I interviewed Murillo Xavier who discussed Redesign of Complex Supply Chains.
It’s good to speak with you today, Murillo. It’s been a while since we talked. We did an interview in the past. Today your topic is: redesign of complex supply chains. Can you start by providing a brief background of yourself?
Sure. Hi, Dustin. It’s great to be here again. Let me introduce myself. I’m Murillo Xavier and I have been working with supply chain for almost over 20 years, also focusing in strategy and finance in supply chain. I worked for some of the Fortune 500 companies in Brazil and the United States. I’m also the author of some books on strategic sourcing and project management. I spent a brief part of my career working as a consultant for Pricewaterhouse Coopers and as a capital controller at Nestlé Waters. Currently, i work for HP, where I develop new strategies to transform supply chain and make the company more competitive. Also, my undergraduate was in industrial engineering, and I have an M.B.A. from Michigan State University and a few supply chain certifications from APICS and from ISM. Quite a good experience in supply chain, and I am glad to come here and talk to you and share some of my experience about complex supply chains.
What is involved in the redesign of complex supply chains?
It’s a very, very interesting topic. I love to talk about supply chain and all the complexities. Let me just give you some background on that, what makes a supply chain complex. For that, let’s go back to the ’80s, when most of the supply chains were still very vertical-integrated. At that time the companies wanted to manage each step of the manufacturing, thinking they could do a better job than their competitors, optimizing processes, managing people, and controlling costs. They thought they could have better quality, better velocity, better costs by controlling everything. In the ’90s several companies were already moving away from that idea. They were trying to move from a vertical integration, doing more outsourcing. It was only in the beginning of the ’90s, after a publication by Michael Porter, that companies started investing more in outsourcing.
Michael Porter stated that companies should focus on their core business and outsource the rest. Pretty much, he was suggesting that people should invest on their strengths. If you’re good doing something, go and do that something, and whatever you’re not very strong, outsource. You have, in each step of your supply chain, a very strong process. You have good people knowing what they are doing and doing what they do best. Let’s talk about the outsourcing.
What’s the problem with the outsourcing? By outsourcing the noncore business, other companies can experience better cost and have access to new capabilities, among other things. They have to make some tradeoffs. In these tradeoffs they will increase the complexity of the supply chain because now you have a new business partner, and with that new business partners, you have to create a whole infrastructure to support this partnership, and by that I mean all the communication with a partner, operational and strategical processes. We have new systems, new contracts, new control mechanisms, cultural aspects of the relationships, and many other small things that comes with this relationship, this kind of arrangement. At this point supply chain became significantly more complex.
On top of that, we started seeing a lot of mergers and acquisitions in several industries. Some of the companies trying to increase their portfolio of products to better attend their customers. They create a lot of complexity, introduce a lot of complexity, and the customers, they were demanding much more from the customers. They were not looking anymore for product; they want a solution, they want someone who sometimes could be a one-stop shop for all their needs. They didn’t want to specify what they want. In most cases they want to go to one of their suppliers and say, “Hey, this is my problem. What do you have for me?” and the companies then had to improve and reinvent themselves. We are talking about companies with a massive number of suppliers, partners, who acquire a new business, different technologies, and a very different customer base than what we had in the ’80s and ’90s.
All this evolution called a lot of complexity in our supply chain. Just to give an example about all these mergers and acquisitions that I am referring about, when I started with HP years ago, in the technology industry, I tried to understand a little background of the company, and I saw that in the past six years before I’d started at HP, HP had probably around 60 companies they acquired. IBM, in four years, had 40 acquisitions, and Dell had 11 acquisitions in two years prior to my start at HP. All the IT industry, they are very heavy in mergers and acquisitions. That’s the thing about complexity; it came very strong and very fast. Companies start putting together some process, some interfaces with the companies they acquired, and most of them never had a chance to redesign the entire process and see what makes sense. In a redesign what you try to do, we try to get rid of all the waste that we have, because we have a lot of processes that are duplicated, the communication doesn’t work very well; we’ve had a lot of double handling not only of material, but also information.
That’s the core of the redesign, just trying to understand what we have today and really go and do a clean-sheet exercise and try to see what would be the best process to handle all the material and all the information that have to go across the companies. The final goal is to have a seamless integration across the entire supply chain, to have all the suppliers working as one, as the same company, if everyone were in the same company. These would minimize all the downsizing of the outsourcing. When I talk about visibility, control over our strategy. If we have this seamless integration, everyone would be on the same page, following the same strategy, and that would allow for companies to maintain their competitivity.
How do you recommend taking on such a big task?
Well, I really like to follow a Lean Six Sigma approach, so I like the framework: define, measure, analyze, implement, and control. In the define step we try to really understand the problem, understand the different areas we want to attack. If we’re talking about a specific commodity in our company, if we’re talking about the business segment, if we are trying to redefine a change for a region. What problem are we trying to solve here? We’re trying to solve, also, inventory, lead times, quality issues. What is triggering this redesign? We define them and move to the measurements. We measure other relevant KPIs, which is necessary here. Usually for this kind of redesign, it’s a lot of inventory-related KPIs, so levels of inventory, aging of inventory, and several others here; also, time, cycle time, lead time.
There are a lot of measurements we take in order to understand how effective and how efficient our supply chain is. Once we have this picture and we do process mapping, we have a very good idea of the problems we’re facing right now with all the requirements of the supply chain, and then we can move to the next step, the analyze phase. In the analyze phase we will try to make sense of all this data and try to understand what’s causing the problems and come up with different structures, different options, different alternatives to tackle the problem. From there we will have some proposals to offer redesigning, and then we will move to the implementation phase, implement these new structures. Finally, in the control phase, we make sure we have the proper governance around these new processes, check to see if everything’s working well, and make any adjustments. That’s usually a very strong framework, so we base the redesign on data, and we keep measuring and making sure that we have the best solution implemented.
Do you have any success stories?
Yes. When I moved to HP, we had commodities that I was called to analyze, a particular commodity. For that commodity, we were trying to understand a little about the inventory at that time. We believed we had excess inventory for that commodity; and, in fact, we had excess inventory for some SKUs, and we had shortage for other SKUs. Then we tried to see what the problem was, what was causing that. We had problems, then, because of FRACAS, because of our manufacturing process, the complexity of our products, the number of partners we had. It was calling for a major redesign. We started this process many years ago, trying to understand what we had on our hands, so we did all the process mapping, we took all the different measurements, and in the end, we had a few steps, we wanted to implement a few proposals.
Some of those proposals involved SKU rationalization, so we reduced probably around 40 percent, the number of SKUs for that particular commodity. The interesting thing here is when you talk about a seamless integration across the supply chain, we realized that some of our partners, they had in their systems several SKUs that we were not using anymore. The information was not flowing across the supply chain, so we designed all this governance. Every time we were eliminating a SKU, we really wanted to make sure that our entire supply chain, they were eliminating the same SKU. The information had to flow and everyone would delete from their systems. We were verifying inventories across the supply chain to make sure that product was not in our systems, causing waste in the supply chain.
SKU rationalization was one of the steps. We had supply chain network redesigns, where we were trying to eliminate some notes, some double touch of products across the supply chain. We had, also, another point where our manufacturing strategy, we had several manufacturing steps, and we reviewed the supply chain segmentation, trying to understand for that particular commodity if we had fast-moving SKUs and slow-moving SKUs. For that, we tried to adjust one strategy for fast-moving SKUs; the other a different manufacturing strategy for slow-moving SKUs. It was a matter of understanding what we had on our hands, adjusting. The final proposal there was about collaborative planning. We were studying a better way to communicate with our suppliers, our partners, how we could come up with changes in our plan in almost real-time and release information available to everyone across our supply chain. We have several systems that can deal with this capability nowadays, and technology has evolved so fast and today we can do that.
Technology’s helping us a lot to solve a lot of problems that we had in the past and helping us with better integration of our supply chain. Several companies in the IT industry, they are taking the steps; some other companies, they experienced a dramatic reduction, for example, on-boarding of new suppliers, new capabilities for tracking products for greater visibility of inventories across the supply chain and to adjust for changes in the market. Now our supply chain’s much stronger for this commodity. Every time we have a change in demand, for example, we can communicate much faster with our suppliers. Everyone’s on the same page; we can adjust to any issue, any shortage in the market. It was a great case and worked very well.
Thanks for sharing today on this topic of the redesign of complex supply chains.
It was my pleasure.
About Murillo Xavier