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lcecere

Three Lies and a Truth

Posted by lcecere Oct 21, 2012

When new groups come together, the forming process is often awkward.  Teams want to know each other, but introductions are strained. So, how can they do it quickly and move on to solving business problems?  Ice breakers help. One of my favorite is the game, "Three Truths and a Lie." In this team activity, people who do not know each other list four statements and ask the group to guess which statement is false. It is usually fun and revealing.

 

This week, I played a variant of this game with my audience. I spoke at the Kinaxis event (#kinexions12), and I asked companies to answer the question, "Which of the following statements is true?" I played three lies and a truth with the group. Most were surprised at the answer.  Here is the list:

  • Supply chain technology implementations have reduced inventory.
  • Companies should implement supply chain best practices.
  • Companies that have focused on collaboration in the supply chain have built competitive advantage.
  • Supply chain excellence matters.

 

Seemingly, most supply chain leaders that are reading the press or going to industry conferences, would believe that all four statements are true. However, based on the research for the book Bricks Matter, I now sadly know that only one of these statements is true.  Here I share insights on my journey to understand the truth.

The Lies that I have Told

As a supply chain analyst for the last ten years, I have a passion for writing. I have averaged about 100 articles a year. I love the process of research. For some absurd reason, that I don't quite understand, I have a passion for supply chain. I believe that it is the lingua franca of the business.  Unknowingly, I have told three lies. I have discovered the truth through the research for Bricks Matter. Here they are:

The Lie of Inventory Reduction

Over the course of the last decade, I have carefully recorded and reported presentation after presentation from conference after conference and interview after interview with supply chain leaders.  Repeatedly, I heard that supply chain applications have saved costs, reduced inventory and improved customer service. I wanted to believe, and in fact, I do believe that most projects did have short-term impact. However, the results were not sustained and the impact cannot be seen on the balance sheets.

 

How do I know?  I have been fortunate over the last year to work with Abby Mayer (@indexgirl). Abby and Mikey on my team have  built a database of financial ratios from publicly available balance sheets from 1995-2012. We have been mining the data to understand the trade-offs between growth, profitability, cycle and complexity ratios. We are trying to understand how supply chain leaders have raised the bar at the intersection of these four sets of metrics on the supply chain effective frontier. The results have been eye-opening.

 

The problem is that when I examine balance sheets over the last decade, as shown in Figure 1, I find that only high-tech and electronics industries have reduced inventories year-over-year. Other industry groups did not. The reason?  I think that there are many.  Many would argue it's because supply chains grew more complex. Some would say that it is because supply chains became longer due to outsourcing,  I struggle to think that this is the reason. The high-tech industry experienced the blow of both of these business impacts simultaneously. In fact, I believe that if these issues solely drove up inventory that the high-tech industry inventories should have soared higher than other industries. They did not.

 

I think that the answer is deeper. I believe that the more insidious reason was that most supply chain projects were implemented as discrete projects and not part of a systemic business transformation.  Leaders focused on process after process that was not designed to be part of a larger supply chain strategy. Silos in the organization do not know how they align because over 85% of companies are not clear on supply chain strategy.

 

I also believe that it is because the organization is not incented to manage cash-to-cash metrics. The strong functional silos focus on their own metrics which seldom include the cycle metrics of inventory turns, working capital or cash-to-cash.  When working capital has been reduced, it is usually a story of reducing payables. For many this has increased supply chain risk due to a weakening of the supplier base.

 

Technologies were implemented as projects. Well-intended projects and process built-in isolation were a major barrier to meeting the goal. There was no accountability. As a result, most of the results were not sustainable over time. For more on the impact of supply chain technologies on inventory, check out the blog post "Why Have We Not Reduced Inventory?"

 

The Lie of Best Practices

As I have studied the practices of supply chain management, I do not think that we have BEST practices. Instead, I think that they are EVOLVING.  I think that any consultant that talks to you about best practices should be nicely escorted to the lobby and shown the curb.

 

In the last decade, we have moved through the evolution of the efficient supply chain (lowest cost per case) to the reliable supply chain (right product, at the right time at the right cost) to the resilient supply chain.  In 2009, the definition of supply chain resiliency was driven by the impact of the Great Recession. In 2011, insurance claims and business continuity amplified the discussion. Last year, $450M of profits were lost in the Japanese auto industry and Intel lost 1$ billion in revenue due to floods in Thailand  and the associated impact on Thai suppliers.

 

Over and over again, I see that the evolution of supply chain processes is born largely from failure. This heightened awareness on business continuity has increased the emphasis on supplier development and is changing the processes in procurement to focus from squeezing costs and terms to building relationships. But, it does not stop there.

 

With the rise of corporate social responsibility, and the discussion of natural capital accounting focused on air, water, land and biodiversity, companies are learning that only a tiny fraction of non-renewable resources are under their direct control. (reference Carbon Disclosure Project 2012). This measurement of intertwined, non-renewable resources will push a new definition of supply chain management. It will force the discussion of supply chains to value networks. Companies will be forced to own their entire supply chain.  However, there is more to the story.

 

As growth flattens and commodity pressures escalate, market-to-market orchestration and the building of outside-in horizontal processes is the next frontier. The momentum to build market-driven value networks with bidirectional orchestration of demand and supply variability is the aspiration.  Today's supply chains were built assuming that manufacturing is the primary constraint and that oil was a $10/barrel. West Texas crude is now selling for 3X the price in the 1990s. Materials and commodities are becoming the new supply chain constraint, and there are few technologies to guide direct procurement visualization and optimization.  This was the roots of Kinaxis, and new players like SCA, Signal Demand and Triple Point are entering the fray.

 

I agree that there are best practices to implement a technology. Industry templates, commonly defined interfaces, and IT standards; but we cannot confuse the implementation of a technology with the definition and implementation of holistic end-to-end value networks. I think we are a LONG way from having supply chain best practices.

 

Ironically, my observation is that the same thing that got us here will be a barrier for the future.  It is the definition of the "supply chain organization." For many years, the evolution of supply chain practices was slowed by the lack of a supply chain organization.  Now, based on the work that I am doing with companies, I am seeing the inverse. The narrow definition of the supply chain organization has become a barrier. When you say building the "end-to-end value chain" and there is push back that this is not the job of the supply chain, you have problems.

 

Unfortunately, the supply chain organization has been defined too narrowly.  It is frequently named supply chain; but only has control over logistics or distribution. The definitions in Europe are more constraining than those in the US. The irony is that while these teams state that they want to build the global end-to-end value network, that there is no one in the group that is responsible for looking at business decisions end to end.  In fact, in most organizations where I am working today, I struggle to find anyone that has an end-to-end focus.

 

Unfortunately, the door is not swinging both ways. Our drive for supply chain excellence, put the sign over the door. Horizontal processes --Sales and operations planning, revenue management, supplier development and corporate social responsibility-- are the pathway forward; but to do this the supply chain organization has to be willing to have the spirit to tackle what they feel that they cannot do. Simply put, it is the building of the processes from the outside-in from the customer's customer to the supplier's supplier. They have to be comfortable challenging sales-driven and marketing-driven mindsets to drive higher value through market-driven value networks.  Most are not ready. The windowless silos are too strong. While the group will say that these are supply chain processes, they do not feel that it is the role of the supply chain organization to drive them. I find this sad.

 

Where will the organization get the cross-functional leadership to build these horizontal processes? It will probably happen through failure. If we do not change, it will be driven through a bad score on a carbon footprint audit, a failed product launch, or supplier failure. The supply chain organization now has as deeply entrenched walls as the other silos in the organization. The group has forgotten the charter to connect the silos, reduce latency and improve end-to-end decision-making. For many, sadly, this not the role of the supply chain organization. This old supply chain gal is shocked, and leaves many organizations shaking her head in disbelief.

 

For more on this subject, reference the blog post "Reflections."

The Lie of Collaboration

There is probably not a more overhyped and overused word in supply chain management than the term "collaboration." It is pervasive in the spoken language of every supply chain executive and absent in the results.

 

I believe that collaboration is a sustainable win-win value proposition that benefits both parties. And, if this is the case, I believe that you should see the total cost of the supply chain decrease and the days of working capital improve.  As I run these analysis and study value chain after value chain, I cannot find one example where supply chain processes have improved total cost and working capital. I really want to believe.  I keep on looking.

 

Instead, what I find is that we have shifted costs and working capital backwards in the supply chain. The waste in the crevices of the supply chain that lies between parties has not declined. The irony is that pushing costs back in the supply chain weakens the supply chain because most suppliers have a higher cost of capital and lower gross margin than their downstream trading partners.  One of the ironies of this work has been the discovery that most of the work that we have called "collaboration" has actually put more risk into the supply chain.

 

 

My favorite slide on collaboration came from a P&G presentation at an Effective Consumer Response (ECR) conference in Europe. The speaker was sharing his experience on "collaboration."  His belief was P&G in Europe experienced a number of failed attempts at collaboration because there was not a shared vision, the right skills, aligned incentives, available resources, a common plan and leadership to drive the program.  It was only when a company could bring all of these elements together that he believed supply chain leaders had the "right stuff" to drive successful collaboration.

 

For more on supply chain collaboration, check out the blog post, "Yes, I Am a Contrarian."'

 

Why? Why? Why?

So, why have we perpetuated these myths?  I think that it is because we are not holding ourselves accountable to balance sheet deliverables. The data is hard to get. The peer group analysis is even tougher, and most supply chain teams struggle to speak the language of business.  My advice is to cast off the four letter acronyms and forget the "geek speak" of IT. Instead, learn to talk the language of financial supply chain ratios and hold yourself and your team accountable.

 

The Truth

The truth is that supply chain excellence matters. You can see it in the resiliency of companies when faced with market shifts or in the ability of companies to make progress on the supply chain effective frontier of trade-offs (reference the Supply Chain Insights report, Conquering the Supply Chain Effective Frontier ).  We will be sharing insights about these findings on Friday, October 26, 2012 @ 1:00 p.m. EST during our second Supply Chain Insights Webinar, The Supply Chain Index, 20 Years in the Making: A Focus on Discrete Industries. We hope to see you there!

 

Next week, I will be speaking at the Consumer Goods Technology (#CGT2012) event and the Institute of Business Forecasting Executive Event (#IBF12). We have a newsletter publishing with new reports on Wednesday. We look forward to getting your feedback.

 

Let me close with my quote of the week. It comes from Don Gaspari, NCR at the Kinaxis Conference. I had worked with NCR for many years and had helped them develop their S&OP processes. He gave a great presentation.  I was proud. He closed with "Supply chain is like marriage. It depends on good communication." I think that this is true.  I don't think that we can clearly communication unless we can speak the truth even when it hurts. So, I think that it is time to get honest with ourselves about the progress of supply chain management over the past decade.

"If only I had the money that the company was supposed to save from the multiple ERP and supply chain projects. There were a myriad of projects and we are at the same place that we were when we first started. I am a skeptic. I just don't believe it anymore when I see it on a project justification."  CFO of a major manufacturer

 

I want to believe. I really do. This year supply chain leaders will celebrate thirty years of progress in supply chain management; but we have not made progress on one of the funamentals:  inventory management.  I think that it is time for us to take the litmus test and ask the hard questions, "Have our practices impacted days of inventory?  Have the early adopters of inventory optimization seen a reduction in inventory on their balance sheets?" Sadly, I think that the answer is no. Here I give my logic.

 

How I Draw this Conclusion.

I have been an industry analyst since 2001.  I have written many articles about Advanced Planning Systems (APS), Enterprise Resource Planning (ERP) and Advanced Inventory Optimization. I want to believe. I am optimistic.  However, through this period, I did not have the access to financial balance sheet data to judge if the companies that were deploying the technologies were making an impact on the balance sheet.

 

When I started  Supply Chain Insights I wanted to put "research" at the core of the company.  As a result, I invested in building qualitative survey capabilities and built a database of twenty years of supply chain ratio data (for more on this capability reference the research report, The Effective Frontier and check out our community). Over the past three months, we have been mining this data, and the results disturb me.

 

In my prior work as an analyst, I did not have access to this data. While I could get two to five years of data from the Hackett studies done for CFO magazine, I did not have the ability to look across time, test it against macroeconomic factors and supply chain maturity.  I love having this capability now.  It is eye-opening.

 

 

What I See in the Data.

This week, as I prepare for our second webinar on October 26th at Supply Chain Insights, I am working with Abby Mayer(@indexgirl) to understand the performance of discrete industries over the past decade.  We have been running an analysis for the past fifteen years on discrete industries. (We covered the process industries last month.) As we run the analysis for industry after industry, as shown in figure 1, I am hanging my head.  So far I can only find one industry that has systemically reduced inventory and working capital over the ten-year period. This industry is High-tech.  The rest of the industries have the following characteristics:

  1. In the last decade, Days of Inventory are either unchanged or have slightly increased.
  2. If Days of Working Capital have decreased in an industry, it is largely the result of changing payment terms and decreasing Days Payable. We have squeezed suppliers. It is not an improvement in Days Receivable or Days of Inventory.
  3. There is no pattern between the adoption of advanced technologies for inventory reduction and balance sheet results.  There are a few outliers (e.g., Procter & Gamble and Kimberly Clark); but for most companies that I have worked with, I see that they have purchased and implemented inventory technologies, but there has not been an impact on future years results in either Days of Inventory or Days of Working Capital.

 

What I Think it Means.

I am searching for the answer to this sticky question.  I find that it is "sticky wicket." Technology vendors have pushed advanced math and new technologies into the market, and early adopters have adopted the tools. I have avidly followed this market for the last ten years. I have attended conference after conference where I have seen the obligatory slide of "We reduced X days of inventory, improved costs and driven XX% improvement in customer service." I know that you have seen it as well. You see it conference after conference. It is in presentation after presentation. Are these supply chain leaders telling a lie? I think not.  Instead, I think that six factors are behind the results:

  • Bias. Supply chain leaders tend to overstate business results. (I find that it is analogous to asking a woman to put down her "true" weight on her driver's license. Supply chain leaders tend to overstate results.) The projects are successful when first implemented, but they are usually a piece of the business and the results cannot be sustained over time.
  • Increased Complexity. The supply chain is a complex system.  Business complexity has increased with an impact on inventories. Too few companies understand the impact of sales policies, product proliferation and the long tail of the supply chain on inventory.
  • Project-based Focus. Multiple projects have been implemented without an overarching road map and a clear supply chain strategy. Companies cannot achieve supply chain excellence by working discrete projects in isolation.
  • Ownership of Inventory as a Metric.  In High-tech, there is greater ownership of the "inventory metric" across the organization. It matters for all functions.  A good example of this is the culture at Samsung.  By definition, the culture is inventory adverse. Regions are held accountable for obsolescence. I think that it is because the margin of High-tech products falls so fast as the product ages.  So, the longer that it is held, the greater the loss for the company.  In High-tech, this margin curve is more extreme than other industries.
  • True Understanding of Supply Chain as a Leadership Advantage.  I believe that the high-tech industry is heads-and-shoulders better at planning than the other industries. The stakes are higher.  As a result, the executive teams have a greater appreciation of supply chain due to the margin impact of new product launch. These industries paved the way on building supply chain practices. In other industries, the margin curves have not driven similar adoption.  (e.g., Why should a pharmaceutical company get good at inventory if the margins are so high? As they face the patent cliff inventory management will matter more. )
  • Forgetting Inventory Basics. A decade ago, the supply chain had two buffers: inventory and manufacturing. With the move to outsource manufacturing, inventory became a more important buffer.  The focus shifted from just inventory levels to form and function of inventory.  However, as many companies outsourced manufacturing, they failed to look at the impact on inventory strategies and push/pull boundaries. I was even at one company last year that had outsourced manufacturing and forgot to figure out where these outsourced manufacturing locations would "store their inventory."  Many companies have outsourced manufacturing, but not designed the supply chain to support the outsourcing decision.

 

I am looking for your insights. I am trying to figure this out.  Over the course of the next three months, I will be interviewing companies that have implemented these newer technologies and tracking their claims back to their balance sheets. Let me know if you have any thoughts to share.

 

For more on inventory management, reference the following articles by the Supply Chain Shaman:

 

So Proud...

UnCorked!

Yes, I am a Contrarian

Rock, Scissors, Paper. The Pitfalls of Integrated Business Planning

Heh?  

My iphone buzzed on my nightstand.  I groaned. I had gotten to bed late. It was 6:00 AM. This was before my wake-up call. I am not a morning person.

 

As I picked it up , I saw a twitter alert welcoming people to the APICS webinar with @lcecere on Agility that afternoon. Much to my chagrin, I rubbed my eyes and checked my calendar. The APICS event was not there.  My schedule had me on a plane to Chicago at the time of the presentation. There were 250 attendees signed up and I needed to adapt. We rescheduled my flight and I quickly put together some slides for the presentation. (To see the what I built, check it out on SlideShare or view/download it in the SCI Community)

 

As we went live with the webinar, I laughed. I had successfully adapted to give a presentation on agility to 254 people.

Defining Agility

 

When I think of the definition of the word agility, I think of Gumby, pictured here. Gumby can bend and adapt. He started as a green lump of clay. He was designed to be agile. Your supply chain needs to be agile too.

 

The best supply chains are also designed for purpose. They are balanced. They also have the right amount of agility. The foundation is a base of strong processes to deliver business results.  "But," you might say, "what is the right amount of agility? And, how do I design for agility?" The answer is the goal of this post. For the purpose of this discussion, I define agility as the design of the supply chain to deliver the same cost, quality and customer service given a level of both market volatility and process variability.  It requires design. For mature supply chain organizations, it is a natural extension of six sigma.

 

One of the largest issues for organizations to drive supply chain agility is the lack of a commonly held and well-understood definition. As you will see in the questions from the respondents, people often confuse agility and responsiveness.  They are also very confused. It is something that they want, but they cannot describe it and they do not know the steps to take to make it happen.

 

Seven Levers of Agility

 

In this blog post, I publically answer the questions from the webinar.  The astute reader will quickly see that the concepts, while simple, are not well understood.

 

Q: Is it only inventory disrupting the agility resulting from inaccurate forecasts by S&OP? What is the biggest challenge in supply chain agility in balancing the cash-to-cash cycle? Is it S&OP?

 

In the supply chain, variability and volatility come from many sources. The best way to start the design of an agile supply chain is to look at the sources of variability and market volatility that your supply chain encountered in the prior year.  These can be shift in the channel, issues in manufacturing, increasing variability in transportation, or a shift in commodity prices.  Make a list and identify the degree of impact. <The reasons are usually many.> Then match the type of variation with a potential agility design element to absorb the variability.  The biggest barrier is looking at the design holistically.

 

The focus in agility is in horizontal processes.  There are seven primary agility levers:

 

  1. Analysis of Form and Function of Inventory:  Form of inventory is the decision of what form to hold the inventory in: raw material, semi-finished good or finished good. The less conversion of materials in the inventory strategy, the greater the flexibility of the supply chain.  Likewise, the functional forms of inventory are cycle stock, seasonal inventory, and safety stock.  Companies that are agile try to minimize the need for cycle stock and use discipline in run out of seasonal/promotional inventories.  These companies have accurate inventories counts and analyze the form and function of inventory quarterly.
  2. Alternate Bill of Materials and Alternate Sourcing: The more alternatives that exist through the manufacturing and procurement processes, the easier it is to design the supply chain to absorb cost and supplier variability. Additionally, through network strategies, be sure to design your warehouses for flows. Products with dissimilar flows should not be stored together.
  3. ATP. Product Substitution Logic and Accurate Inventories: Clarity of product substitution and accurate inventories enables a robust Available to Promise Signal which helps to align demand and supply for order fulfillment.  Companies that have implemented ATP well rate themselves more agile.
  4. Common Platforms:  The more that products are standardized and platforms are rationalized, the easier it is to design for agility. I worked with one liquor manufacturer that had the same product in 197 different bottles each with a different "footprint" for the conveyor, the manufacturer improved agility by reducing the number of packaging types and designing the packaging for common footprints (similar shape of the bottom of the bottle) to minimize changeovers. Likewise, I also worked with a company that had 67 varieties of carrots that they processed.  Most of them similar cuts, but different specifications. They worked with R&D to simplify the ingredient lines to get more common ingredients across the products.  Due to the need for R&D support, this agility lever is the hardest to make actionable.
  5. Flexible Manufacturing Scheduling Practices: The design of manufacturing processes to flex with market fluctuations. This is the design of alternate work centers, high performance work teams, alternate plant sourcing, and quick changeovers. Companies with long order lead times and a long freeze duration have a difficult time being agile.  (However, a note of caution: I still believe in a freeze period to reduce cycle stock.  The goal here should be to make the right trade-offs between inventory strategies and manufacturing policies. These should be evaluated together frequently.)
  6. Agile Transportation and Distribution Networks:  The use of alternate routing and mode, cross-docking, yard management and warehouse management to absorb changes in volume and the shifts in tasks.  The network is designed to allow shipments from multiple origins with tight workflow integration between transportation, order management and warehouse systems. Additionally, through network strategies, be sure to design your warehouses for flows. Products with dissimilar flows should not be stored together.
  7. Streamline Horizontal Processes. Decrease data latency and friction between organizational silos. Design the supply chain outside in with the processes minimizing data latency and maximizing cross-functional process understanding to minimize the impact of organizational silos. Also, invest time in improving the cross-functional processes of revenue management, Sales and Operations Planning (S&OP) and Supplier Development.  In the determination of policies for each of these important horizontal processes invest in "what-if analysis" and test for feasibility based on predicted levels of demand and supply volatility.

 

Caution:  This analysis is more critical now than a decade ago.  Why? Ten years ago, the supply chain had two buffers: manufacturing and inventory.  However, with the outsourcing of manufacturing, the analysis, placement and determination of inventory becomes more critical.  This realization gave rise to the use of inventory optimization technologies that use deeper optimization than the traditional deterministic logic found in the traditional Advanced Planning Systems (APS) and Enterprise Resource Planning (ERP) systems.

 

Tips on Executing Agility Well

 

Q: You mention that Executive Buy-in is the biggest stumbling block. What  techniques are being used to get executive buy-in?

 

In the webinar, I spoke about the lack of understanding of supply chain fundamentals by the executive team being a major stumbling block to the implementation of supply chain excellence and the adoption of the seven levers of agility.  The best way to help the executive team understand that the supply chain is a complex system with increasing complexity that requires design to be agile is to show them through experiential training activities, what-if optimization or discrete simulation.

 

The other advice that I would give is get alignment on each supply chain definition.  The lack of alignment and agreed upon definition is a barrier to the adoption of practices to improve agility.

 

Q: Our techniques for agility usually involve expedite vs. de-expedite in our planning teams which keeps our teams in fire-fighting mode.  What do you recommend for breaking that cycle?

 

I would start with a clear definition.  Shortening cycle times improves responsiveness: the time to react.  It helps, but is not the answer to improving supply chain agility.  Achieving supply chain agility requires a much deeper design.

 

Use simulation technologies to show executives the impact of using the seven agility levers to improve the quality of response. It is about much more than the time of the response.

 

Q: What will be the role of the freight companies in the supply chain agility?

 

Freight companies and alternate modes are key elements of agile networks.  Companies that are the most agile have strong relationships with their carriers and share forward visibility for equipment requirements.  They are disciplined in dock scheduling times and loading practices to ensure that the "controllable time on the dock and being loaded" is minimized and performed consistently to the same time schedule.

 

Q: For a business who perhaps has not done a sufficient job defining and documenting their supply chain strategy, how would you suggest they get started so that all the key elements are covered?

 

In my research, I find that 95% of companies are not clear on their supply chain strategy.  Companies complain that there is insufficient detail in the business strategy to make it actionable, but I find few teams walking the extra mile to define the supply chain strategy as defined in figure 1.  The seven levers of agility need to be woven into the supply chain strategy in each of the white boxes below.

 

Where most organizations have failed is by starting with process.  The most successful supply chains start at the top of the chart and work down.  The laggards believe that they can copy processes without a definition of strategy and as a result, they implement pockets of technologies without a holistic focus to drive value.

 

 

Q: What is the best metric to begin analyzing when starting to evaluate Supply Chain agility?

 

The best way to evaluate agility is to simulate volatility through either event simulation or what-if analysis and see the impact on cost (Cost of Goods Sold), customer service (on-time delivery and orders shipped full and complete), and quality of output (first pass yield, recalls, etc.)  The quality element is the toughest to model.

 

Q: You touched on robust network design tools which allow you to test your network to determine your agility.  Can you give a few examples of tools that are available today?

 

I continue to be impressed with the work that Llamasoft is doing on simulation and optimization in network design. They have the most "packaged" network simulation capabilities.  I also like their new iPad tool, Llamasoft Sherpa for network visualization. There are also good what-if analysis tools. Insights (Product Insight Supply Chain Optimizer) has also been working on some "what-if" tools to maximize profitability that you might want to consider, and many clients have i2 Technology's Network Strategy tool (now owned by JDA) or the Logictools Network Analyzer Product (now owned by IBM). (Logictools is best deployed for a single user.) I also have a lot of faith in Chainalytics as a source of business process outsourcing. 

 

Q: I notice example for large companies, for small firms "what if "may not be practice, what do you recommend for smaller firms?

 

The same principles apply.  I just used larger companies in the examples. I see many small companies doing a great job at building an agile supply chain.

 

Q: Given the graphs shown in the slides is the following true: The less working capital days the better?

 

Yes, the goal is to reduce the amount of working capital by decreasing inventory and better managing receivables and payables. Progress in working capital has primarily been made by companies increasing the terms of payables. Very few have done a good job of reducing inventory or improving inventory turns.

 

Like a Green Lump of Clay

 

In short, it is like working with a green lump of clay.  Work with your team to try to craft a flexible and agile supply chain out of your supply chain.  Carefully work cross-functionally on the seven levers of agility and the understanding of the executive team.  Your supply chain is like a green lump of clay that is ready to be molded. It is not as easy as one or two process changes. Instead, it is a holistic redefinition.

 

Good luck on your journey. Let us know if we can help.  And, if we missed an agility technique that has worked for you, please share it!

 

For further data on agility, you may want to read these additional articles:

 

Scream

 

ETC.

 

http://www.supplychainshaman.com/uncategorized/etc/Preparing to Run the Race for Supply Chain 2020

 

Sales & Operations Planning Improves Supply Chain Agility

The supply chain is knotted. It is unruly. It is complex.  Will it ever be tamed through social?

 

Yesterday, @DamarqueViews asked me a question on twitter: "What do you think are the greatest barriers in the adoption of social technology in the supply chain?" I laughed.  Such a deep question on twitter. I tried and tried to figure out how I could answer this question in 140 characters on Twitter.  I could not. It was preposterous to try.  So, I thought that I would write a blog to answer what seems like a simple question.

 

For many readers that know my background, they know how deeply I have thought about the topic. I find the evolution of social technologies, and the promise of social, exciting for the supply chain. So much so that in 2010, I believed that the convergence of social and traditional enterprise applications would happen quickly. It is one of the reasons that I went from working at AMR Research to being a partner at the Altimeter Group. It is also why I launched the Rise of Social Commerce Event at Altimeter. It is why I bought a license for Jive and built the Supply Chain Insights Community.

 

My writing in this area was very early. I quickly found that the two topics were worlds apart. I had to learn a new language, a new set of vendors and connect with a new group of users. It was earlier than even supply chain innovators. What I found when I tried to help supply chain leaders connect the dots was:

 

Today's Social Push is Marketing Driven. There is a Big Difference Between Marketing Driven and Market Driven Supply Chains.

 

I find that the social work is usually being done by the digital marketing team that is worlds apart from the main marketing team; and that the marketing group is worlds apart from the supply chain team. To use an astronomy metaphor, it is like a person on earth trying to talk to a person on one of  Jupiter's 67 moons, and then connecting with an array of stars in the Milky Way. Yes; someday it will happen, but not any time soon.

 

A marketing-driven organization is one that is good at marketing.  They excel in the four Ps of marketing. These organizations often have a digital marketing group residing within the organization that is agressively working the convergence of e-commerce, social, and mobility.  I see the value. I get it. However, most supply chain professionals do not know these individuals. The digital marketing group is often siloed. I found that I was often introducing the two organizations to each other for an awkward conversation.

 

In contrast, a market-driven organization connects bidirectionally market-to-market to orchestrate the signals to shape demand and mitigate risk (buy-side to sell-side and back). They price and position based on marketing swings. They understand how to shape demand to maximize profit.  These organizations listen for market opportunities and translate them to their suppliers. They are proactive through demand, design and supply networks.

 

Traditional marketing is about yelling a message.  Companies have rewarded marketing departments for many years to have the same message yelled rhythmically into the market.  The supply chain team's role has been to take these orders and fulfill them.  The concepts of social --listening, testing and learning -- are revolutionary, even for marketing. They are just now becoming a topic for the VERY EARLY adopter in supply chain management. Yes, you see Dell with their social listening organization; and yes, you see weekly meetings at Whirlpool to discuss twitter feedback; but this is the exception, not the rule.  The idea of marketing talking cross-functionally to supply chain, quality, and customer service teams to discuss even customer quality feedback weekly is in itself a new concept.

 

It will not happen through social CRM. Customer Relationship Management (CRM) technologies create a more efficient marketing and sales team, but they are not good listening posts for customer data.  Salesforce.com will only help in the automation of the sales group, it is not the answer for the supply chain. Sentiment Analysis and Text Mining Tools offer promise, but the typical social listening tools used in digital marketing like Coremetrics and Radian6 are grossly inadequate. Why? These tools only answer the questions that we know to ask. They do not answer the questions that we do not know to ask.  For example, would Toyota have thought to ask the question, "Are my brakes failing?" Or Kellogg the question, "Do the liners in my packaging stink?" The social signals for both companies were in the twitter feeds for months before they picked up product quality problems.  In January 2010, Toyota had a very messy recall for nine million vehicles globally.  In 2010, Kellogg had a problem with an odor in waxy resins found in the package liner. Total charges were $46 million with a $.09 impact on earnings per diluted share. Would social listening have helped? Absolutely! Are the organizations ready to do it now? Sadly not.

 

The ends of the supply chain--both in customer and procurement-- are fragile. We have built transactional buying relationships. True relationships in the supply chain are few and far between.

 

Is there promise? YES!  Would I like to see adoption? Absolutely! Will it happen soon? No.  What would companies do if they wanted to accelerate the progress?  They would take the steps to be market driven. To do this, they would map the customer signals back to their supply chain through value-based mapping. They would ask how social can impact their supply chain source, make and deliver processes. Which would lead them to implement text mining/sentiment analysis as a core project for 2013 into their business intelligence systems.  Are supply chain organizations doing this? Sadly no.  Instead, the supply chain organizations are investing in bigger, better and faster ERP systems and they let the digital marketing organization continue their work in isolation.

 

Enterprise and Social Technologies are Like Oil and Water. Last month, I was at a chemical manufacturer, and the Chief Supply Chain Officer walked me to the elevator. He said, "Lora, you write a lot about social technologies. We use Yammer. I don't get it. I just don't understand the value proposition. All of these conversations are out there in a disconnected way, what value is this to my organization?" This conversation typifies the discussion. For most leaders in supply chain and manufacturing, this is a new world, and not one that is well-understood or valued.

 

When you make a salad dressing with oil and water, you need an emulsifier.  A substance to suspend one liquid in the other. I think that this is an appropriate metaphor. Supply chain systems are based on transactional data.  These technologies are VERY structured with well-defined data models. Social technologies are unstructured and random. By definition, the tagging and categorization gives a flat architecture.

 

On one of your blogs you take the popular view that Enterprise Social Networking is a growth market.  You support it with the statement that Forrester estimates that the market will be worth around $6.4 billion in 2016. This is a ten-fold jump. In 2010 the value of this market was $600 million. I am an old gal. I am suspicious. In 2001, Forrester and Gartner had also promised that the B2B supply chain exchange (marketplace) organizations would also transform the supply chain about the time of the ecommerce bust in B2B. The promise was that 35% of Supply Chain transactions would happen in B2B exchanges. That they would grow ten-fold by 2010. It did not happen. Remember the promises of Transora, Covisint and Commerce One? For those that don't remember these names, let's just say that the analysts got it wrong. It did not happen. As an analyst that has done this type of prediction for many years, I just find this hard to believe.

 

The month that I left Altimeter I had a deep and heated  discussion with Charlene Li, founder of Altimeter Group, on this same topic. Charlene wrote the report http://www.altimetergroup.com/research/reports/making-the-business-case-for-enterprise-social-networks. Charlene was arguing that social networking would be a separate and distinct technology market.  I just cannot see that it will happen this way.  I see enterprise social networking as a technology that will be consumed by larger platforms. It believe that it will become part of the existing processes of order-to-cash and procure-to-pay. We can already see this in the launch of SAP's Streamworks and INFORs Infor10 ION Workspace.  I believe that Microsoft's acquisition of Yammer and VMware's purchase of SocialCast are also steps in this direction. I believe that Jive and Lithium will get purchased by the enterprise players and embedded.  They will help, but the assimilation will not be fast.

 

I believe that social technologies will be suspended in the Enterprise Resource Planning (ERP) technologies as they mature.  I believe that we will soon see Microsoft include enterprise social networking in Microsoft Dynamics and AX.

 

So in closing, "What do I think are the greatest barriers in the adoption of social technology in the supply chain?"  The biggest barrier is us. The supply chain leader will have to first learn about social technologies to apply them, and the digital marketing person will have to learn about supply chain before he can have the discussion. Is there value? Absolutely!  I believe that the greatest value lies in reducing signal latency in the extended supply chain. It can improve new product launch.  It could redefine quality systems.  It could be used to connect the value network collaboratively. I could go on and on. There are lots of possibilities.

 

Today, data latency in the supply chain is too long. However, to use social data to improve signal latency, organizations will have to first learn to listen before they can create an organization to use social data.  They will have to take the challenge to map the processes from the outside-in versus relying on conventional data that is inside-out. Unfortunately, in my opinion, it will take a material event, like the one above for Toyota or Kellogg, to understand why it matters. Let me know how I did answering your question. And, for all of those following the blog, please join in the discussion.  Have a great week! It is a beautiful day in Baltimore. I think that I will go for a run.

I take supply chain seriously. My friends might tell you TOO seriously.  I think that the entire world should. I believe that better supply chain practices can save the world, and I think that it makes a difference in warfare and welfare. I think that it is at the core of the Gross Domestic Product (GDP). Yes, I am an unabashed zealot.

I have been at it for a long time. I have gray hair. Some even call me a Shaman.... Some use worse names....

 

In 1985, when my boss told me we needed to build the end-to-end value network to better service the customer, I did not ask questions. I just started working on it as an objective.  Today, when I talk about building the end-to-end value chain, people will look at me strangely and say "That is not supply chain. That is the role of marketing or sales or procurement. " I scratch my head. I look at supply chain as a way to deliver value-based outcomes in business networks. I have little patience for the discussion of "whose role it is."  I just think it needs to get done, and that in most organizations it is not. We have made too little progress in supply chains and there is a new opportunity with new technologies to design for value.

 

My definition is wide. In my mind, the processes of supply chain cross over and overlap at the ends of the supply chain. Yes, I believe that supply chain overlays on top of the sales and marketing organizations and the procurement function. I feel that these organizations have defined their roles too narrowly. Too few are focused on the role of the organization in driving value networks to improve value-based outcomes. Most lack the understanding and they are just not incented to build value networks.

 

The focus has to be market to market. I believe that the supply chain team can make a difference, but it requires reschooling. It is about much more than trucks and sheds. Or pumps and valves. Or contracts and negotiations. In my mind, it is the end-t0-end process: from the customer's customer to the supplier's supplier.

 

To me, supply chain is business. It is a better way to design business networks to drive value-based outcomes. It is a shift from marketing-driven to market driven. It is a transition from digital marketing to digital business. I have little patience for people who want to talk about the fact that sales, marketing and supply chain need to get along and align.  In today's world, they won't. They are incented differently in the organization, and the incentives put them at odds. Instead, the leadership team needs to build a strategy for the entire organization to focus on the delivery of value-based outcomes.  The supply chain can then be the catalyst to map the processes outside in. This is the focus of this blog post.

 

As I have traveled this week, first to Retail Connections to talk to retail, then to GHX to discuss Healthcare and Implantable Devices, and now to the WIPRO analyst event, many things are rolling around in my head. I want to share four concepts that I think are core to building end-to-end value networks.

 

We Are Destroying Value.  As I look at the building of value networks, traditional processes have moved costs and waste back in the supply chain. Our "best practices" are destroying value.

 

At my new company, Supply Chain Insights, we are analyzing supply chain ratios over the past twenty years to understand the impact of supply chain practices on value networks. It is fun work, but the results are shocking. Most companies have made their own organizations more efficient (ROA), but they have not reduced inventories and they have pushed costs back in the supply chain on suppliers that are less able to bear them. This has made the supply chain more fragile. Overall, total costs of the value network have increased because companies have not owned their networks. We have let buy- and sell-side transactional relationships erode value. Today, we are not aligned on value-based outcomes.

 

Figure 1.

 

I can find only two good examples of value networks creating value: Taiwan Semiconductor (TSMC) in the semiconductor industry and Performance Based Logistics in Aerospace and Defense. In every other value chain, we have said we are "collaborating" but in reality, we are moving inventory, costs and waste backwards in the supply chain.  Consider figure 1 re Healthcare. Hospitals have reduced cash-to-cash cycles by improving accounts payable and squeezing suppliers.  Pharmaceutical and Medical Device companies both have high margins, but have not created stable supply chains.  Look at the gyrations of Boston Scientific and Eli Lilly for the same period of time. (And, these are the best of their peer group.) When looked at in a network view, cash-to-cash cycles have gone up in the end-to-end value chain and supply chain results have become unstable. Hospitals lack a basic understanding of supply chain management and the legacy defintion of the sales relationship to the physician is a barrier to driving sustainable value. I am still amazed that we sell implantable devices (without track and trace capabilities) from the trunk of the sales person's car to the hospital. The discussion in healthcare needs to move from a focus on efficient sickness to health and wellness. We cannot get there from here.

 

I had a conversation with one of the major medical device companies, a healthcare distribution firm, and a leading hospital. They all said that they wanted to design for value. However, twenty minutes into the meeting, it became very obvious that their role in life was defending their current position in the healthcare. They really believed that they knew "best practices." I strongly believe that what is needed is a  revolution not an evolution. We will never redesign healthcare for better outcomes if we do not redesign the buy/sell relationship and improve the understanding of the service providers on why supply chain matters.

 

Automotive is a perfect example of what not to do in building supply chain value. The automotive industry took an early lead in squeezing suppliers so hard that they created risk in the supply chain by creating instability. It was one of the issues of American automotive companies' demise. Instead of pushing costs and waste backwards in the supply chain, companies should redesign for value-based outcomes. A.G. Lafley's turnaround of P&G, through the focus on the two moments of truth (purchase and usage), is an example. The transactional nature of procurement and sales is a barrier to redesigning for higher value. Please hear my plea: give the supply chain group the opportunity to redesign the value chain from end to end. Own the entire supply chain.

 

Figure 2.

 

Industries Are Not Created Equally. They Are at Different Levels of Maturity. One of the important characteristics of a mature supply chain is resilience. When you look at year-over-year results of supply chains over the last decade, you see a very different picture of resilience. Mature supply chains have the behavior of Colgate and P&G in figure 2. They show resilience and year-over-year progress against their goals. The next best condition is the pattern seen in the DuPont and Samsung results. DuPont, while not showing wild gyrations over time, actually moved backwards in gross margin and cash-to-cash, while Samsung moved back to move forward. Merck and Zimmer on the other hand show wild swings. They were unable to manage their supply chain performance through the recession. Reversing these swings and gyrations is an opportunity for both Zimmer and Merck. This is what a supply chain is all about.  Supply chain resilience is the role the unsung supply chain hero. This can only happen by owning the entire supply chain.

 

B2B Is Not B2C. Clicks are sexier than bricks; but increasingly, companies are learning that they need to put their bricks--stores, factories, and distribution centers-- to better use. However, I feel that we need to do it in the right way. I have seen many an article mistakenly claim that B2B models need to adopt B2C techniques. While I do agree that there is a lot that B2B models can learn from B2C, they are fundamentally different. It is not as easy as control/copy/paste.

 

The term B2B is used to describe many contexts, so let's start with a definition. B2B usually means one of two things: a B2B online channel presence or B2B Messaging. My use of B2B is about the connection of the extended value networks and the use of both. Today, B2B relationships in the extended supply chain are based on passing EDI messages or portals. EDI is like passing messages in closed envelopes. It is slow and expensive. Enterprise portals are like a bad party game where no one wins.

 

Data volumes grew 18X in 2011. We are entering an era of machine-to-machine (M2M) messaging that will transform B2B relationships. There will be 50 Billion devices connected by 2020 with a 33% compounded year-over-year growth rate. This will improve the supply chains' ability to know more about consumption. It will redesign the last mile. It will affect the home, the hospital, the vending machine, the car, and will increase the impact of the connected consumer. It will also impact the factory with a redesign for digital manufacturing. In this world, maintenance is no longer based on time; instead, it will be based on equipment sensing and actual usage. Similarly, distribution centers will be redesigned to implement digital logistics where safe and secure supply chains will be based on RFID chips on pallets, and container and logistics sensing will allow real-time connectivity to determine dock scheduling, put-away and  multi-tier available to promise. It is coming. It will  not be as easy as stuffing new signals into last decade's Enterprise Resource Planning (ERP), Manufacturing Execution Systems (MES) or Warehouse Management Systems (WMS). Similarly, Supply Chain Planning (SCP) will be redesigned to take advantage of new forms of sensing. These systems will become legacy applications. Enterprise systems will have to be redesigned for new forms of B2B and M2M connectivity. The Cloud is an enabler. New forms of analytics will yield new opportunities, but we have to be open for change.

 

As we run the race for Supply Chain 2020, Big Data Supply Chains and the redefinition of enterprise systems will become a new reality. It is my hope that we can use this change to focus on value-based outcomes. It is my mission to help companies see that we can redesign the supply chain from the outside in with a focus on corporate social responsibility, risk management and health and welfare. However, to move forward, we must "learn the practices of the past, to unlearn them to relearn the processes of the future."  We do not have "best practices." We have "emerging practices."

 

The Role of the Store. I spent the week at Retail Connections and facilitated a discussion with retailers on the Role of the Store. Itwas a fascinating discussion. Retailers have made large profits from B2C endeavors, but the tide has gone out. Store profitability has declined. They are being attacked in the store by online retailers. However, the store will not go away.

 

Retailers now need to truly design for value. For many, the belief is that they should work on cross-channel convergence and have the store fulfill B2C orders. I eagerly shared the pictures of my damaged products from Macys and JC Penneys, companies that have adopted this strategy.  The group laughed when I shared the story of how the JC Penney "Customer Service Representative" wanted me to meet the UPS man at 3:00 p.m. on a busy Monday to prove to them that the $2.00 Pyrex bowls they had shipped without packing materials broke in transit. Bottom line: I've stopped ordering from JC Penney online.  In similar fashion, I have received three consecutive orders from Macys with damaged goods. Macy's went to store fulfillment without training their employees. Cross-channel fulfillment and omni-channel is easier said than done.  I order 75% of my purchases online. I find that only Nordstrom is doing a great job shipping from stores to my home. The difference is training and the definition of the role of the store.

 

In the session, we talked about how to drive greater value in the stores and erase the erosion in profitability. The group agreed that it cannot only be about price. We discussed driving higher value in the store.  Follett told the story of digital signage and gamification in their school bookstores. Safeway shared the story of their QR code wall. Godiva shared how a "chocolate dipping station" in their store increased purchases by XX% (I cannot reveal the number).  On the plane ride home, I spoke to HEB about how they are doing different better with the opening of Hispanic stores that sell a few select items that appeal to the Hispanic shopper at rock bottom prices. (Small refrigerators and large colored marshmallows help to drive hispanic traffic.) When I hear the consultants wax (and waft) elegantly about SOMOLO strategies, I want to scream. I think that we have forgotten that the role of the store is about service.

 

For the record, I hate the name SOMOLO. I hate the name Omnichannel. Sometimes, I think that we get so wrapped up in geek speak that we forget the basics. Retail needs to be about serving the needs of the consumer. It should be a discussion of value. Execution matters. The supply chain matters more than ever. In the last decade, we have only automated B2C. It is time to redefine the retail supply chain for value and redefine the role of the store. Retailers, like hospitals, have had weaker supply chains than those of their suppliers. They have automated B2C and run their stores like it is business as usual. They have squeezed their suppliers and not owned their value chains. I think that it is time for a change.  What do you think? Do you think there is a need for change as well?

 

Become a Value Chain Warrior.

 

If you like my charts, and you would like to better understand your performance check out our new community at www.SCICommunity.com. We welcome you to our new community to get custom cuts of supply chain ratios for your company. While you are there, you can read our 12 new reports or fill out a rating or review on a technology provider.

 

At Supply Chain Insights, we are busy doing supply chain research and trying to understand how to better drive value in value chains.  If you would like to help us in our mission, please take the time to participate in our surveys. We share our research openly, and if you fill out a survey, we would be glad to discuss the results on the phone with you and your team. It is a "If you scratch our back, we will scratch yours" model. We would love your participation. We believe in the Open Content research model, and we do believe that supply chain can drive value-based outcomes. And, yes, we are zealots. We want you to join in this revolution. Thank  you for listening.

lcecere

How we Lost the Plot

Posted by lcecere Oct 1, 2012

One. Two. Three Four.  Count them. Embrace them. And, move forward.

 

If someone loses the plot, they have stopped being rational about something. I frequently see many bright, bright supply chain planning people talk about demand planning irrationally. I feel that they have lost the plot. In this blog post, I share four reasons why I think that this has happened.

 

It is ironic. I see these very bright capable supply chain leaders, that have driven millions in savings for their business through continuous improvement, unable to be rational about managing demand.  It is emotional. It is something that they cannot control. They want to focus only on supply. They do not want to touch demand. They do not realize that no matter how much they focus on supply processes that they can never overcome a bad demand signal through supply tactics.

 

So, it is for this reason that I believe supply chain leaders have "lost the plot."  Here are four reasons that I believe this has happened:

  • Want to be More Accurate? Just Ask Sales. This has a good intent; but, it is bad for businessOne of the biggest mistakes that we have made  in the evolution of demand management processes was the introduction of consensus forecasting in 2002-2005.  It was a good idea that was poorly implemented.  People were asked their opinion, but there was no accountability. All inputs into a consensus forecast should be measured for bias and error. Individuals on a team need to be held accountable. Organizations confuse sales-driven processes as demand driven.  What we see in working with clients, is that the most biased group in consensus forecasting is sales.  Sales tends to be "coin operated" with a bias based on the bonus structure, and this bias comes through in all consensus forecasting processes.
  • Getting Perfect on Imperfect Data. Leaders Focus on the Probability of Demand. Laggards Talk about How the Forecast is Never Right. Often people get so excited about improving the forecast that they lose common sense. For example, I often see companies calculate forecast numbers to the ninth significant digit when the forecast accuracy is 30-50%.  I say, "Really? How does this make sense?"  I find that leaders focus on understanding the probability of demand, while laggards try to make imperfect numbers more perfect. I wish the companies would put more energy into accepting the probability of demand and building that into decision processes.
  • Lack of Understanding of how to Make it Better. These same leaders excel at the management of continuous improvement programs for supply. However, they have not thought about applying similar logic for demand. They lack the understanding of Forecast Value-Add (FVA) and how to drive continuous improvement programs in demand planning. Instead of a programmatic way of driving improvement, they ebb and flow and say, "Lets take a closer look a the numbers." A closer look will probably reveal nothing, but a continuous improvement program can drive big dividends.
  • Matching Aspirations and Capabilities in Channel Relationships. In the last decade, there has been a fad to do more Vendor Managed Inventory (VMI) and CPFR relationships. These relationships are negotiated without any alignment of skills and capabilities of the channel relationship.  I seldom see a client that has measured the forecast accuracy of a channel relationship and discussed how to improve it in the top-to-top meetings. VMI relationships should only be aligned with channel partners that are significant in volume, have clean data, and high forecast accuracy.  Too few companies know the forecast accuracy of their downstream channel partners; yet, they staff 30-50 Full Time Employees (FTE) to work in VMI relationships.

 

What do you think? Why do you think that progress in demand management is stalled?