to work, for you. Leave your comments below.

 

                                                           

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

In Part 1 of this series, we left the C-suite executives in a discussion with the sales and marketing about why the firm was losing sales and customers. Naturally, their claim was, “Hey! It’s SupplyChainMgt CRT 1B.jpgnot our fault….”

 

NOTE: You will probably need the background provided in Part 1 of this series, so we urge you to find it and read it.

 

As happens in a great many business enterprises that rely upon inventory and product for delivering to their customers, when the sales department run into challenges like lead times that exceed customers’ expectations (or tolerance) and shipments being late, they often make a visit to the purchasing and production departments to try to figure out what is going on.

 

Not infrequently, since sales and marketing folks are typically closer to the C-suite executives, these conversations between sales and marketing and the purchasing and production teams take on more the tone of commanding and demanding than an inquiry.

 

Priorities and Actions Confused and Confusing

 

Let us begin our discussion by looking at the relationship between entities 14 and 15: IF [14] the management team members often find themselves in disagreement over which items to stock in what quantities, THEN [15] this is likely to lead to problems in meeting the expectations of customers regarding lead times, or delivery performance issues.

 

But why? Why do such disagreements arise in the first place?

 

We will look further down the tree to discover why.

 

Entity 3 says it is because the team is often finding it difficult to determine which actions might be effective and which priorities to set. You have probably heard (or, had) many discussions around some or all of these questions:

  • Do we run large batches to get better efficiencies, or do we break setups and run smaller batches in order to meet customer demand?
  • Do we do preventative maintenance on our equipment to prevent lost time at a critical moment, or do maintenance only when absolutely necessary?
  • Do we buy in big volumes to get the lowest possible cost—while growing inventory, or do we buy only what is needed based on end-user demand?
  • Do we hold prices to maintain our calculated margins, or do we cut prices to get more orders?
  • Do we ship only complete orders to reduce shipping costs, or do we ship partial orders in order to satisfy more customers?
  • Do we allow more overtime in order to meet customer demand, or do we hold overtime to a minimum in order to keep costs down?

 

Sadly, most management teams have tried both sides of all of these options! Oftentimes, they find themselves working both sides of these questions—switching priorities—on a regular basis. For example, the first part of every month or quarter comes a mandate to “hold costs down,” so big batches are maintained, maintenance is postponed, buyers make big purchases at rock-bottom prices, only complete orders are shipped, and overtime is dramatically curtailed or made totally taboo.

 

However, come the end of the month or quarter, everyone’s world is turned upside down. Forget about “cost control,” it is now all about getting those shipments out the door. Setups are broken to produce items on current open orders; small purchases of out-of-stock components are purchased to meet immediate demand for goods that must ship; excess shipping charges are paid on both inbound and outbound orders to keep things moving; and overtime is allowed for anything that needs to ship before the end of the accounting period!

 

Is it any wonder that Entity 8 is a cause? Actions and priorities are constantly changing.

 

In fact, oftentimes constantly changing actions and priorities actually drive higher shipping costs, overtime, and more. And, [8] if actions and priorities articulated by top management are constantly wavering between extremes, is it any wonder [3] that the team responsible for purchasing, inventory management and production have trouble determining what the proper and effective actions and priorities are—or, should be—at any given moment?

 

Of course not!

 

As you have likely experienced, all of the ensuing confusion and fire-fighting leads to more un-desirable effects including: [4] longer (average) lead times (and, certainly, unpredictable lead times), and [13] robbing from Peter to pay Paul, as the saying goes, when things get in a real knot!

 

------------------------------

 

If you have experienced similar things in your operations or supply chain, we would be delighted to hear from you. Leave your comments below or contact us directly, if you prefer.

 

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

This is part 1 of four part series to help executives and managers just like you see clearly that managing an enterprise or a supply chain requires that you clearly comprehend SupplyChainMgt CRT 1A.jpgthe dependencies and synchronization required between stochastic events. (Stochastic is just a fancy way to describe events or systems that are unpredictable due to the influence of one or more random variables.)

 

The accompanying figure is actually the topmost portion of a Thinking Process tool called a Current Reality Tree or CRT. We use the Thinking Processes to help organizations unlock tribal knowledge in order to understand how their enterprise or supply chain is working—or, more importantly, failing to work. The arrows in the CRT represent cause-and-effect connections. For example, we can easily read and understand: [17] IF our operating expenses are too high, THEN [23] our profits are too low. (The entities are numbered to make discussion and referencing simpler.)

 

The C-Suite Starts at the Top of CRT

 

Top-level and financial executives always see the top of the tree (CRT). They see growing expenses (sometimes misread as “costs”) and falling profits. However, they sometimes fall in to the trap of believing wrong things about the real causes—and possible solutions—for falling profits or rising expenses. By helping the whole management team build—and agree upon—a view of their current reality in a CRT, we can help wipe away illusions and chronic bad thinking.

 

In this example, we can see the following: IF [22] our sales and marketing expenses are increased in order to gain new customers and sales, THEN [17] our operating expenses are increased and are likely to be (or, become) too high quite easily.

 

“But, what is causing us to increase our spending in sales and marketing? Why are we having to increase our efforts in this area, and at such expense?” you might well ask.

 

In this case, the answer is found in entities 19 and 21: the company is losing both sales and customers.

 

Unfortunately, the loss of sales is a double whammy on the bottom-line of the enterprise! Not only is the loss of sales driving an increase in expenses for sales and marketing as efforts increase, it also means that Throughput (T) is decreased. (Here we use the Throughput accounting definition of “throughput” as revenues less only truly variable costs (or, TVCs).

 

An increase in operating expenses and a decrease in Throughput drives the bottom-line downward rapidly, and the C-suite is well aware of that—even if they remain unclear as to the real cause of the fall.

 

Conversations with the Sales and Marketing Team

 

Naturally, the executives and managers are gravely concerned about falling profits. And, of course, they wonder why the company is losing sale. Even some long-time faithful customers are slipping away to competitors, as well.

 

Executives, driven by concern, might well call in key players from sales and marketing to have a pow-wow. What do you think they will learn? Have you had similar occurrences in your company?

 

See entity #15:

“Hey! It’s not our fault,” says the sales manager defensively. “We’ve had quite a few customers complaining about lead times lately. Some of our competitors seem to be able to deliver faster than we have lately on some critical items we normally supply. And, when they’re not complaining about lead times, our customers—or, at least, some of them—are complaining about our poor on-time delivery performance. We make promises to our customers based on what we’re told by purchasing or production, and still we don’t get things to our customers when promised. What do you expect us to do? We can’t work miracles and, believe me, we’ve had plenty of shouting matches with managers in purchasing and production, but nothing seems to change much.”

 

HINT: As you can see in the figure, there are six different arrows leading into [15] “We have considerable contention with our customers over prices, lead times and delivery performance.” That means there are six (6!) potential causes for what’s happening in sales and marketing.

 

Check Part 2 in this series to see what we uncover.

--------------------------

 

This series is a based on real-life experiences—just like many of our clients have experienced to a greater or lesser degree over the last several years. There is no fiction here, and chances are, if you are involved in manufacturing and supply chain matters, many portions of these discussions will seem eerily familiar to you.

 

Watch for Part 2 coming soon.

 

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

I have long been convinced that the role of inventory management (and the inventory managers themselves) is undervalued in most organizations. Typically, those responsible for inventory management manage one of the enterprise’s top-valued assets on the balance sheet.InventoryManagementFunctions.jpg

 

Yet, sadly, the management of this high-value asset is left mostly to unplanned, non-strategic evolution and seat-of-the-pants reactionary decision-making in far too many cases.

 

Writing in the “21st Century Supply Chain” blog at the Kinaxis Supply Chain Expert Community, Andrew Dunbar put his finger on precisely why inventory management is so elemental to the health of the overall enterprise. He writes, “Inventory management is not a stand-alone business process that occurs after other processes are complete. It is a high-level process that should be integrated into other supply chain planning processes including, at a minimum, sales and operations planning (S&OP), master production scheduling and supply action management. Inventory managers should support multiple business objectives and should have business integrated targets related to inventory levels, total inventory cost, and inventory quality.” [*]

 

Inventory management in the supply chain should be strategic as well as tactical. After all, inventory management governs most of where variability in supply and demand will accumulate, and where it will be either stopped or passed along. If the variability is stopped, stopping it will tend to dampen or eliminate the bullwhip effect up and down the supply chain. If it is not stopped, then it is likely that variability elsewhere in the supply chain will be amplified.

 

Strategic inventory decisions also determine how, when and where lead-times are decoupled in order to meet market tolerances or provide strategic or tactical advantage to supply chain participants.

 

Most importantly, the strategic management of inventory as a high-value enterprise asset determines just how much return on investment (ROI) is garnered by the dollars invested in inventory. This is crucial to ongoing success.

 

So, perhaps it time to stop allowing inventory to be managed in an unplanned, non-strategic, seat-of-the-pants reactionary way. What do you think?

Let us know your opinion by leaving your comments below.

 

 

[*] Dunbar, Andrew. "The Future of Inventory Management." Kinaxis Supply Chain Expert Community. July 23, 2015. Accessed July 24, 2015. https://community.kinaxis.com/blogs/21st-century-supply-chain/2015/07/23/the-future-of-inventory-management.

 

 

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

Writing recently at Forbes.com, Lora Cecere gave the supply chain management community a penetrating article on the connection (or, lack of connection) between efforts to improve forecasting and results found in better inventory. The article was entitled, “Does Better Forecasting Improve Inventory? Why I Don’t Think So Anymore.” [*]Uncertainty - elephant.jpg

 

While the whole article is certainly worth your consideration, I would like to call specific attention to some areas that I consider critical—and too frequently overlooked.

 

Clarity on the Goals and Function of Inventory

 

Cecere’s to-the-point remark on the matter of understanding the true strategic and tactical function of inventory is key here. From her years of studying supply chains and gathering of statistical data from a large number of companies, the says: “In the benchmark data, companies that had clarity on inventory goals and understood inventory drivers cross-functionally make the most improvement.” [Emphasis added.]

 

Our anecdotal experience in working with dozens of small to midsized business enterprises facing supply chain challenges confirms what Cecere says.

 

We find that, for most of our clients, inventory has merely evolved over time. Inventory levels are driven more by seat of the pants reactions to events and which part of the organization got most upset last—if sales, inventories usually go up; if finance, inventories usually go down—than they are by any real understanding of inventory goals and drivers.

 

In fact, while virtually all of our clients consider inventory—in bulk—to be strategic, they mean nothing more than that they could not do business without it. Almost none of our clients, if asked, could provide for us with the strategic or tactical rationale for the specific target on-hand inventory levels of any given SKU-location. My guess is that is precisely the same for most of Cecere’s clients, too.

 

In teaching and mentoring our supply chain clients, we emphasize the fact that inventory positions (that is stock quantities positioned at a particular point in the supply chain) are strategic, if and only if the quantities effectively perform all of the following critical functions:

  1. Absorb variability effectively on both the supply side and the demand side
  2. Decouple lead times to meet the markets demand tolerance for delivery
  3. Provide real (calculable) return on investment (ROI)

 

As Cecere asserts, then, it makes sense that the better an organization understands inventory goals—and has a well-settled and effective underlying strategy related to inventory—and drivers, the greater their opportunity for improvement. Making adjustments—“fiddling”—with all of the individual factors and departments that affect inventory outcomes is just rearranging the furniture if the firm lacks a clear understanding and strategy to drive improvement.

 

Inventory Is the Most Important Supply Chain Buffer

 

In dealing with the matter of “buffers,” Cecere says, “The most important buffers—shock absorbers for volatility—in the supply chain is [sic] inventory and manufacturing capacity.”

Of course, the reason inventory is the most important and most often used is because inventory is actually a composite buffer. Inventory stores—simultaneously—both time (the time to produce and transport the goods) and capacity (the capacity to produce and transport the goods).

 

However, in a strategic supply chain implementation, there are actually three types of buffers that can be strategically created and tactically managed:

  1. Stock (inventory) buffers
  2. Capacity buffers
  3. Time buffers

 

Each of these types of buffers has its place. And, each of these types of buffers can provide tactical alerts and metrics that can lead to ongoing improvement.

 

The Role of Technology

 

We are delighted to hear Cecere’s comments on the matter of technology: “There is more and more need for an inventory planning role to manage the form and function of inventory and develop inventory strategies. Buying the technology and not having clear processes and accountability does not help.” [Emphasis added.]

 

I actually work for a firm where our primary business is the sale of technology, but I frequently find myself in the odd position of telling clients not to buy more technology until a clear strategic impact for the technology can be established. And establishing the clear path to ROI means that there needs to be a sound and effective strategy for inventory decision-making that comes even before process improvement and accountability (in my opinion).

 

Thanks

 

Thank you, Lora Cecere, for another clear, to-the-point and hard-hitting article to help drive supply chain improvement. My hat is off to you.

 

Please leave your thoughts on these important matters in the comments section below.

 

 

[*] Cecere, Lora. "Does Better Forecasting Improve Inventory? Why I Don't Think So Anymore." Forbes. November 29, 2015. Accessed November 30, 2015. http://www.forbes.com/sites/loracecere/2015/11/29/does-better-forecasting-improve-inventory-why-i-dont-think-so-anymore/.

 

 

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

More than a year ago, my friend Lora Cecere published an excellent article entitled “Let the Qs Begin”. I was reminded of it when I ready Joseph Y. Calhoun’s analysis under the title Graph declining2.jpgDisappoint”.

 

In Calhoun’s opening paragraph, he says, “The Citigroup Economic Surprise index set a record this year for the length of time it stayed in the negative column [actual results falling below expectations]… of over 200 consecutive days. Even in the depths of the Great Recession we never had more than 100 consecutive days in negative territory. It is odd that economists have remained so optimistic – overly so – even as the data continues [sic] to defy their sunny outlook.”

 

His somber tone and warning continues: “The trends that have been in place for over a year continue. The industrial/manufacturing economy is in recession and has been for months in my opinion.”

 

No “Doom-sayer”

 

I am certainly not trying to be purveyor of doom and gloom. But, I am a realist; and I believe that businesses and supply chains that want to be healthy and thriving in the years to come will face challenges unlike most have seen up to this point in time.

 

Like the Boy Scouts say: “Be Prepared.”

 

Lora Cecere’s article highlights the real world in which we find ourselves, as well. She opines: “Growth is slowed, and supply chain is more important to success [than ever before].”

 

But, as one who works day-in and day-out with Fortune 500 giants with worldwide reach, she still affirms that these “leaders” in industry are engaged in struggles not significantly different from the struggles we see in our own day-to-day exchanges with those in the small-to-midsized enterprise marketplace. Cecere says, “[W]e are horrible at figuring out what adds value…. [N]ine out of ten companies are stuck.”

 

What Has Not Worked?

 

Cecere’s experience with industry-leading giants confirms that

 

  1. Vertical excellence has not brought the desired results. Companies having the best manufacturing, procurement or logistics still seem to achieve only marginal gains over their less sophisticated competitors.

  2. Project focus has failed to produce anticipated ROI (return on investment).

  3. “Big Bang” technology approach has also not been effective. In fact, Cecere says, “[M]any companies move backwards… when they try to implement” large technology programs intended for improvement.

What Has Achieved the Best Results?

 

Here, according to Lora Cecere, are some of the things that have contributed to real and effective improvement for some enterprises and supply chains:

 

  • Leadership – enlightened leadership that focuses on the management of the supply chain as a complex system: We could not agree more! We are absolutely convinced that executives and managers who take steps to understand fully their enterprise and supply chain from a complex adaptive system (CAS) standpoint (rather than a mechanistic approach) are more likely to reap rewards in terms of rapid ROI than are their counterparts.
  • Outside-in Processes – Here again we are fully in agreement with Cecere’s assessment. The evidence clearly shows that companies that become truly demand-driven are able to do more with less and, thus, achieve rapid growth and substantially better ROI than their industry peers that continue to rely on outmoded thinking. (By demand-driven, we do not mean, necessarily, make-to-order. However, we do mean a vastly reduced reliance on forecasts for determining actual execution. Planning and buffering may rely on forecasts, but execution should not.)
  • Supply Chain Design – Active, and intentional, design of the supply chain: Yes! So many supply chains we come into contact with in the companies we meet have just sort of evolved—and not (frequently) in a good way. There is nothing intentional about them. Most decisions about where, when and how much stock should be held in the supply chain is localized and (quite evidently) not strategic in any sense of the word.
  • Aligned Metrics – To ensure the [proper] management of the complex [adaptive] system, the metrics… need to be managed as a non-linear system: Right on, Lora! Bad (poorly designed) metrics are a huge source of bad supply chain decisions and create conflict between divisions, departments and supply chain partners.

Getting Ahead of the Game

 

Despite the sun-shiny faces on so many economists worldwide, unless things change dramatically, the days of fast-growing economies are not in our foreseeable future. It is far more likely that we will be facing days of slow economic growth accompanied by increased competition.

 

Now! Right now is the time to begin changing the way you look at your enterprise and your supply chain.

 

The old things are not working any longer. In fact, you’ve probably discovered that they have not been very effective for a decade or longer.

 

It’s high-time to consider new thoughtware and becoming demand-driven so you can overtake your competition and grow rapidly in the midst of a slow-growth economy. Some are doing it. Why not you?

 

Let us know your thoughts on these matters. We would be delighted to hear from you.

 

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

If your company and supply chain is like most companies and supply chains, you are doing everything you know to do to try to reach more of your goal—trying to make more money tomorrow than you are making today. You are trying diligently to improve your return on investment (ROI).PandG RevGrowth v ROIC 2000-2014.jpg

 

So, why is it—with all the programs you’ve tried, all the talent you have on-board, all the experience your company has on staff, and with all the big investments you’ve made in time, energy and money—that real, long-lasting bottom-line improvements are so elusive?

 

Don’t Feel Lonely

 

The accompanying graph represent data from a Fortune 500 company you would know if I could name it here. They spend millions on their supply chain efforts, and have for many years. (Graphic adapted from Cecere, Lora, and Regina Denman. Supply Chains to Admire - 2015. Report. September 8, 2015. Accessed December 3, 2015. http://supplychaininsightsglobalsummit.com/supply-chains-to-admire/.)

 

Nevertheless, when plotting revenue growth against ROIC (return on invested capital) for this company, we see the firm not in a pattern of ongoing improvement, but quite literally, wandering all over the place.

 

ROIC for the firm was negative in three years between 2000 and 2014 (2001, 2009 and 2013). The only brief period which could logically be described as a period of ongoing improvement was the years 2001 through 2004—when their trend was upward and to the right on the graph, indicating growth in revenues and improving ROIC.

 

After that, however, the magic vanished somehow. Between 2006 and 2009, even though revenue growth was relatively steady, return on investment was steadily declining—and has not yet recovered!

 

Aligning Resources to Strategies

 

I don’t know about you, but I am guessing that the executives at this firm did not decide in after 2004 to switch strategies and work in the direction of lower revenues and declining ROI!

 

No!

 

Executives virtually always set forth strategies for improvement. But, the ability to effectively implement the strategy for improvement means being able to tactically align internal and supply chain resources so that they act in a coordinated way to improve and reach the desired strategic goal.

 

Resource Contention

 

If the executive team and managers at every level do not fully understand the interdependencies between the various participants, functions and silos of operation across the company or the extended supply chain, then it is inevitable that resource contention will arise between initiatives, programs, and investment decisions (and the metrics that drive them). In most companies—like your own, and the one we see in the accompanying graph—improvements in one area are (unintentionally) offset by unintended consequences in another area of the business or supply chain.

 

This is exactly what happens when improvement programs and decisions are made at the local level—instead of being made with a system-wide view of the enterprise or supply chain.

 

You have probably been through this cycle many, many times already: In order to reduce inventories, we end up causing stock-outs and manufacturing delays. In order to trim away at costs, we hurt our quality or damage our ability to deliver to our customers on time. So that we can get one project completed or product delivered on-time, we expedite it and, in doing so, end up causing other projects or products to be delivered late or needlessly delayed.

 

Sadly, we invest more and more in accounting systems, new metrics, and financial incentives focused on improving the performance of local function after local function, silo after silo, only to find that these local improvements have no positive effect on our bottom-line—at least, not for long. And, worse, the local improvements actual trigger something else—something we may not even be able to clearly identify—and our bottom-line gets worse after the “improvement.”

 

An Organization in Conflict with Itself

 

As Debra Smith put it so very well:

 

Agreement on the need for a measurement system that encourages local actions in line with a company's bottom-line results is common, but it continues to be elusive. Traditional cost-accounting product cost allocation, using direct labor to assign overhead to the products with a focus on local labor and machine efficiencies, is at best irrelevant and at worst dysfunctional.... An organization in conflict with itself by definition is not aligned and cannot execute even the best strategy to its highest potential. (Smith, Debra. The Measurement Nightmare - How the Theory of Constraints Can Resolve Conflicting Strategies, Policies, and Measures. Boca Raton, FL: St. Lucie Press, 2000.)

 

Enterprises and supply chains—clearly, even at Fortune 500 companies—remain bound in their internal conflicts mostly because most of the classic schools of business in our nation teach their students to manage complexity by breaking it down in manageable chunks. We call those chunks divisions, departments, functions—silos of every description. In doing so executives and managers lose sight of the big picture—that the companies and supply chains do not operate as silos, they operate as a chain of dependent events and actions.

 

Most executives and managers today have not been provided with the tools to clearly be able to lay hold of a system view of their enterprise or supply chain. Again, Debra Smith helps state the need so clearly:

 

Without comprehensive education of mid-management and the ability to clearly diagram the conflict, middle management and first-line supervisors are hopelessly forced into action that usually compromises at least one of the objectives. If they are being measured with multiple competing objectives, they are set up to fail. Usually the plant performance is judged on the outcomes of all of the competing measures so it is impossible for the plant to win. It is still possible for the person in charge of only one program to "win" but often everyone else and the company loses. (Smith, ibid. p. 18)

 

We freely confess, as consultants to enterprises and supply chains, we do not have all the answers. But, we can bring the tools and education to managers and executives so that they can, first of all, understand how and why they companies work—and fail to work—and then move on effectively to creating their own solutions to their unique circumstances.

Helping achieve a system view and bring an end to internal conflicts can get companies on the road to real and enduring ongoing improvement.

 

How is your company or supply chain doing? Are you seeing lasting improvement, or are you wandering like the Fortune 500 company in the graph above?

 

Let us know. We would be delighted to hear from you.

 

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