value networks

Piece Parts

by Lora Cecere on February 7, 2014 · 0 comments

You have brains in your head, and feet in your shoes. You can steer yourself any direction you choose. You’re on your own and know what you know. And, you are the only one that will decide where to go.

Dr. Seuss

In this blog we are going to focus on the word part.
By definition it is one of the pieces, sections, qualities, etc., that make or form something.

Merriam-Webster Dictionary

I love Dr. Seuss. When my daughter was six, I would beg her to let me read her another whimsical Dr. Seuss story before she went to bed. It was fun. The words from Seuss would flow from the pages as I held a promising young girl full of life and energy. We laughed at the illustrations. The sing-song words rang through the night air as we turned out the light and said good-night.

Tonight, as I return from a client, I thought that I would start with Seuss to lighten up a bad story.  It is a story of parts. It is a tale of pieces that do not assemble to build the whole. It is 2014. Leaders tell me the real story of monies spent and pennies saved. The consultants and technology vendors tell the stories of small dollars invested and large value gained. The advertisements in the airports boast of great gains. There is a disconnect. I do not see value when I am visiting clients. So I ask myself, “Why?” These leaders are well-equipped. They have brains in their heads and feet in their shoes. They can steer themselves any direction they choose. Why are we not making more progress?

Let’s start with history. We have been at this for at least thirty years. This is not a new topic. ERP was designed to deliver transactional efficiency. It accomplished this goal. It was not designed to be a planning architecture.

At the beginning of the last decade, the promise of the tightly-integrated enterprise was born. Companies invested in tight integration of ERP with supply chain planning (APS). It was a mistake. ERP vendors rushed to provide planning solutions that were less robust than best-of-breed providers. Consultants touted that 80% was good enough. Today, ERP investments have consumed IT budgets. The monies have flowed to the consultants. Today, only 8% of companies are satisfied with their “what-if” capabilities and only 22% of companies can get to cost data in making planning decisions.

Figure 1.

We are stuck. We have not been able to build the planning architectures that effectively let manufacturers plan from the customer’s customer to the supplier’s supplier. As shown in figure 1, the gaps in the value chain network are large. In this blog, let me share some insights based on work with clients and augmented with data from two recent studies that we have just completed at Supply Chain Insights. (We will also be sharing more insight on this topic on our webinar next week.)

The Problem

The goal was to automate the process of planning from the customer’s customer to the supplier’s supplier. However, today, we have pieces that do not fit together to make a whole. Sadly, our architectures are a compilation of piece parts. Most companies have defined enterprise architectures that are inside-out, but lack the ability to take them outside-in. The focus is on the enterprise not the value network.

With the investment in transactional systems for order-to-cash and procure-to-plan, many have lost focus on planning. As a result, they are not effectively able to connect to customers and suppliers. We have talked about it for a long time, but we are not making much progress.

The Dilemma. How We Got Here.

-Outsourcing Is Growing. It Is Here to Stay. It Is Growing More Important. In the study of 63 manufacturers, the average company has outsourced 49% of logistics and 30% of manufacturing. Physically, the supply chain is becoming a network. Logically it is not. Companies are more dependent on each other and there is less excess capacity. It is more brittle and less flexible. Upstream companies have systemically pushed costs and waste backwards on suppliers. While EDI is used to share transactional data, and progress has been made in this area, the software of choice to share plans is an excel spreadsheets. Yes, we have brains in our heads and feet in our shoes, but we communicate most of the important information about the supply chain in an Excel spreadsheet? Does this make sense? I do not think so. I spoke to one client last week that gets 13,000 spreadsheets from one customer that has 72 manufacturing plants with changes two to three times a day. After these discussions, I am amazed that we have made as much progress as we have.

-Nine out of Ten Companies are Stuck at the Intersection of Operating Margin and Inventory Turns. We have automated the enterprise, and 90% of companies have a supply chain organization, and have implemented supply chain planning. Most have multiple systems, but lack a clear understanding of planning architectures. New forms of analytics and cloud-based solutions are emerging, but companies are not clear how to use them. There are a number of science projects. Current investments are enterprise focused. They do not focus on automating the value network.

I am convinced that the greatest opportunity to unstick the supply chain lies in the value network. We have got to break the cycle of pushing costs and waste backwards in the supply chain and paying a higher price for materials. Modern procurement practices have lengthened payables by 30 days and made it almost impossible to have a true relationship. 

-ERP Was to Be the  Solution. We have naively gone down this path. ERP vendors were to build the architectures to extend the enterprise to their trading partners. It has not happened. As shown in Figure 2, connectivity of planning information with trading partners for third-party logistics, transportation and material suppliers is important to companies, and supply chain leaders have lost confidence that this gap can be closed by an ERP vendor. The investment in supply chain planning is growing by 55% in 2014, yet 56% of supply chain leaders report that it is focused on the work with their strategic vendors which are most often the ERP provider.  The selection of IT solutions is typically a joint decision where IT is involved 80% of the time and the line of business leaders are involved 85% of the time. This just does not make sense to me.

-Supply Chain Business Networks Are New and Promising; Yet Only Represent 7% of the Flow. Today, there are a number of cloud-based supply chain planning solutions and new forms of business networks that offer both applications and communities to facilitate these planning flows; however, the awareness of these by line-of-business supply chain leaders is low and the ability to get funding for these projects is tough because most of the corporate funding is locked into ERP programs.

Where Do We Go from Here? What Do We Do About It?

Supply chain leaders have brains in their heads and feet in their shoes. Only they can direct what they do. They need to act. Ownership of the extended value chain is more important to drive differentiation and improve Corporate Social Responsibility initiatives. What steps to take?

1) Get clear on a planning road map. Put the parts together to make the whole. Build a multi-year road map.

2) Recognize the reality. Stabilize ERP investments. Recognize them for what they are. You need them as a planning system of record and to automate transactions. The gap in current state to automate the value network is real.

3) Take ownership for the signal that you are sending your suppliers.

4) Partner with emerging cloud-based solutions and business network technologies to connect the extended value chain.

Today, there is no perfect solution. However, the path that we are going down is not closing the gap. It reminds me of the old saying of “no matter how far you have gone down the wrong road, that when you realize that it is the wrong road, turn back.”

I would love to hear your thoughts. What do you think?

For additional writing on ERP and supply chain planning check out the blog posts:
End of the Fairy Tale, Part I

End of the Fairy Tale, Part II 

Dancing with a White Elephant

The healthcare provider network is fragmented. As the power shifted from the supplier to the healthcare provider, over the last decade, the healthcare provider responded. The hospital built a supply chain organization that is now viewed as stronger than that of its suppliers. Today, providers of healthcare self-assess that they are more successful meeting their goals than the supplier.

The supplier, or healthcare manufacturer (pharmaceutical or medical device) in the healthcare value chain is three times larger than the provider. They have four times the profits. However, in our recent study on healthcare, the supplier rates themselves 15% less successful than healthcare providers in their ability to deliver on their supply chain goals.

Here are the highlights from our recent study:

1) Rising Complexity. Nearly two-thirds of manufacturers are offshoring to reduce costs. They have longer more complex supply chains, but rate themselves low on their ability to plan demand and manage a network.

2) Enterprise Alignment. Only 1/3 of suppliers feel that they can effectively integrate their supply chain and sales processes within their own organization. This is a barrier to forming a successful value network..

3) End-To-End Focus not in Sight for Suppliers. Two out of five manufacturers report that they have someone responsible for the end-to-end supply chain. For the supplier, the focus to move from a supply chain to build a value network is just starting. To focus on the patient, there needs to be a value-chain focus.

4) Stalled Progress on Inventory and Cash-To-Cash Cycles. While hospitals have improved inventory turns by pushing the responsibility backwards onto the supplier, in the last decade, there has been no improvement in cash-to-cash and inventory cycles for the value network. Each party self-assesses their capabilities in demand, supply and network planning at a very low level.  There is a need for both parties to step up and improve capabilities.

So, in the absence of supply chain leadership, the government will step in to try to heal the healthcare value chain. What they will find is:

1) Value Analysis and Supplier Collaboration Programs by Hospitals Just Starting. Over 70% of healthcare providers now have value analysis programs. They are being used to evaluate new products and services. Sixty-seven percent of companies rate them effective in meeting the goals of managing costs, determining physician preferences and reducing infection rates. However, most of the processes are not about VALUE; instead, they are about cost mitigation. There is a need to align value-based outcomes to serve the patient. The toughest nut to crack is the incentive systems.

2) Business Model Innovation Needed. Unlike other industries, no company in the healthcare value chain has stepped forward to use power to drive business model innovation (E.g. like Wal-Mart in retail or Intel in the semiconductor industry) to significantly improve the end-to-end value chain. This is an opportunity for a company like Eli Lilly or Nova Nordisk. Both of these companies actively provide medications to diabetic patients. The movement to patient sensing and monitoring and direct delivery of services to the patient through better communication and monitoring for the physician is now within our grasp at a technology level. The greater barriers lie in the building of systems and effective networks for patient delivery.  The most movement is with CVS and Walgreens.

3) Lack of Alignment on Outcomes. Regulations, taxation and talent are the top three challenges for manufacturers while the top three challenges for providers are costs, inventory, and contract management. Sadly, the patient does not make the list. We are a long way from a focus on value-based outcomes to serve the patient.

If I had a magic wand, what I would like to see happen is:

1) A redesign from the Patient back with a Focus on Wellness. I would like to see us rethink the value network and the delivery systems to focus end-to-end. Since, we are facing government intervention, perhaps a tax credit for big pharma and medical device companies to invest in innovation to use the Internet of Things to focus on real-time patient monitoring to improve wellness?

2) Investment by Manufacturers in Supply Chain Planning. It is hard for companies that have high profit margins to focus on supply chain planning to improve costs, inventories and customer service. With the rise in complexity, it is time for manufacturers to get to work to close the gap between themselves and the other manufacturing industries. Perhaps an audit system on supply chain excellence to get reimbursement levels?

3) Data Sharing on Usage. The management of goods throughout the channel and the sharing of downstream data in a meaningful way can streamline the entire value network. The redesign of these systems outside-in could dramatically reduce costs and improve service.

4) Eliminate Rebates. The healthcare value network has the most antiquated and ineffective system for rebate management. The waste and time spent trying to manage bifurcated trade should be eliminated.

5) Building of Strong Networks for Case Management. I like what GHX is doing on the building of an inter-enterprise system of record for case management for scheduling a patient and the management/tracking of use in the operating room. I would love to see this type of approach be more widely adopted.

What are your thoughts? For more on the study, please check it out at Insights on Building Effective Value Networks.