Market-Driven

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!

 

 

Definition: Brass tacks are a type of pin or nail. The phrase to come (or get) down to brass tacks is sometimes used idiomatically to consider the basic facts of a situation. Source Wikipedia

In the 1990s suppliers had channel power. The formula for success seemed foolproof. A new product was launched, the ads ran on national TV and “poof” a new brand was created. This all changed with the disintermediation of national media.

During the next decade, the power shifted to the retailer. Consumers became more loyal to retail brands, and retailers increased the number of products manufactured and marketed as house brands. This trend spawned chains like Trader Joe’s, Walmart, Whole Foods Market, etc.

Today, with the acceptance of the mobile phone and digital media, the power has shifted to the shopper. Consumers want to shop anywhere, and buy in the way that they want to buy. The digital consumer often wants to shop online, pick up at the store, and conveniently manage returns. The e-commerce customer wants convenient delivery to the home.

With the shifts in power, the relationships in the value chain are morphing. Each year I go to the Consumer Goods and Technology (CGT) conference where speaker after speaker talks about retail/supplier collaboration. I usually sit in the back of the room and watch the event with a wry smile on my face. Why? I am a disbeliever. Collaboration is evasive. Today it is more talk than action. In this post I want to share what I think really needs to happen to spawn true collaboration.

What Is Collaboration?

I define collaboration as a lasting win/win value proposition for both parties. Today we have collaborative data sharing, and collaborate processes, but we seldom have what I term true collaboration.  Instead, we have had situations where one party wins at the expense of the other. In the 1990s the supplier won at the expense of the retailer. In the last decade the retailer won at the expense of the supplier. It is for this reason that I sit on the back row at most conferences watching, listening, and smiling.

Why Is It More Important Now?

As the bricks and mortar retailer is attacked by e-commerce pure plays—Amazon in North America, Alibaba in China, and Flipkart in India—assortment and excitement in the store become paramount to lure customers. They need the supplier more to drive excitement in the store. While many retailers are changing the role of the store to include services: pet grooming in PetSmart, clinics in CVS, cooking classes in Williams-Sonoma, etc.—this is not enough. The retailer needs the help of the supplier more than ever. It is for this reason that I have written a letter to the retail Chief Operating Officer below.

My Letter to the Retailer

Dear Retail Chief Operating Officer,

I have watched the evolution of consumer value chains for many years. I have studied the building of collaborative processes, and written about the shifts, and highlighted where we are gaining value. I know we have talked about collaboration for many years, but all I see is pilots: good intentions defined by fits and starts. In my research, I do not see that any retailer has really redefined value chains through collaboration. Based on what is happening in the industry and the need to drive excitement in assortment in the store, I would like to share three things I would do if I were you to build a collaborative framework to enable true collaboration between you and your suppliers.

Figure 1. Data Sharing Mechanisms

1. Share Data Freely and Openly through a Private Network. Today, as shown in Figure 1, most retail data is shared through a portal. The most effective way to share data is through a  private network. Portals do not enable effective data sharing and support of collaborative practices. When data is shared through a portal it lacks a persistence layer. As things change there is no system of record. Today only 3% of retailers are using private networks for data sharing. I know that this takes investment,  but it is worth it in the long run. Consider the impact of Walmart’s Retail Link on Walmart.

Figure 2. Current State of Perpetual Inventory

2. Get Good at Data Sharing. Replenishment is fueled by an effective perpetual inventory signal. It anchors optimization engines for replenishment. The supply chain needs it. Without a perpetual inventory signal you will never be able to manage out-of-stocks and promotions. Today, as shown in Figure 2, 57% of retailers have a perpetual inventory signal in the warehouse, and 47% have a perpetual inventory signal in the store. Collaborative relationships need a good signal for inventory. It needs to be an accurate signal reflecting real-time changes as orders are shipped throughout the day. So, to be a collaborative trading partner, build a good perpetual inventory signal … there is no substitute for an accurate PI signal in supply chain excellence.

Additionally, get good at forecasting. Measure the Mean Absolute Percentage Error (MAPE) of your forecast and focus on driving improvement. Today there are only two retailers that have forecast accuracy that is good enough to drive value downstream for trading partners. Drive a difference. Own your data.

3. Take Your Hand Out of the Supplier’s Pocket. For many, deductions and penalties for performance have become a budget line item (often a profit center). And 84% of retailers charge for deductions with 1/3 of retailers having a budget for deductions with many taking them into income. As a result, it has become a systemic way of making money for the retailer which is a lose/lose. In this relationship no one wins. Suppliers cannot get to the root cause to solve problems, and revenue recognition is delayed. Instead, it becomes waste, or Muda, in the supply chain to track and manually audit. Instead, focus on clean transactions. Carrots drive better performance than sticks.

My advice. Own your own network. Focus on creating value and winning together. Isn’t that is what collaboration was supposed to be all about? If you get serious, I want to write your story in the new book that I am writing. 

What do you think? I would love to hear from you. This month, in our newsletter on October 21st, we’ll be sharing the results of a study that we’ve been working on focused on Downstream Data Sharing. We would love your input as we close the survey.