Market-Driven

Time for a Mea Culpa?

by Lora Cecere on April 16, 2014 · 2 comments

It is a slow week. Most of my friends are on vacation. I would like to be on vacation with them, but it is not in the cards.

I have taken myself off the road to write the book Metrics That Matter. It is tedious.

Let me just state for the record that “Saying that you are going to write a book, is far more exciting than writing one.” I like to write, but I am 52,000 words into a 90,000 word project, and I am struggling. My mind says write, but my heart says it is spring. I want to garden. I find it easier to write in the winter. For now, I have taped a picture on my desk of the vacation that I want to take in May when the book is finished, and I continue to be head-down … typing away.

Writing the book is helping me to get perspective. Check out Figure 1. For most companies today there is great room for improvement in the supply chain. It is cautious, reactive and traditional. We have designed it to be that way. Companies want a supply chain that is more aligned and agile. But, guess what? We have not designed it to be that way.

Figure 1.  Current State of Supply Chains

Some Stories from the Road

On the 2nd of April, I sat before a board discussing how a company could exceed expectations in the delivery of Return on Invested Capital (ROIC) and superior operating margins and fail at the delivery of customer service and inventory.

On the 9th of April, I went to see a supply chain leader that spoke of how a “tightly integrated” global supply chain was making things worse for him. His demand signal was worse in global markets, especially Brazil. Because he had reduced his buffers—both inventory and manufacturing—and had built a push-based supply chain using a forecasted demand signal, he was failing in many markets.

Last week, I was working with a company that personifies the words cautious and conservative. They have a goal to be agile and aligned; however, their continuous improvement processes are making steady improvement on an efficient supply chain model that is anything but agile or aligned.

As shown in Figure 1, we have built a global, controlled supply chain, but is this want we really want?

Many Ironies.

I see many ironies. There are too many to count. Let me give you a few.

  • Companies say that they want to build the end-to-end supply chain from the customer’s customer to the supplier’s supplier, but the investment is primarily in enterprise systems.
  • Supply Chain leaders will state in one breath that they want to be innovative and try new technologies; however, in the next sentence, they will ask for a statement of a definitive Return on Investment (ROI) for a project. How can you drive innovation if you hamstring yourself to only take a step to try a project with a definitive ROI?
  • New forms of analytics allow us to see demand patterns and translate actual channel demand 10-40X faster, but companies are slow to adopt the techniques.
  • As growth has slowed, and global compliance requirements are increasing. Supply chain matters more, but it is understood less and less.
  • Nine out of ten companies are stuck at the intersection of operating margin and inventory turns, but they do not know what to do about it.
  • Corporate social responsibility and the sustainable supply chain matters. Sixty-five percent of nonrenewable resources lie outside the four walls of the enterprise, but only 21% of companies are actively trying to work with suppliers on the reduction of carbon, water and energy footprints in the extended supply chain.

I Think That the Answer Lies in Leadership.

I encourage all supply chain leaders to have an “oops” day.  What is an “oops” day? It is a day for you to have a mea culpa meeting with your team. It is a meeting where you don’t pretend anymore that everything is wonderful. And, where teams don’t prepare pretty charts to tell you everything is glorious. Instead, you book the biggest conference room in the building and invite a cross-functional team to review what happened in 2013.

Before the session, ask a small group to chart your progress on the Effective Frontier using orbit charts. Figures 2 and 3 are some examples. Note that on the chart of inventory turns versus operating margin, that one division is making progress while the other has not. In parallel, on customer service, one category is making progress while two are not. This is common.

Figure 2. An Orbit Chart of  Performance Comparing Two Divisions within a Company

The issue? The company was doing well on the management of a regional supply chain, but failing in managing products across geographies for a global supply chain. They had not adopted work processes that were more global.

We often find that companies have better performance in the management of regional supply chains where the sources of supply are in the same market versus the management of products across borders. However, when you chart your own progress, you will see your own patterns.

Like most companies that we work with, these lines are not linear. And few show a positive trend. For most companies we work with this is eye-opening. You just do not see the patterns of the interrelationships of metrics in an Excel spreadsheet. And you need to look at the intersections over many years. It is useful to plot these, and then step back and have a dialogue with the greater organization in the meeting.

Figure 3. An Orbit Chart of Customer Service (Case Fill) Versus Inventory Turns

To get ready for your meeting ask each person to write down the number of “oops” moments, or issues, that they felt in 2013.

As part of the meeting, record all of the misses on chart paper and tape them to the wall. (This is why you need a big wall and lots of paper.)

An “oops moment” could be:

  • A product sold more than expected. Your team could not meet the customer service goals.
  • Product quality issues. The team had reliability issues with a new product or a launch that created problems.
  • The product undersold in the market. Your team could not throttle back production fast enough and the company was stuck with product to be written off.
  • Employee turnover was high. There was a shortage of planners resulting in a problem.
  • The issues go on and on…
After putting them on the wall, step back and ask a series of questions:
  • What are the root issues?
  • Where are we failing?
  • What are we doing well?
Then ask the group to work in smaller groups to answer the questions of:
  • What data is available that we could use to be more responsive?
  • Could new forms of analytics help?
  • How could we improve outcomes through better work in horizontal processes? (S&OP, revenue management, corporate social responsibility and supplier development)
Then give the group an innovation fund. Ask them where you should spend your money to drive iterative progress. And then charter a group to get started.
I firmly believe that we need to have more honest moments with our teams. Most companies do not have the answers. When I work with companies, the gap in supply chain performance is larger than I expected. Yet, I see us driving continuous improvement programs to get more efficient at doing what we do today. I do not think that this is the answer. Instead, I think we need new mental models and we need to adopt new ways of thinking.
For example, I think that there is promise in the adoption of new forms of analytics. It is an iterative process. It is not a Big Bang project like ERP. For more on this topic, listen to our podcast miniseries on Analytics available on itunes.
For additional insights on new ways of thinking, tune into our webinar series. We have one more in April and three planned in May. The one next week focuses on the work that we have been doing on the Supply Chain Index with Arizona State University (ASU). We have been partnering with ASU to determine the best method to calculate strength (year-over-year improvement) and resiliency in the orbit charts. We are making progress. This work continues through May with the launch of the Supply Chain Index report. The Index will rate every publicly held company on strength, resiliency and balance for the period of 2000-2012. Company performance will be by industry group.
To learn more on our work on the Supply Chain Index, join via the webinar sign-up on the Supply Chain Insights website.

 

Can You Take the Risk?

by Lora Cecere on April 11, 2014 · 0 comments

“This is not a supply chain process. It is a new way of doing business.”

Financial Leader in Discussions on Demand Sensing

In 2013, 80% of supply chain leaders had a material supply chain disruption. It was not just one. The average company had  three. Yet, in a study that we just completed, when asked about business pain, supply chain risk rates low. How come?

It is new.  It lacks a consistent definition and set of practices. Companies reward the urgent. Risk management requires a focus on the important. It requires leadership and orchestration. Teams don’t know what to do. The companies that are the most mature learned the hard way. They had a disruption.

Defining the Topic

Let’s start with a definition. For the purposes of the study that we just completed, we defined supply chain risk management as the proactive identification and resolution of potential risks to the supply chain. The key word in this sentence is proactive. Unfortunately, too many supply chains are reactive. The systems respond, but they do not sense. Performance is measured by indicators, not by performance predictors. The reward systems focus on the urgent, not the important.

In this series of posts, I will be sharing insights from the research from this recent study. This data will also be featured in an upcoming report in our newsletter.

New Insights

When you talk to supply chain leaders about risk management, their answers tend to be hard-wired for supply. Many will wax eloquently about the work that they are doing on “control tower” or “supply chain visibility.” It is not sufficient. We are only dipping our toes into turbulent waters.

I have been working as an analyst in supply chain management for the last decade. In this role, I have done a study on risk management about every five years. I seldom get surprised on study results; but, the answer to the question on risk drivers in this survey surprised me.  As you can see in Figure 1, today it is less about supply and more about demand. The largest gap in risk management expected over the next five years will be the management of global operations. For me, these two trends hop off the page:

  • Increasing Complexity of Operations. With a decade of building global supply chains behind us, companies are feeling the impact. Local regulations, fair labor, variability in shipping lanes, new materials, outsourced manufacturing and faster product development cycles are all contributing to the pain. The financial stability of contract manufacturers and third-party logistics firms is a growing risk. It is not just one factor. We are better at managing regional supply chains than tangled/knotty global ones. The organizational dynamics and politics make regional/global governance difficult.
  • Demand Variability. The biggest surprise for me in the research is the role of demand uncertainty on risk. The building of demand sensing capabilities requires the automation of market sensing and the use of channel data. The change management issues are high. It is difficult for the supply chain to accomplish this by themselves. Why?  The term “supply chain” is politically charged. It has become a function, not an end-to-end process.  Marketing and sales are also functions. The functional approach does not allow us to build demand processes. By and large, marketing and sales are not good at forecasting demand. They introduce bias. To combat this issue, and drive success in demand sensing, many companies have to rename the work stream so that it can truly be an end-to-end focus. For sales-driven and marketing-driven companies, this is a major change management issue.

 

Figure 1.

Supply Chain Risk Drivers

So, What Should Companies Do?

Recognize the Issue. Simplify Operations. This includes simplification of the product lines and the definition of standard ingredients and/or interchangeable parts. Our research supports that getting this on the product development agenda is a barrier. Mitigating this risk issue requires striking the right balance between global and local governance. There is less variability in the management of regional supply chains. Accountability and priorities are clearer.

Use Channel Data and Build Demand Sensing Capabilities. Reduce demand latency and automate the processes of demand. I work with many companies on the differences between marketing-driven and sales-driven processes and the journey to become market driven. When marketing and sales operate as functions, they are not aligned to more holistic end-to-end processes. This is growing as an enterprise risk.

Focus Where It Matters. Yesterday, I hosted a webinar with David Simchi-Levi of MIT. He has defined a Risk Index which analyzes the Time for Recovery and the Financial Impact (FI) to analyze the risk of the supplier base. It is a great technique to use in supplier development and network design.  For those interested, check out David’s recent article on Harvard Business Review. His work with Ford is profiled in Figure 2. After the analysis of Ford’s supplier base, David offers recommendations and actions that are shown in figures.  However, to use this methodology requires the organization to be proactive. In the Ford example, the greatest risk was with a tier 2 supplier of O-rings that had low spend. David’s methodology is a stark contrast to the conventional work on supplier development and network design. In the conventional approach, companies would look at the suppliers with the greatest spend and miss the impact on the tier 2 suppliers with low spend. David’s point in the webinar is that you have to be focused and deliberate. Ford has 5,000 suppliers. It is not a simple activity. It requires work. However, based on the results of the study, it is worth it.

 

Figure 2.

Chart by David Simchi-Levi

 

The slides from the risk management webinar are now available on SlideShare. Check them out. We will be doing complimentary webinars twice a month in a countdown to the Supply Chain Insights Global Summit. In this event on September 10th-11th, 230 supply chain leaders will gather to focus on the supply chain of the future. With the coalescence of digital manufacturing, new forms of analytics, The Internet of Things, and the collaborative economy, we think that it is time to re-think supply chain practices and imagine what it could be. Today, 45% of the seats are sold. It is limited to 15% technology and consulting attendees. We would love to see you there.

 

 

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