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Time to Take Out the Pen

Posted by lcecere Aug 21, 2013

When you get asked the same question over, and over again, it is time to take out the pen and write a blog post. Here it goes....


Last week, when I was sharing the recent results of the Supply Chain Insights Sales and Operations Planning study with survey respondents and attendees to our public training, one question kept coming up. It was "How do the change management issues differ by level of S&OP maturity?" Here I answer this question.


Figure 1.



There are usually four distinct change management stages as shown in figure 1. When companies are early in their infancy in managing an S&OP process, the biggest barrier is typically the role of finance and the integration of the S&OP process to the financial budget. For many organizations, this is a tough obstacle. I have seen financial guys kicked off of the S&OP team. It takes time and education for companies to align. The budget is developed as a planning tool at the first of the fiscal year. It is a guide, but should never be used to constrain the S&OP plan. Instead, the goal becomes maximizing opportunity while mitigating risk. In this process, budget assumptions are aligned to market actuals.


The second barrier is moving from a focus on matching demand and supply (managing volume) to maximizing profitability. The change management issue is that the technologies do not do this well. And, calculating profitability in today's complicated business environments is not so easy. Only 23% of companies feel that they have systems and processes that enable the translation of volume to profitability analysis. At this stage of the process, which is often called Integrated Business Planning (IBP), companies will usually build something on their own to augment the traditional functionality of Advanced Planning Systems (APS).


As they get more fluent in profitability analysis there will be a thirst for visualization and "what-if " analysis. Only 11% of companies self-assess as having the ability to complete "what-if" analysis well. Most systems are just too inflexible.


Probably the greatest challenge of all lies in the transformation from inside-out to outside-in to become market driven. This usually requires the reimplementation of technologies and processes and the building of demand and supply networks to connect with market data. I find this stage the most exciting and enjoy helping companies to rethink their processes through the training.


Let me know your thoughts. Did I miss anything?

Today, I finished up a report on  supply chain talent. After doing the analysis of the results, I even more firmly believe that supply chain talent is the missing link in the supply chain.  In figure 1, I outline the company's biggest gaps. It is the sourcing and development of mid-management talent. YOWZA! It is large.


Figure 1.


Isn't this ironic? Most of the current company's efforts are focused on new-hire recruitment or mentoring for high-performance development for executive level positions. There are few companies that understand and have addressed the mid-management talent issue. OUCH!


Figure 2.


As a result, mid-management supply chain talent is getting short shrift. If you cannot make our Thursday webinar or the Supply Chain Insights Global Summit, here are a couple of facts to consider:


Opportunity to improve. Overall, companies rate their capabilities to manage supply chain talent worse than their peers. In the study, when companies were asked to self-assess their capabilities to manage supply chain talent, 17% self-rated that they perform better than their peer group while 34% reported that they do worse than their peers. And, we all know that self-assessment scores tend to overstate capabilities. <It is a bit like me reporting my weight on my driver's license.> I think that it is worse than reported...


High turnover. Average turnover of supply chain managers is 15%. It is increasing. In the study, 46% of companies attempt to hire from within the company, and 17% fill roles primarily through recruiting talent from other companies.  External recruiting is becoming less and less successful.


Shortage of talent. The average company in the study has four positions open for five months. Companies are is feeling the pain of open positions. The most difficult positions to fill are in the areas of planning that require both a technical mastery of technology and an organizational understanding of the business drivers.


Stiff competition for college graduates. Today, there is a 6:1 demand to supply ratio for new college graduates in supply chain management. Competition is intense and there is a lot of effort to attract the best and brightest from college recruiting; however, the larger issue is with the retention of mid-management talent.


Working on the Right Stuff? In short, we need to broaden our scope. The current focus is on recruiting college graduates and high-performing talent with little attention being given to middle-management talent development. Only 23% of companies responding to the study have a planned cross-functional training program for existing employees. This study points out the need for skill development in the areas of training and career progression to give employees cross-functional breadth.


Want to know more? On Thursday this week, I will be joined by three of my favorite people—Joe Krkoska, Dow AgroSciences; Nick Little, Michigan State; and Marcia Conner, Sensify (a specialist in adult learning)—for a webinar on Supply Chain Talent.  In this session, we will be sharing insights from our recent study.


We will continue this discussion at the upcoming Supply Chain Insights Global Summit in Scottsdale, AZ on September 11th and 12th. I would love to hear your thoughts.


Does the study mirror what you are seeing in your organization?

The websites are swept clean. The messages are honed. The Wikipedia pages are aligned. The E2open marketing machines are spinning. The blogs, social media networks, and pundits are whirring with predictions and accolades. I watch with a bit of amusement, and want to offer a bit of caution.


Let me start with a disclaimer. The Shaman is a curmudgeon. She cannot count the number of SCM software  acquisition announcements that promised 1+1=10. In short, this never becomes the reality.  Very few software acquisitions reach their potential. The ones that do can be counted on one hand. However, I like this acquisition. It will make E2open more relevant and could accelerate the evolution of a new form of marketplace offering. The supply chain management market is troubled and needs some excitement.


icon-scm was founded in 1992. The product, a licensed offering, was designed to enable a "rapid response" of what-if analysis in material-centric discrete supply chains. The company partnered with SAP to launch a product offering, SAP Supply Chain Response by icon-scm, in 2010. SAP company passed on a thirty-day period of first refusal to acquire the asset allowing the purchase by E2open on July 31st, 2013. This licensed software offering was purchased at slightly under 3X revenues. In 2012, icon-scm had revenues of approximately $10 million. The product was used to improve supply chain decisions in discrete manufacturing companies like Avnet, Hewlett-Packard, Pratt & Whitney, and Western Digital.


Based in Germany, icon-scm and the company leadership team was driven by a very product-based mentality. The company was never good at marketing. The company name is hard to say and for client's to remember. < I liken it to the Johnny Cash song, A Boy Named Sue. The company was born into the world with a tough name and faced a tough uphill battle. The founders bet the future of the company on the SAP partnership. The results were disappointing for both parties.>


Over the last decade, the German-based company was never able to successfully compete with the more aggressively marketed Kinaxis solution. There was a strong preference in the market for a Software as a Service (SaaS) offering, and Kinaxis was quick to claim that position. SAP's marketing of icon-scm was one of the most confusing marketing positions in the history of supply chain software. The tension between the SAP sales team to position SAP APO and SAP Supply Chain response by icon-scm was always tough.


With all of this as a preamble, and background, let me share five reasons why I think that you, as a supply chain leader, should care:

  1. Execution is key. E2open users need to get involved. When the hype settles, it will be all about execution for E2open. With all software acquisitions, there are trade-offs. The E2open client base is a very loyal long-term user base. Now is that time the E2open client base needs to get very involved with E2open management to ensure that product roadmap trade-offs are in their best interest. Act now to avoid a surprise. I expect E2open to continue to acquire additional assets and built a stronger presence in the supply chain market.
  2. Marketplace offerings are gaining steam. The race is on. A new form of marketplace offering is emerging.  The battle lines to build inter-enterprise supply chain solutions are drawn. SAP is betting on the Ariba platform. Elemica, E2open and GT Nexus are improving their solutions, working on aggressive product solution platforms to provide new value.  Each has a different, and improved, position to improve value chain network visibility and analytics. My bet is on the evolving best-of-breed provider landscape. <I find it hard to see the value in using the Ariba network that was designed for indirect procurement to seize this market opportunity.>
  3. Validation of Rapid Response as a market is good news for Kinaxis. The Canadian planning vendor, Kinaxis, pioneered the concepts of Rapid Response early in the decade. They were one of the first SCM vendors to move to a SaaS model. It was a gutsy, but right, move. The company has waged a tough market battle for recognition. The acquisition of icon-scm by E2open now makes them official competitors and validates the space. The building of icon-scm functionality into the E2open platform should be a wake-up call for Kinaxis to move quickly to evolve their strong cloud-based architecture to a one-to-many and many-to-many data model to serve the emerging marketplace opportunity. It is my hope that they get more serious about their relationship with GT Nexus.
  4. SAP partnerships have less meaning. icon-scm and SAP partnered in 2010. It was a "preferred partner" with formally announced intentions to incorporate the Rapid Response functionality into its supply chain management capabilities as an SAP Solution Extension Partner. The partnership was on the official SAP product roadmap. It drove the buying decisions of many a CIO.  While the press will say that SAP will continue to support this application, over time, clients will have to rethink their platforms to migrate to E2open or to embrace Kinaxis. SAP is betting on their new solutions based on the Ariba Network.
  5. SAP loses momentum to drive value for supply chain leaders. The right acquisition would have been SAP's acquisition of E2open and public disclosure that SAP APO and SAP SNC have not lived up to their promise. In my opinion, the SAP teams need to rewrite their applications to meet clients' needs. They are losing market relevance.

At the end of the presentation today, it happened. At break, after sharing research on the principles of becoming market driven, I was relaxing with my coffee when I heard a person softly say, "I am sorry to be so dumb, but I don't think that I understand the concepts of becoming market driven ... or the differences between market driven and demand driven. It is probably me, and I hate to ask it in the group, and I would certainly hate to APPEAR in your blog tomorrow, but can you explain it ONE more time?"


It is ok. It is just you and me, dude. I will not share your name publicly. Since so many people have the same question, I thought that it would make a good blog post. I have done it in the form of an open letter.


Dear Gnarly Dude:


First of all, there is no such thing as a ''dumb question."


It takes courage to ask tough questions, and I appreciate it. These concepts are not easy.  In fact, it took me eight years of research. So, please don't apologize. It is ok.


Let's start with the difference between market-driven versus marketing-driven processes. In the old-fashioned, conventional organization, functional processes are usually marketing driven. Marketing hones what they think is a brilliant message and broadcasts the message to the crowd through media tactics. The marketing group tightly controls the message to build brand. It is hard to change because the marketing organization driving a marketing-centric program has worked over the last two decades. Change is tough.


Contrast this to a market-driven company, where you are serving the customer by listening, testing and learning. It is not about control. Instead, you understand that the crowd has wisdom to share and you want to listen. You want the supply chain to be designed to drive unique assortments and to reliably respond to changes in demand. To do this, the supply chain is designed to sense, learn and then respond. Today's conventional supply chains only respond, and the design of the systems usually gives us a "fairly dumb response" based on history.


Additionally, in a marketing-driven company, good news happens fast. When a product is selling and marketing is meeting the business objectives, everyone is quick to grab a beer and do a toast. I am sure you have a lot of T-shirts in your closet from these launches. However, when the sales are not at plan, the news travels slowly in the organization and there is often a lot of denial. As a result, organizations are usually struggling to write off SLOB (slow and obsolete inventory).  A discussion with marketing about SLOB is never a good thing.


So, what is the difference between a market-driven and a demand-driven value network? A demand-driven value network senses demand with minimal latency to drive a near real-time response for demand shaping and demand translation. In this network, the bullwhip effect is minimized using channel data.  Contrast this with a market-driven network that builds on the demand-driven concepts. It takes it one step further. Being demand-driven is a prerequisite to be market driven. In a market-driven value network, the use of market data is used to orchestrate trade-offs market-to-market (buy- and sell-side markets or channel to supplier trade-offs) through the use of advanced analytics in horizontal processes to orchestrate demand and supply decisions based on analysis of profitability, mix and volume against the business strategy.


Why do we need to change? It comes down to good business. In most companies, growth is stalled. Traditional marketing tactics are not as effective as they used to be. Power has shifted to the shopper. Companies today are unable to drive profitability, and manage inventory cycles, while absorbing the complexity of a rapidly changing product mix. The traditional supply chain is designed to support high volume, predictable items in known markets. When things change, it cannot adapt.


So, if you buy the argument, here are some steps to take. The first step is the building of an architecture to match customer attributes to product attributes. Think about these concepts:

  • Building of Listening Posts and Actively Listening and Learning from Consumer Data. Most of this is unstructured  data—Facebook, Twitter, Ratings and Reviews, and Blogs—which requires the deployment of sentiment and text mining applications. These technologies are new, and the process evolution to support the use of the data is evolving. The first step is to set up a cross-functional team to review this data weekly and then start to use the data in conventional processes (e.g., rating and review data into forecasting as a causal factor for new product launch, discussions on true customer sentiment to drive the decision of how much to make on the second production run after launch, or market receptivity to a new promotion, etc.)
  • Design of Outside-in Processes. The use of channel data—point of sale, warehouse withdrawal, basket, and retail partner perpetual inventory data—to understand channel flows and improve demand sensing. When companies are market-driven they use channel data to drive a pull-based response while actively designing push/pull decoupling points to maximize flexibility while minimizing costs. This channel data is archived in a system of reference, often termed a Demand Signal Repository, for reuse. Using cognitive reasoning engines and advanced optimization, unique insights radically improve the response.
  • Rethinking Planning.  This channel data is then used to drive planning. Demand planning models are based on attribute logic. So, as items change, the new item is forecasted based on profiles of the history of products with like attributes.
  • Embrace Test-and-Learn. Actively design in vitro test-and-learn scenarios based on carefully designed testing based on market data. Use test and control markets to adopt assortment and demand shaping activities. Use new forms of analytics to learn from channel sales. Build a supply chain to support this type of agile response.
  • Use New Forms of Analytics to Drive Demand and Supply Orchestration. Traditional supply chains respond to volume-based pulls based on orders and shipments. The data are stored as an item sold, at a location, based on volume. In market-driven value networks, companies actively use optimization and predictive analytics to match price and demand shaping activities market-to-market. In horizontal processes, like revenue management and Sales and Operations planning (S&OP), new forms of analytics are actively used to make trade-offs of mix, profitability and volume. Commodity markets are too volatile for this to be a passive process. For example, if a product has a high commodity cost, or is difficult to manufacture with unsure reliability, the company would question if this is the right product to promote or market. The orchestration of demand to supply evaluates the price elasticity of market pricing against the commodity risk in sourcing and the reliability of processes to deliver. Let me give you an example. During the recession, there were two competing breakfast cereal companies. Each had the option to promote either cereals with corn or wheat. It was proven that consumer sentiment was equally disposed to either product. Corn was skyrocketing in cost and one cereal company orchestrated demand and supply and decided to promote a line of wheat products. The other company promoted corn-based products based on history. The company that promoted wheat-based products gained market share and managed profitability. The other company reported a serious decline in earnings.
  • Alignment of Functional to Corporate Metrics. Focus on the Use of New Forms of Analytics in Horizontal Processes. Market-driven companies understand that the most efficient supply chain is not the most effective. They actively design the supply chain based on the probability of demand and the uncertainty of supply. It is clear that the complex trade-offs of the supply chain cannot be made in spreadsheets. As a result, they model the potential of the supply chain by analyzing the trade-offs of growth, profit, cycles and complexity in new forms of analytics that support the horizontal processes of revenue management, Sales and Operations Planning (S&OP), supplier development and corporate social responsibility.


So, gnarly dude, I put you at the head of the class. You listened intently in this morning's session, and you asked wonderful questions. I wish you well in your market-driven journey. I cannot wait to write your case study.


Sincerely yours,


The Shaman