@ Supply Chain Management

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Supply Chain Assessment isn’t child’s play. You need a true specialist.

So advises Jane Lee, a director of supply chain solutions at SupplyChain Consultants in the June edition of GLCS. She begins her article by saying what may seem as obvious but in a fad fed world, it may not be first on your agenda.

The first step to improving your supply chain is very basic: you have to understand what is working and what is not./blockquote>
And that’s the segue for introducing supply chain assessment as one of the key competencies that a supply chain consulting firm should possess. Therefore, how does a firm evaluate which supply chain consulting firm to employ to fo the assessment?

Many consulting firms will claim an expertise in almost anything. A firm that does consulting on finance management, corporate strategy, shareholder value and oh-by-the-way supply chain effectiveness is frequently a “jack of all trades, master of none”.

The number of qualifications in the above statement ought to give one pause. Why doesn’t she just say what needs to be said – that a jack of all traders is a master of none.

Firms which focus entirely on analyzing and improving supply chains have a large institutional knowledge base of what has and has not worked in scores of other companies, enabling you business to leverage other companies’ mistakes.

Couldn’t have put it better myself though I might have added a qualifier here where it is necessary – was another consulting company involved in that failure or not? Then again, maybe not – another commandment to savor – Thou shall not put a gun to your own foot.
Jane’s distilled recommendations on supply chain qualifications:
1. Choose practise over theory when it comes to knowledge
2. Choose consultants with domain/industry specific knowledge
3. Choose a listener over spouter
4. Choose consultants with an ear for red flags
All of the above are great tips for choosing a supply chain consultant. I would add the following:
5. Choose someone who can adapt their recommendations to you existing systems/be prepared to change a lot of things
6. Choose someone who can base his recommendations on hard quantitative analysis (like a decision support system) rather than soft fluffy feel good terminologies. Of course, I wouldn’t consider LEAN or Best Practices as soft fluffy feel good terminology – that goes without saying.
The latter half of the article deals with how a typical supply chain assessment looks like:

1. The level of coordination between different operations from forecasting to manufacturing to order fulfillment as well as effectiveness of the current supply chain planning operations
2. A comparison of the operations with best-in-class operations to determine areas of improvement
3. An assessment of the IT system being used to support the supply chain, to identify specific gaps and improvement potential
4. Business process changes and organizational needs to support a best-in-class supply chain operation

Jane warns about the following which I think is important to know:

Studies show that implementations of even the best information systems tools, without accompanying business process changes have not produced the expected results.

Jane expands on what a firm should expect from a supply chain assessment:

1. A map of the current state of the supply chain
2. A map of the desired future state of the supply chain
3. A list of “low-hanging fruit” improvements that can be made at little/no cost
4. A detailed, prioritized, step-by-step path forward to move from current state to intermediate states to future states and the associated organization, business process and tool changes in order to make the progress
5. A database of the firm’s historical supply chain for internal analysis and improvement
6. (Three points collaspsed into one) Customer analysis and segmentation using lead times, pareto analysis and customer service criteria
7. Identifying trends within the firm’s supply chain operations and execution

Developing the Super Supplier

A central component of getting your firm to run through its daily operations is the quality of the supplier relationships and the inbound materials that are processed. So in the natural progression of superlatives, if the supplier relationships that were the base description at the beginning of the SCM initiatives, then it is quite natural that we must have by now arrived at the “Super Supplier”. Ofcourse, what is the next superlative then? I suppose it would be “Next Generation Total Quality Super Responsive Supplier”. Jokes aside, developing supplier relationships are critical to the supply chain, so much so that I view the proliferation of technology into the space with suspicion. This suspicion is not really about the efficacy of the technology that is making inroads into the firm but about its impact on the way that business relationships (the intangible side, specifically) are affected.
The article Developing the Super Supplier at CPO Agenda delves into the issues of who, what and how a super supplier comes about.

“Super collaboration” is the most advanced form of customer-supplier interaction possible. Unlike combative, co-operative and even partnership types of relationship, it aims to create competitive advantage for both parties over the long term, argue the authors – three professors at the IMD business school in Switzerland.

Hmm… create competitive advantage for both parties over the long term? Let’s see…

Four conditions are required for super collaboration to take off: procurement has to be focused on enhancing competitive advantage; a genuine market opportunity must exist; all functions in both organisations must be committed to making the relationship work; and a strong communication and evaluation structure needs to be in place.

It appears from the summary that the competitive advantage so developed has more to do with cost rather than differentiation. I’m guessing that the notion of cost employed here is not the lowest price bid but lowest total supplied cost.

Update: Only the executive summary was available and so I cannot access the rest of the article.

IBM’s Dynamic Inventory Optimization Solution

I am currently watching a webinar sponsored by the Electronics Supply Chain Association (ESCA) on Dynamic Inventory Optimization from IBM. The Center for Business Optimization (CBO) group has two individuals – Terry Gleason and Michael Datovech, presenting their DIOS (which I suppose stands for Dynamic Inventory Optimization System) tool in a brief manner.
According to the service template that IBM’s CBO uses for consulting with clients, they have a timeline of working through an entire engagement in a 6 week timeframe, reporting back the potential savings that could be had i.e. ROI analysis. The actual implementation of the recommendations i.e. to inteface with a SC planning tool or ERP tool takes about 12-20 weeks.
Beth Enslow of the Aberdeen Group also presented during the webinar (before I actually logged into the presentation). According to the slides that she presented:

Interest in advanced inventory optimization is especially strong in electronics and high tech, retail, consumer goods, industrial distribution, make-to-stock mfg, medical distribution, chem/pharm and aftermarket parts.

Update: Just finished the webinar. Was alright – got some more fact based market research, so to speak. The IBM tool had a degree of sophistication that will be lost on line managers who will resort to doing what they know or “tinkering” around to see what fits. Ideally, that makes for contracts for supply chain consultants who can adjust the appropriate distributions to use for modeling and the like.

Let me reiterate a commandment of successful change practice – “Thou shall not confuse those you upon whom you wish to impress change.” Perhaps, it should be changed to – “Thou shall not confuse” but that is sometimes too restrictive because in confusing others, sometimes, I see very clearly what the problem is with the issue at hand- call it: a mental clarification through numerous what-ifs that lead only to error.

Creating Competitive Advantage in Supply Chains – Real Differentiation

In a previous post on Creating sustainable competitive advantage in your supply chain, I ended it thinking that the true source of competitive advantage that is available for firms is differentiation. Here is an article by James Conley that describes the competitive advantage created by Apple with its iPod series of MP3 players.

Frog Design’s Luke Williams suggests that the “clean” look of this product is an intentional consequence of references to the white ceramic and polished chrome tropes of the humble bathroom design experience

Fine-tuning your supply chain

David Margulius writes about the recent McKinsey Quarterly (registration required) article about the data capture for supply chain in his column titled Fine-tuning your supply chain. Just reading the headline made me think about i2\’s ABPP system post wherein I was thinking about whether it was really “fine tuning” or “fine tinkering” that managers are upto in the supply chain.McKinsey research offers:

The problem, according to the McKinsey research, is that companies today not only buy more from far-flung third parties in an effort to cut costs, but they also rely more on third-party contractors to move these goods around the globe. That means critical supply chain data (such as quality, inventory, and capacity) is “locked up in the IT systems or spreadsheets of a dozen or more companies.”

I think this was always a problem (I blame Microsoft for the Excel program) especially with technically clueless managers who have just gotten trained on some spreadsheet or powerpoint tool and know only how to deploy such tools. Another source of the problem is as David himself outlines:

Although the McKinsey report makes sense, it misses the boat in one key area: human nature. Companies, as do people, sometimes don’t want to pass information on to partners for competitive reasons, control reasons, or just for no reason at all.

If you\’ve worked in the business world, you just know that this is true – its just human behavior.McKinsey outlines its view of best practices for reuniting supply chain data:

1. Fit information flows to supply chain types. For fashion-oriented products such as iPods, for example, focus on IT connections that help you “chase demand rapidly by providing repaid coordination between designers and suppliers.” But for commodities such as TV tubes, focus on cost and inventory data.

In other words, customize your supply chain operating model (that should ideally integrate a supply chain information and data exchange mode) with your business strategy.

2. Develop deep monitoring capabilities, or systems that allow you to pull key data from both your suppliers’ systems and their suppliers’ systems (you’ll probably have to give suppliers incentives to invest in this, McKinsey warns).

How about “bull-whipping” your suppliers as an incentive to developing deep monitoring capabilities. This should really be the only incentive for suppliers to cooperate with you and anything above and beyond that is a premium that you\’re paying out for reducing the uncertainty for suppliers for free.

3. Think cross-functionally and use detailed scorecards. Your purchasing people may be rewarded for selecting the lowest-cost supplier, but the manufacturing group may be rewarded for keeping inventory low and fill-rates high. They must get in a room and agree on performance metrics to make sure you get all the data you need from your suppliers.

Basic supply chain execution meaning that the supply chain is here and not here. By definition a chain is not one link though the strength of the chain is limited by the strength of its weakest link. If two functional departments are operating together, it makes sense not to incentivize or measure them in contradictory or incoherent ways. There is a thing to be mentioned here about truth – it needs to be repeated or else it is forgottten.

Top 25 3PLs

The top 25 third party logistics (3PL) providers as reported by Global Logistics and Supply Chain Strategies magazine are:

1. Exel, PLC – $13,335
2. Kuehne & Nagel – $10,700
3. Schenker – $10,700
4. DHL Global Forwarding – $9,500
5. UPS Supply Chain Solutions – $7,700
6. Panalpina – $6,320
7. CH Robinson – $5,689
8. TNT – $4,270
9. Expeditors – $3,902
10. Schneider Logistics – $3,852
11. NYK Logistics – $3,560
12. Penske – $3,171
13. Eagle Global Logistics – $3,096
14. Nippon Express – $3,000
15. PWC/Geologistics – $3,000
16. Bax Global – $2,899
17. UTi Worldwide – $2,785
18. Ryder – $2,181
19. Caterpillar Logistics – $2,100
20. Kintetsu – $2,025
21. Menlo – $1,340
22. APL Logistics – $1,290
23. Maersk Logistics – $800
24. SembCorp Logistics – $713
25. Fedex Trade Networks – $672

Marrying business cycles with business activities

InformationWeek’s Q&A with UC professor Peter Navarro about Riding the Business Cycle more wisely
According to the professor,

Enterprises can be more competitive by better managing the ups and downs of the business cycle, notably via sharper control of inventory and capital outlays such as technology spending.

Well, that’s something that harkens me back to my days working in the semiconductor equipment industry which is notorious for its expansion and contraction cycles. I went through two cycles of expansion and contraction which was more magnified in the South-East than in the US. The management in my firm was very keen on synchronizing their business decisions with the cycle because it was simply impossible to sit on equipment worth sometimes a quarter of a million swiss francs each and hope to ride out the cycle. The cycles in that time were getting shorter and shorter in time periods. However, my firm had one foot stuck firmly in the past as they manufactured their machines exclusively in Switzerland which meant that even though the quality of the machines were well acknowledged, agility and speed to market were not up to the competition. The market had no problem informing us of the same too.
Professor Navarro avers:

But timing, very often, is as [important] or more important. In terms of inventory-type management, the kind of micro approach to managing inventory is to increase your inventory turnovers as much as possible all of the time. In fact, what you want to do going into or out of a recession is to cut inventory more subtly. When you are coming out of a recession, you want to be building up because you want to be the first on the stock shelves and have the opportunity to sell.

Easier said than done. Imagine the plight of an inventory manager acting contrary to all the information he is getting from the marketplace and his peers in the industry. I’m a fan of contrarian investing but I’ve also found that investing contrary to the market is no easy thing – fear, herd mentality, emotion – they just overpower the rational decision making process. However, there is something else that is missing – in stock trading parlance, it would be, “Never catch a falling knife” or “Don’t try to call the bottom”. If you called the bottom or the top as the case maybe, you’d reap the maximum benefit but then you’d also be trying to catch the falling knife. Nothing like this could work without involvement of the top management but then again that would mean that if the timing were wrong it would be their heads on the chopping block with inventory write-offs and the like. I don’t think that they like their heads getting chopped no matter the bounty of future reward.

You can’t wait until good times are back. Moreover, recessions tend to be shorter than expansions, so there is a window of opportunity there. If you move three, six or nine months faster than your rivals, then you’ve got them.

Well, that’s probably true from government statistics but I don’t think thats the case with reality (Or that’s what I think of government statistics). Official recessions are short and recovery is swift. Take a look at this chart and then tell me that recessions have been swift uniformly.

One thing is certain as we speak. Looking ahead, there seems to be a real chance of a recession looming not in the distant future (like the end of the year). That means that companies ought to be tightening up right now but then government data reports some of the lowest unemployment rates (Ok, I have a quibble with the government data on how unemployment is measured) and from my experience firms have opened up their hiring again. So who’s cutting back right now in the industry at large? I’m seeing more furious M&A activities at this moment instead.
So what should business executives be paying attention to according to the professor:

One of the things I preach is that executives need to be attentive to economic information on a daily basis, and it does not take a lot of time compared to the payoff. The weekly Economic Cycle Research Institute (ECRI) has two really good indices for businesses to keep their eyes on. The first is the Weekly Leading Index, and the second is the Future Inflation Gauge. Together, they provide executives with a simple but powerful forecasting tool.
In addition, the yield curve, which measures the relationship between short-term and long-term interest rates, has a tremendous amount of information in it. The Federal Reserve determines short-term rates, while long-term rates are basically determined by thousands of savvy investors betting billions of dollars on the direction of the economy. When you get the unusual case of an inverted yield curve, where longer-term rates are actually lower than short-term rates, this is can be a sign of a coming recession. An inverted yield curve has, in fact, predicted five out of the last six recessions. …

Here’s something more that Professor Navarro has to say about using the supply chains themselves as forecasting tool:

A well-constructed supply and distribution chain can be its own forecasting tool. I urge your readers not to think of the goal of supply-chain management to always inventory as slow as possible just to tighten, tighten and tighten. In times of recovery, economic recovery and expansion, you actually want to decrease your inventory turnover ratio. But that is not the goal in and of itself. The goal essentially is to move more products into the sales channel at a time when you think demand is going to be moving upward. That way, you can push out your competitors and take advantage of the pent-up demand that gets unleashed. This goes to the point of macro-managing vs. micro-managing your inventory. I think that is a really important distinction, because businesses tend to focus on micro-managing their supply chain, in a sense that they are always trying to squeeze things down, when in fact it is often better to move things up.

I think businesses to a great extent do this that is build up inventory in anticipation of great sales coming up but whether they do this in concert with business cycles I cannot say. However, what I have seen is that there is no risk management applied to the efforts to ramp up or ramp down. I’m looking into how I can adapt stochastic optimization into supply chain design and development and that would address the matters of uncertainty that crop up with business cycle forecasting.
In conclusion, I think that the Professor has some great points and insights to offer but then again do those recommendations jive with the behavior of man in general. I think what the Professor is advocating is contrarian business cycle management or efforts that go towards that. But there’s a reason why there are only a few good contrarian investors and that’s because there are only a few good investors to begin with.

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.

@ SCM Clustrmap

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