Advanced Planning Systems

The End of a Fairy Tale. Part 2.

by Lora Cecere on January 14, 2013 · 5 comments

Usually in a fairy tale there is a big, bad wolf… or a hairy monster.  One that is going to eat you up!

In part one of this blog series, I started the saga of the supply chain fairy tale.  It was a story where people believed that functional excellence leads to supply chain superiority. Year after year, well intentioned people toiled against improving metrics that reduced, not improved, the effectiveness of the supply chain. The example that I give in the first post is the focus of manufacturing strategies to drive strong results to improve Return on Assets (ROA) that have actually caused a deterioration in operating margin. For the supply chain traditionalist this may seem counterintuitive, but I make the argument that three primary factors have changed– go-to-market strategies,  cost inputs and the basic rhythms and cycles of the supply chain –and, that there is a need to manage the supply chain cross-functionally to drive end-to-end progress. I strongly feel that a blind focus on functional excellence will cause the supply chain to become out of balance.

Here I want to make the argument that the big bad wolf that is swallowing up the supply chain is investment in traditional technologies that were primarily designed to improve manufacturing decision making processes by reducing only manufacturing constraints. I feel that there is an opportunity cost to the organization to work on their third or fourth ERP upgrade and look blindly, and only, at analytics from the ERP vendor. Instead, I would like to see companies invest in new forms of analytics to better use existing data. The argument that I want to make here is that the supply chain problem has changed, but we are implementing the same old technologies without stopping to realign against new goals. Here is my argument.

Based on recent research, today, over 90% of companies have an Enterprise Resource Planning (ERP) system and an Advanced Planning System. These technologies are mature. We are in the evolution phase of user-based enhancements. The consolidation of this industry has served the technology providers well, but has largely stymied innovation. Yet companies are still investing millions of dollars in these upgrades. I feel that many of these technologies are now legacy.

I feel that continued investment in multi-year ERP systems is the big, bad wolf. The opportunity cost to an organization is huge. Based on the analysis of financial ratios, I can clearly see that companies with the best results on revenue-per-employee have strong ERP systems, but they have implemented once and have avoided multi-year evolution projects.  ERP is valuable to improve transactional accuracy, but I can find no evidence that  investments in ERP  have reduced inventory or improved cash-to-cash cycles. I believe that the ERP and APS systems that were developed in the 1990s are now largely legacy applications.  I also believe that companies should stabilize their investments in these technology areas and begin to push the acquisition of technologies that can better align with the organization’s need to reduce operating margins, absorb volatility and drive agility.

While some would point to companies like Amazon and Apple as examples of how to solve this dilemma, I think not. Don’t get me wrong. I like Amazon and Apple, and I admire the leadership within each of these companies that had the courage to redefine business models. For most companies, the use of supply chains to redefine business models is not a current reality. They see supply chain as a function within the organization not supply chain as a way of doing business. They do not have the power to redefine business systems to be an Apple or an Amazon. So, to hold up Apple and Amazon as points of light to help companies go forward is a bit like saying that Lora Cecere will be the February Cover Girl model on Vogue magazine. You got it! It is a low probability that this will ever happen.

Table 1.  Ten-year averages – food manufacturing companies

Figure 1.  Metrics comparison of Kellogg Co. vs. General Mills, Inc.

A Case Study

As a researcher, due to merger and acquisition activity, it is getting harder and harder to compare companies.  The peer groups are growing more and more complex. It is tough to compare conglomerates, and I do not believe that you can put companies from all industries in a spreadsheet and shake them up. Instead, I think that the best insights come from comparing peer groups. In table 1, I compare ten-year averages (2001-2011) for food manufacturing companies. In this industry, operating margin has decreased by 1%, Return on Assets has decreased by 2%, SG&A margin has increased by 1%, and days of inventory has increased by 3%. The only good news is that revenue/employee has improved by 29%.

The answer is not to be like Amazon or Apple. I think that the answer is to be more like General Mills. Note in the figure above how General Mills has improved operating margin for the past three years.  I compare General Mills to Kellogg to give some contrast. Over this period, the cereal business has been hard hit by commodity price increases and private label.  Corn and oil have tripled in cost. Both are more volatile.

So why has General Mills been able to increase operating margin, and the peer group has not? The reasons are many; but, I think one of the core reasons is General Mills is good at supply chain planning. They are not only near the top of their peer group in forecasting, but they use their forecasting analytics to drive better plans. They have become best-in-class at network design and they are very active in the use of advanced technologies for inventory optimization. Unlike many companies that buy technologies for a project and then do not use them, General Mills has built the teams to actively model demand and supply and drive better results.  They have had the courage to give up ROA to drive better operating margin.

Where to Invest?

So, if you are a supply chain leader, what do you do? Where do you invest? I feel strongly that the answer lies in the use of new forms of analytics for network design, demand and supply sensing, supply chain visualization, demand orchestration (horizontal orchestration of demand and supply variability for price, material substitution, and alternate sourcing), and the use of listening posts to better understand unstructured data from the channel.

It cannot be a fad, it needs to be part of the DNA. Multi-tier inventory optimization was a fad in the last decade. It was overhyped and largely underdelivered. Unfortunately, I see that many companies have invested in inventory optimization and have not reduced inventories. The answer is a lot like why people do not lose weight on diets. It takes commitment, hard work, and discipline. These are three characteristics that elude many organizations.

In closing, I want to leave you with a couple of thoughts. There are many technology vendors that will knock at your door, and your day will be packed with meetings, but stay focused on what matters. Our goal in the supply chain was to reduce costs, improve customer service, reduce inventories and drive growth. Over the course of the last decade, we have gone backwards not forwards. I think that we need to hold ourselves accountable to financial results. I think that it takes new forms of analytics to push us off of this supply chain plateau. However, it has to be part of the DNA: it cannot be a fad diet.  Let me know what you think.

Like A Green Lump of Clay….

by Lora Cecere on October 7, 2012 · 0 comments

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. It is a goal for 87% of companies, but only 27% of organizations feel that they have met their internal goals to achieve agility.

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 io. 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.

Preparing to Run the Race for Supply Chain 2020

Sales & Operations Planning Improves Supply Chain Agility