Demand

Three Questions People Are Afraid to Ask….

by Lora Cecere on October 29, 2014 · 0 comments

Groupthink is a psychological phenomenon that occurs within a group of people in which there is a desire for harmony within the group, but the result is an irrational or dysfunctional outcome.  Wikipedia

You know the drill. The meeting is on everyone’s calendar. It has been set up by the CEO or a board member’s assistant months in advance. The room is big, the PowerPoint deck is large, and the coffee cups are arranged in neat rows on the counter of the side of the room. There is an abundance of pastries flowing from the basket, and the stage is set for an impactful meeting. Even though things seem to be going well (all of the meeting details are well-executed and the speaker is giving an energized presentation), the room is eerily quiet. The speaker is speaking, the beautiful slides move quickly at the front of the room, but the audience is not engaged.

In my travels, I attend these meetings frequently. They are precipitated by a strategic relationship between a consulting company and the executive team. The consulting team pitches a theme—vision of supply chain best practices, big data analytics, or demand-driven value networks—to the executive team, and a new project is initiated. The first step in the journey is a kick-off meeting. The second step is usually a large implementation of a technology project—Enterprise Resource Planning, Customer Relationship Planning or Analytics. I feel that the industry is engaged in ‘Group Think’. No one in this meeting is going to ask tough questions. The board has not set up the team for success. Here are the three questions that I would like people to ask:

Table 1. Comparison of Results for Best of Breed Solution Providers to ERP Expansionists in Supply Chain Planning

Question 1: What drives a successful implementation of supply chain planning?  Supply chain planning is now in its fourth decade. The first evolution of technologies were built by best-of-breed solution vendors. These solutions were usually implemented by the technology provider by consultants with specialized skill sets. The promise was the delivery of a decision support system that would allow the organization to optimize the relationships between cash, cost, and customer service against the strategy.

The second-generation of solutions were built and marketed by Enterprise Resource Planning technology companies like SAP and Oracle. The promise of these solutions was that an ‘integrated planning solution with ERP would deliver greater value’. (This solution is termed the ERP Expansionist in Table 1.) This new solution was favored by the Information Technology (IT) organization. By purchasing planning and transactional systems for a common vendor, they had one throat to choke and they were familiar with the architectural elements. It was also the preference of the consulting partners because the projects were longer, more costly and better aligned with the consulting model. But, did it add more value? The answer is no. As shown in Table 1, the movement to adopt “integrated ERP and Supply Chain Planning software from an ERP vendor” moved the industry backward. Ironically, the solutions implemented by the consultants, as contrasted to those implemented by the technology vendors, also produced less desirable results.

How do I know this?  The results in Table 1 come from a nine-month research project of 120 respondents representing 183 instances of demand and supply planning. (The average company has more than one instance of both.) In the study, the respondents were asked to rate time to Return on Investment, and satisfaction. We also correlated the results to balance sheet performance. What do we find? Best-of-breed solutions have a higher Return on Investment and are quicker to implement. They also have higher satisfaction rates. The highest satisfaction comes when the technology vendor implements the solution. It is significantly different at a 90% level of confidence. In the data, we can also see that the implementations from the ERP Expansionists have significant gaps—requiring more planners, longer times to plan, and greater difficulties getting to data.

Why does this happen? Leadership teams struggle with the trade-offs between cash, cost and customer service. As a result, supply chain planning is often a targeted project when the strategic consulting partners talk to their clients at a board level. The strategic consulting partners are respected in these relationships and seldom questioned, and the stage is set. In parallel, there is a low-level of trust for the best-of-breed technology vendors. Many are very sales-driven and difficult to work with. The market was overhyped at an early stage and trust eroded. Would the board deliberately select a system that takes longer to implement, with a lower Return on Investment, requiring more ongoing labor and producing lower results? Of course not. But, the industry is in a groupthink. No one is having a fact-based discussion. This is how we see our role.

Table 2. Characteristics of those Satisfied with Supply Chain Planning

Q2: Who does supply chain planning well? What can we learn? As shown in table 2, the companies that are the most satisfied with planning are smaller organizations with 15 or less planners and without high item complexity.

To drive maximizing the value of planning, organizations need to be aligned against an operating strategy. Companies adopt planning to optimize the organization’s response from the customer’s customer to the supplier’s supplier. The supply chain planning cannot be effective if implemented by a supply chain function that is focused only on customer service, logistics and distribution. It requires the support of the organization to optimize the response for the end-to-end value chain that crosses functions.

What can we learn from this table, and the research? A successful supply chain planning implementation is about more than technology. The implementation of decision support tools needs to be a way of life. Planners need time to plan, and the organization needs to be aligned against a shared vision or operating plan. It cannot be about the optimization of vertical silos within the organization. This leads to a sub-optimal response.

The second thing that I learned from the research is that we do not have good solutions for large organizations in the market today. If you have a large number of planners and high item complexity, you are at risk. This I think leads us to the Third act of Planning.  In the third act, I believe that the technologies are very different from those in the first three decades of evolution. In the Third Act, I believe that the processes and technologies are redesigned outside-in from the channel back to the enterprise. I think that it is a new world of cognitive learning, rules-based ontologies, concurrent optimization, and B2B Networks based on canonical infrastructures with many-to-many data models. These new technologies are evolving. (I will write more on this in my next blog post.)

Q3: How do I become demand-driven? Data surrounds the company. The data in the channel is changing faster than the company can adopt processes and technologies to use it. It is piling up on the doorsteps of most major companies. Some may be used by the digital marketing teams for marketing purposes, but the average company does not know how to use it. They struggle to listen to and interpret market signals. It is ironic that there has never been a time in history where customer data is more available, and the demand higher for companies to operate a customer-centric value network to sense and respond to true demand, but the solutions to use the data are evolving. Today, they do not exist.

Most consultants and technologists are guilty of bait and switch. The discussion is on becoming demand-driven, but the recommended solution is a traditional approach. When the pretty slides are over, the consultant submits a project plan to implement the traditional forecasting, order management and supply planning that does not sense market demand and translate it into usable outcomes. The audience listening to these presentations does not have the courage to raise their hands and ask the question, “How do you define demand-driven value networks?” and then follow with the question of, “Can the traditional technologies really help us to become demand driven?” The consultants are incented to recommend the solutions that they are familiar with in implementing. Most know very little about the true definition of demand driven.

Tomorrow, I get to deliver this message to a large manufacturing client. I am speaking at their global kick-off. I am going to encourage them to not be guilt of industry groupthink. In this blog, I hope that I push you too. I want you to raise your hand and question the status quo. And, if you do not have the courage to do it directly, share the research and ask your leadership team to give me a call. I answer all emails and phone calls. I want to change the dialogue. It is tough for me to see that nine out of ten companies are stuck, and not making progress, at the intersection of operating margin and inventory turns. I grow weary of all of the consultant presentations of how supply chains can reduce inventory without looking at the form and function of inventory and the real needs for inventory to be a buffer of demand and supply volatility.

Join us next week for our webinar on Supply Chain 2020. In this session, we will share research on the future of supply chain technologies, and I will be joined by a panel of two leaders that will share their insights on what the future means for them. In addition, I am now done with the page proofs for my new book, Metrics that Matter. The book is a story. It is a fable about a guy by the name of Joe that does not want to be an average Joe. Instead, he wants to drive supply chain excellence and build the metrics that matter. To do this, he has to build a guiding coalition and  define outside-in processes. Like you, he works with a group of characters within his organization, and is struggling with how to define the opportunity for the company. To do this, he has to use political capital, against great opposition, within the organization to redefine supply chain excellence. The book publishes in December 2014. In parallel, we are busy building a simulation game for organizations to play to understand the concepts of managing the metrics as a system and the importance of outside-in processes. Attendees at our 2015 Global Summit will get to participate in the launch of this new simulated exercise. We hope to see you there!

 

 

Don’t Let the Old Horse Die

by Lora Cecere on August 30, 2014 · 0 comments

Sales and operations alignment. It is the promise. For many this seems like an old horse to ride. It is tough because operations and commercial teams are not naturally aligned, and the implementation of an S&OP process is not a quick fix.

The processes of S&OP are now over 35 years in evolution. In many ways they are quite different, and in many they are the same. Let me explain.

What Is Different?

They are different because in today’s organization, there is not one S&OP process. Instead there are usually four to six. Each needs to be developed and refined.

Organizations are also more complex. With the evolution of global organizations, decision processes are more matrixed and the processes of planning are more complex.

The technological challenges are also greater. The average company has three to five ERP systems, and the data for S&OP comes from an average of 15 systems. There is a growing need for a visualization layer across the matrixed organization and the many technologies that need to support the S&OP process.

These are the new challenges.

What Is the Same?

The challenges for S&OP are steeped in organizational alignment and culture. The best S&OP processes are aligned and balanced with clear goals. This is more difficult that it seems. As can be seen in Figure 1, 68% of processes are out of balance. When a process is balanced the drivers of go-to-market plans are aligned with the goals of the operations. When there is balance, S&OP improves the potential of the organization to perform on the Effective Frontier—to balance growth, profitability, cycles and complexity.

Figure 1.

The organization is not naturally aligned to the same goal. As shown in Figure 2, the greatest gaps in the organization are between operations and sales. The processes of S&OP can improve alignment.

Figure 2.

This happens more quickly if the process meets three conditions:

  1. The S&OP process should report to the profit center manager.
  2. The focus needs to be on driving a balanced portfolio of metrics that goes across the organization. Team members need to be held equally accountable for growth, inventory, profitability, customer service, and forecast accuracy. The process needs to be very disciplined.
  3. S&OP planning needs to be tied to execution. Reliable processes build trust. This happens through the development of playbooks and weekly reviews of the S&OP plan with corrections based on the playbooks. (Planning should not be confused with execution.)

Why It Matters

Today, most companies are struggling with the ability to improve operating margins and reduce inventory levels. Nine out of ten companies are stuck at this intersection. As can be seen in Figure 3, more companies have seen a deterioration in inventory performance rather than driven improvement.

Figure 3.

An effective S&OP process improves alignment between sales and operations. (To understand how we measure alignment, and the impact of alignment from S&OP maturity, reference our report on Supply Chain Alignment.) Based on the work we’ve been doing on the Supply Chain Index, and gauging supply chain improvement, we wanted to understand how improvement in alignment improved inventory turns. To do the analysis, we cross-tabbed multiple studies that we completed in 2013 and 2014 and then enriched the data with our financial ratio data base. The goal was to track the impact of improvements in alignment on financial ratios. We find that improvement in alignment can drive up to a 10% improvement in inventory turns; whereas the lack of alignment can result in a negative impact on inventory turns of 2%.

Balance drives alignment. Alignment drives balance sheet improvement. Keep riding the horse….

It is morning in London, and I spent the week with a client working on the implementation of the SAP IBP technology built on HANA. It is great to see this product being used by clients. The adoption has been a long time coming…

Next week I will be in Stockholm discussing European clients’ progress on the Effective Frontier at the Optilon Conference.  With only two weeks left before the Supply Chain Insights Global Summit, the team is hard at work on putting the finishing touches on new research and insights for the Supply Chain Innovator. Join us at the conference to hear us launch  The 15 Supply Chains to Admire. This analysis is based on both performance and improvement of companies within their peer group on growth, Return on Invested Capital (ROIC), Operating Margin and Inventory Turns. It will conclude a two-year research project. If you cannot make the summit, join us through the live stream via our ustream broadcast.

I hope to see you in my travels.