@ Supply Chain Management


Follow up on Response Management

Randy Littleson of Response Management had a few comments regarding my initial post on Response Management. As I learn more about Response Managment, I offered this comment at his site regarding Response Management and Quick Response Methodology (QRM):
In your comments, you have referred to “breakthrough” in responsiveness that can be achieved by empowering the many stakeholders involved in making course corrections due to unexpected events in the day. From my reading of Response Management (albeit a cursory one at this time), it seems to be a software backed tactical level planning, weigh the options and impacts, decision making (and probably prioritizing) system i.e. consisting of a DSS (Decision Support System) side as well as certain processes that use this DSS. This probably fills a gap that has existed with Supply Chain Planning tools (that remain at a more strategic and long term horizon level) in that they cannot really get down to the nitty gritty of operations. ERP tools have recorded information at all levels of the firm but they do little more than that. I hope that I have captured the gist of the Response Management approach.
Of course, any tool that does some if not all of the above piques my interest greatly.
What QRM does is something quite similar in that it also gets down into the nitty gritty of operations – however it is very much from the planning point of view. With its attendant DSS, QRM plans the structure of the manufacturing system for those very situations wherein Response Management has been highlighted above.
So in a sense, they’re competing ways to solve the tactical issues of daily operations at a level not addressed effectively by SCM/Simulation/ERP systems.

The blind spot in cost calculation…

Early on in my career (i.e. just after my undergraduate degree), I interviewed with BCG. (The only thing I learnt from those heady days was not to be a pompous arrogant ass). Personal distraction aside, I worked through a case with one of the consultants about “saving” a business making tractors from almost certain ruin given such and such market conditions. Coming from a mechanical engineering background, I was not only completely sold on the importance of R&D, good product design, quality etc etc but also unwilling to brook any spending cuts in those areas. The “answer” (or the best supportable answer most likely) to the case was cutting R&D and product development costs for the tractor manufacturer and redeploying those funds to marketing and what not. That and a love for engineering that couldn’t be hidden meant a ride on the road less taken and this during the Asia Financial Crisis of 97-98 (though it quite felt like 97-2000). Today, I have come full circle and its taken me 8 whole years – I still love engineering, trust marketing to elucidate value (not create value), am skeptical of accounting variances and varied accountants (though I realize the value and the limits thereof of accounting practice) and might still fail the BCG case again – taken honestly. Though, I work in supply chain consulting and using a quantitative and optimization approach, I am always keenly observing the limits of what works and what is plain hooey even if it is based on incontestable numbers – that might seem rather piquant but even incontestable numbers come from contestable underlying philosophies. And its precisely this underlying philosophy that this article at Panta Rei: Gemba Keiei, Chapter 6: The blind spot in cost calculation is all about.
Let me jump right in:

Just in Time is the design of production activity to be closely synchronized with customer demand according to the three principles of Takt Time, One-Piece Flow, and Downstream Pull. One of the major goals of Just in Time is to prevent the mother of the 7 wastes – overproduction – by making only what the customer needs, when they need it, in the right amount.

And thus manufacturing became an art. There is the science of manufacturing, the logic of manufacturing and the art of manufacturing. The above statement encapsulates what can be termed the logic of manufacturing. But somewhere in elucidating the above logic, manufacturing turned from being a science, from numbers, yields, WIP and lead times into an art. The art is the whole thing subsuming logic and science together into a practical effort.

Taiichi Ohno begins the chapter by saying that there is a misconception in the minds of people who calculate cost. They believe costs can be lowered on the basis of volume produced without considering the actual customer demand.

Well, it depends on where you draw the system boundaries. It is not that either of the above logic described is incorrect but one has to look at the completeness of the description. Costs can be lowered on the basis of production volume = economies of scale, nothing wrong here. However, the system drawn up here doesn’t take any inputs from any agent outside the purview/control of the firm when it calculates its manufacturing cost. In this day and age, when a firm goes through its product design and development process, it is not averse to getting customer input at critical design junctures or in the whole design process – doing so mitigates serious risks and thus future costs down the line. Why should manufacturing be any different? The key customer input here – the true nature and magnitude of customer demand. Sometimes demand data is simply unavailable or too difficult to obtain from customers and if manufacturing proceeds without taking efforts to control the risks that such uncertainty introduces in their business model – then system failure is not far off. Adopting JIT as a manufacturing philosophy means creating a system where customer demand uncertainty is reduced by waiting sufficiently long enough until the manufacturer can “see the whites of his customers’ eyes” before acting.

Ohno says “Make only as much as the customer will buy. Don’t make things the customer won’t buy” but the cost accountants reply “What are you talking about? Of course it’s cheaper to make 20 than to make 10.” Ohno recognizes that in terms of simple math what the accountants say may be true but says the reality of costs is not so simple.

Its not the simplicity of the math as Ohno says but the simplicity of the system that the accountants have drawn up and by which they practice their craft. The real world is not just that simple and we ought to adapt ourselves to mitigating uncertainty and risk wherever possible.
However, Ohno makes a larger point next which harkens back to the incontestability of numbers that are available when it is the underlying philosophy that is actually the source of contest.

Here he introduces the famous three equations for cost. Mathematically they are the same. They are very different in terms of the point they bring across. The equations are:
1) Price – Cost = Profit
2) Profit = Price – Cost
3) Price = Cost + Profit

Mathematical axioms are not subject to change by definition and therefore there cannot be anything logically untrue in the above statements. However, the question to us who have to act always is – what variable/constant is known, what are fixed/changeable and what are the underying systems that deal with the three variables/constants above?

In the case of equation 1 the market is competitive and the price is set by the customer.
In the case of equation 2 you need to make a certain profit, let’s say $0.25 per unit. So here you have to increase the value and increase the price so that if your cost is $1 you can now sell it for $1.25.
In the case of equation 3 the math may be the same but the underlying thinking is different, says Ohno. If $0.25 is a fair profit and the cost per unit is $1, then you may set the selling price at $1.25. However if the customer can purchase the same thing elsewhere at $1 then you can not set the price this way.

Nothing mysterious here. All you’ve got to do is choose your mode of competition or adapt a hybrid mode of competition – you can deliver value while trying at the same time to drive costs (what’s the definition of cost agian?) out of your system.
Here is something to savor from Taiichi Ohno:

Costs do not exist to be calculated. Costs exist to be reduced.”

Now, should an accountant’s performance be based on cost reporting or cost reduction? You decide.

Archived webinar on Inventory Optimization in Electronics

An archived version of the recent webinar on Dynamic Inventory Optimization presented by the Electronics Supply Chain Association (ESCA) is available here. Registration is requied and free. The webinar will be available for a year from now. I found some of the items in the presentation especially from the Aberdeen Group as well as IBM’s DIOS group quite interesting and that makes watching the webinar well worth your while.
Some of the other documentation relating to the webinar is also available here:
1. IBM’s DIOS brochure
2. Case study of application of DIOS at a company

You can’t plan your compromises … Yes, you can.

Randy Littleson of Kinaxis on Response Management blog has a post about how firms are often kicked into “response mode” where in they’re trying to respond to the latest fire that is about to kill their customer service ratings. Isn’t it always like that or doesn’t it always feel like that? He is of the opinion, no doubt earned by consulting practice that it is virtually impossible to plan out the activities of the firm such that you can avoid/significantly mitigate the “response mode” state of affairs.

These deviations from plan are happening literally hundreds of times throughout the day in most organizations. It may be a key customer calling, a field failure that needs to be dealt with, an unexpected delay in receipt of a critical part of any number of things that “just come up.”
At the core to solving these problems is compromosing. Teams need to get together and figure out what tradeoffs and compromises need to be made on the spot to solve these types of problems….and they need to do so while weighing the impact on the rest of the business.

Well, you could if you wanted to.
Quite simply, you either have to have excess capacity built into you system (not so good idea) or have a system that operates at or near the lowest total lead time (better idea). I’m not saying that you’d be able to handle every “response mode” crisis hands down this way but a significant portion of the response mode crises ought to be mitigated by advanced planning. But that requires a different way of thinking and applying i.e. bringing in the fruits of applied queuing theory into the firm’s activities. One of the highpoints of my graduate education was putting this into practice – through Quick Response Methodology (QRM). QRM is the brainchild of Dr. Rajan Suri at the University of Wisconsin-Madison and I was part of a team that consulted with a manufacturing firm with the specific objective of reducing their lead times for spare parts.
If you’re facing any of the below:

  • Our biggest customer is demanding faster response time …
  • We provide a high degree of customization, and JIT is no longer helpful in our low-volume, high-mix environment …
  • Our shop floor has become very efficient, but it takes too long to get out a quote or process an order …
  • Our own response time is fine, but our supplier is another story …

Smarter, faster and cheaper Supply Chain Technology…

Logistics Management has an article on their website (Free registration required to view the article) which summarizes a survey of current trens with respect to SCM technology – likes, dislikes, loves and gripes. The respondents were surveyed about the type of SCM or related software that they intended to purchase/upgrade/deploy in the near future, important factors w.r.t SCM software and who in the firms made the decision to acquire SCM software. This is the kind of response that any SCM consultant or SCM software maker has to be keenly watching – hopefully not as a first source of industry trends but as a sort of secondary confirmation.
The article gives an idea about the content of their survey sample:

The final survey sample included logistics and supply chain managers from both large and small companies, with annual sales ranging from less than $49 million to $1 billion or more.

Some important takeaways (which are succintly graphed in the article as well):

1. Six types of software are most commonly used in logistics today. The most popular are warehouse management systems (WMS), used by 61 percent of respondents, followed by enterprise resource planning (ERP) at 55 percent and transportation management systems (TMS) with 34 percent. Rounding out the list are supply chain planning (32 percent), import/export management (15 percent), and yard management systems (YMS) with 10 percent.
When it comes to upgrading or purchasing software, WMS and TMS are at the top of readers’ shopping lists. Supply chain planning and ERP applications are close behind.
This year’s survey also highlighted an important trend in on-demand (“pay-as-you-go”) solutions. Some 28 percent of readers already use such systems, and 34 percent expect to purchase them within the next 12 months.
2. Ultimately, readers said, the most important reasons for purchasing supply chain software include the right features for their operations, quality of service and support, compatibility with existing solutions, and configurability. All of that is aimed at achieving one overarching objective. “The number one attribute that companies tell us they’re looking for is integration of their internal supply chain,” says John Fontanella, senior vice president and research director, supply chain services, at Aberdeen Group. “That is head and shoulders above everything else.”
3. Eighty percent of the respondents who plan to buy supply chain solutions expect to spend less than $1 million on software, training, and integration. Most are currently evaluating vendors, and a smaller percentage have already decided which vendor they’ll buy from. Respondents typically rely on a team that includes corporate management, information technology, and warehousing/distribution/logistics, among others, to make those decisions.
In exchange for their investments in supply chain software, one-third of the respondents expect a payback within 12 to 18 months.
4. Fontanella adds that a 12- to 18-month ROI is not only within reason, it has become a necessity. “It’s not an unreasonable expectation at all,” he says. “A technology vendor that can’t deliver that will be out of business.”

All of the above seems just about right except the last point. T’is all well and good to expect an ROI within a 12-18 month timeframe but to place that squarely on the shoulders of a technology vendor smacks of the COTS (Commercial Off The Shelf) problem and how firms tend to view software solutions – as a magic wand. And that is singularily unhelpful.

The Interactive Global Supply & Demand Chain Map

Supply and Demand Chain Executive has on their website an interactive global supply and demand chain map that has identified enablement options and solution providers for the different functional areas in the SCM space. (Note: The map requies Macromedia Flash Player to work properly).
Look at the map here.

Taking a peek at mySAP (Strategic Supply Chain Design area)

What is the scope of mySAP’s solution space? While dealing with SCM, one has to meddle with the ERP system that one finds within a firm. mySAP is one of those leading ERP providers that is making inroads into the SCM space as well. Here is the solution space of mySAP as outlined on their website.
The main solution function areas are captured in the figure below (which I shamelessly copied from their site – I wonder where the jury of copyright matters rests on the matter?).

Each of the solution areas has its own mini-web site which explains some of the capabilities ensconced therein. So let’s go one by one starting bottoms up:

1. Strategic Supply Chain Design: Three areas under this category.

  • Supply Chain Definition : You can model every part of the supply chain (such as locations, transportation lanes, resources, products, and so on.) using the Supply Chain Engineer in SAP APO. The Supply Chain Engineer allows you to place locations on a map and link them with the corresponding transportation lanes and product flows. Furthermore, you can drill down to all elements belonging to the supply network, or request information about single or combined elements in the network. For example, you have the ability to see which products belong to a particular location. You can also add products to this location or modify the location’s master data. Master data can also be transferred from SAP R/3 bzw. SAP ERP using the Core Interface (CIF). Materials are limited in their validity and availability. This has to be taken into consideration throughout the entire supply chain management solution. A central maintenance instance for interchangeability relations is offered that provides information for all planning applications. This secures consistent planning of discontinued material stock before using follow-up material stock. For a service parts supply chain, the supply chain definition is extended with the Bill of Distribution, which not only describes a location hierarchy but also allows the modeling of virtual locations (which are physically the same locations as aggregation locations in the location hierarchy, but are logically only used to model the direct customer facing demand of those aggregation locations), virtual consolidation regions (to consolidate the demand of several locations for slow moving parts) and inventory balancing regions.

The Supply Chain Engineer in SAP APO sounds a lot like the tool that I developed (based on the transshipment model) that allows for strategic level planning for supply chain components. The great thing about the Supply Chain Engineer is the integration that it provides with the ERP system which is how it should be ideally.

  • Supply Chain Monitoring : The Supply Chain Cockpit (SCC) consists of a highly intuitive, graphical interface that acts as the top enterprise planning layer covering all planning areas such as manufacturing, demand, distribution, and transportation. All employees in the Plan -> Source -> Make -> Deliver cycle of supply chain management can use it to their advantage. As the gateway to SAP APO, the SCC makes dealing with a vast supply chain easier and more manageable. SCC allows you to:

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.

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June 2006