@ Supply Chain Management


Supply Chain Software providers report their successes!

The latest edition of GLCS magazine is out at the site. I scanned the magazine for reports of successes claimed by Supply Chain Software providers in various industries. Some of the successes reported were:

1. IBM reports that its new Dynamic Inventory Optimization Solution (DIOS) helped reduce inventory for a German Retailer – Max Bahr by upto 40%. This they did integrating Point of Sale (POS) transactions from Max Bahr’s 90 stores, analyzing them against a two year history of each product and calculate replenishment targets automatically and even turn 90% of them into orders.

Having attended the DIOS webinar, I must say that what I saw demonstrated seems to accomplish what has been described above. However, I am wary of producing/stocking to forecasts (even if they’re based on factual historical data) but that is probably better than not having an integrated system that actually does some data crunching which seems to have been the case at Max Bahr prior to DIOS introduction. In that case, what is the precise value and more importantly source of the value that introducing DIOS has created at Max Bahr?

2. Oracle integrates Demantra into its enterprise solutions offering. Demantra is focused on promotion forecasting and event planning and its integration into Oracle is claimed as a complementary move.
3. Kinaxis helps Varian Semiconductor respond rapidly to customer needs. Varian Semiconductor operates in a highly cyclical market that involves complex products that require significant customization and ongoing engineering updates. Varian also experiences long lead times from parts suppliers as well as short order lead times from customers. Kinaxis’s response management tool – RapidResponse allows Varian to perform what-if analyses in minutes versus hours with its ERP system.

Very interesting! After coming across RapidResponse and Response Management and quickly diving into the underlying Theory of Constraints, I think that this is very important on two levels. Firstly, that ERP while providing data exchange and visibility across the organization fails to help managers manage their business – meaning that ERP is not really serving the customers needs. Secondly, that RapidResponse works not only at the conceptual level but also from the point of view of ease of implementation and integration – that means that you’re using the ERP data backbone quite effectively.

4. SmartOps creates a model inventory plan for Caterpillar. Caterpillar aims to create competitive advantage by focusing on faster and more predictable product availability. SmartOps solution Multistage Inventory Planning and Optimization (MIPO) helped Caterpillar reduce total chain inventory, improve dealer and end customer satisfaction through improved product availability.

Only one comment to make – Is it so bad in the earth moving/agri-business industry that making one’s product available to its customers faster and more predictably (wonder what that means) is considered a competitive advantage? Is Komatsu listening?

5. Terra Technology provides Campbell Soup with a recipe for supply chain success. Campbell implemented a “Class A” sales and operations planning process (S&OP) by installing Terra Technology’s Real-Time Forecasting (RTF) and Real-Time Inventory (RTI). RTF’s approach to forecasting includes analyzing the most recent demand signals nightly and adjusting forecasts to better predict demand. Because RTF detects unexpected shifts in demand when they occur, Campbell is aware of them immediately instead of weeks later.

Can IBM’s DIOS and Terra Tech’s RTF be more alike? They’re probably not that similar but it does look like they’re competing in the same space. What really underlies this technological space is integrating POS data near real-time into a predictive engine and come up with new targets. Here is a comment from Steve Cortese, Campbell’s director of Supply Chain Infrastructure:

“We carry 20 percent less safety stock using RTI. At the same time we have become more responsive to our customers.”

There are two polar opposite ways of dealing with the uncertainty in demand that a firm might experience at the customer end. One way is to produce to a forecast of the demand and the other is to produce to the demand, the former is a version of reality created by sophisticated/unsophisticated algorithms while the latter is reality. The competition that these two possible ways of competing is really between the realized magnitude of error in the forecast and the ability of an organization to compress its actual lead times in fulfilling the demand. In the former case, while predictive forecasting is better than some forecasting is better than no forecasting, the competency that is being created/honed is How do I create a better idea of what the real demand is going to be?. In the latter case, the competency that is being created/honed is the ability of a firm to relentlessly execute its manufacturing/procurement plan in order to fulfil the demand, satisfy the customer etc. Which way do you think a firm should be headed?

Categorized as: Lean_, Supply Chain Management_, Review_, News_
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Logistics costs under pressure

Logistics Management highlights from their 17th Annual State of Logistics report a finding that rising prices and interest rates will soon push logistics costs above 10% of GDP. They refer to a report written by economist Rosalyn A. Wilson for the Council of Supply Chain Management Professionals (CSCMP) that places logistics expenditures at 9.5% of GDP.

That’s a sharp departure from the three previous years, when those costs ranged between 8.6 and 8.8 percent of GDP (see Figure 1). And it’s perilously close to the 10 percent mark, a long-accepted demarcation separating reasonable and exorbitant cost levels.

Among the factors contributing to this precarious situation are:

One factor is the steady climb in interest rates, which has pushed up inventory-carrying costs. But the biggest cost driver has been rising transportation expenses, which reached $744 billion in 2005, up from $636 billion in 2004. Soaring fuel prices, a driver shortage, and diminished competition have all come together to raise rates across all modes, and for trucking in particular.

The article explains briefly how the value of logistics relative to overall economic activity is calculated:

That formula adds together three components: inventory-carrying costs, transportation costs, and administrative costs. This year Wilson calculated total logistics costs for 2005 at $1.183 trillion, a 15.2 percent hike over the previous year’s total.

The article also offers a snapshot of the US Logistics Market in 2005. That snapshot shows that Transportation costs have the lion share of Total Logistics costs in the US and the major issues there are driver shortages, tight trucking capacity and higher diesel cost.
Longer term, the report outlines aging and inadequate transportation infrastructure and supply chain security as the two long-term challenges for logisticians. Wilson writes that the transportation infrastructure is severely strained in some locations because of the dramatic growth in volume of freight. As for supply chain security, Wilson notes:

Like many other industry observers, Wilson argues for a holistic approach to security. She advocates end-to-end monitoring of cargo and at the same time establishing and preserving a proven chain of custody. Although companies would have to bear the costs associated with those practices, she believes that improved security would justify the expense. “Investment in state-of-the-art cargo- security technology and monitoring solutions can provide a significant return on investment, often at bargain prices considering the value of the capital that could be lost by a disruption in global container shipping,” she writes. Embracing security as a core business function will mitigate the need for invasive government practices, she adds.

Categorized as: News_, Supply Chain Management_
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What should an ERP software/tool possess?

The question that I ask myself today is not what particular features/functions an ERP must possess but what kind of experience must users as well as firms experience with an ERP software/tool? So, I decided to draw up a list of things that ERP software/tools must deliver in three broad experiential areas:
1. Understanding – A concept level requirement. Here the idea is that the assumptions, methodology of planning/calculation should be visible and easily understood by a firm’s management and/or users. This would mean that there are no black boxes that accomplish magical things or some dark art embedded within. From the competition aspect (i.e. with other ERP vendors), this throws open the inner workings of the system. Therefore, it will have to be tempered a bit – grey boxes that nevertheless explain in a simple manner what is being accomplished.
2. Adaptation & Implementation – Should a firm adapt its business processes to an ERP software or should an ERP software be adapted to a businesses processes? That is the basic question that underlies this area of Adaptation. Along with that arises the need for an ERP software to model the business process as it is or in a desired reengineered state. A frequent issues that I have observed is absurdly long implementation plans and projects which increases the risk of failures.
3. Operation & Continuous Improvement – An ERP system might be the backbone of an organization but it cannot be the system that only a backbone specialist only can contend with or change at a moments notice. The very notion of continuous improvement implies that any user should be able to change/improve the functioning or scope of an ERP system.
Now, admittedly, this is a rough cut of what I see an ERP must accomplish in order to be successful. From that broad classification of user experience, some ideas fall out as first cut rules that an innovator might follow:
1. Implementation of the ERP system must be in a timeframe of months (even weeks) rather than years.
2. IT departments must be minimally involved in the setup and roll out of the ERP system.
3. Black boxes must be kept to a minimum if not eliminated entirely
4. Don’t get stuck into thinking that ERP systems should be modular, especially along the lines of defined functional areas. Other forms of organization such as inheritance (OOP) and value chains might offer alternative ways of organizing features.
5. Meta modules and inherited modules must be available. A frequent thought that I have is that when people from different functional areas communicate, they’re abstracting what they think is happening in areas outside their expertise in order to understand those activities. I am thinking out loud here whether that is the nature of communication between functional areas as well.
6. Upgrades to the ERP system should be radically modified. I can’t think of a way to achieve this because the underlying philosophy of the system might change but the architecture initially outlined must consider both ongoing operations as well as future operations along the three broad areas above (Understanding, Adaptation & Implementation and Operation & Continuous Improvement)
7. Dashboards. Dashboards look cool. Other than that, it might very well be an information dissemination service to all members of the firm rather than decision makers.
8. Leverage open cooperation between ERP adopters and implementors across different industries and allow them to collaborate on process development, insights, measurement and continuous improvement ideas. In fact, allow them to exchange and adapt business ideas through the system.

That’s an attempt at a first list. Some of the above might seem outrageous and wishful thinking but if you’re going to set goals, they might as well as be as far out as possible. Next step – features.

Categorized as: ERP_, Tools_
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Shopping for an ERP system

How does one go about getting an ERP system? That’s what this article: ERP Shopping Tutorial from Managing Automation sets out to do. According to MA’s resident ERP expert Joshua Greenbaum, there are some initial steps that must be taken that are crucial to success when it comes to selecting the right ERP solution.
He elaborates that one must:

  1. Wrap your mind around the critical business issues your organization seeks to overcome by adopting new enterprise software.
  2. Make sure of stakeholder buy-in across the enterprise — from the plant floor to the top floor and all the key functional departments in between.
  3. Conduct an extensive integrator capabilities assessment.
  4. Data integration and migration is critical to successful implementations.
  5. Once these pre-requisites are covered, then — and only then — you can begin to explore the technical speeds and feeds of a new ERP software suite.

I posted the above initial steps that must be undertaken in order to select an ERP system because they’re threshold level hurdles any ERP software providers/start up must overcome in order to make the cut. However, they’re only initial hurdles and they’re are a number of architecture, implementation etc issues that need to be overcome as well.
As for a comprehensive list of ERP providers, Managing Automation has the magic list as well here.

Categorized as: Tools_, ERP_, Supply Chain Management_
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What maketh an ERP software?

What maketh an ERP software system? An innocent question like this could subject you to a lot of harassment (sarcasm overfloweth here) – the magnitude and kind of undue attention would vary depending on the source of the attention. For example, an ERP salesman could subject you to a 3 hour presentation (If you’re like me and lose your mind after the first 15 minutes) and I shudder to think that it might happen not less than a week from today.
This site here lists some of the more common ERP modules that are available from ERP vendors:

  • PURCHASING (POP / Purchase Order Processing)
  • INVENTORY CONTROL (Stock Management)

So I asked myself that if ERP were to be redone, who might the logical candidate be? I drifted towards an OpenSource implementation of ERP software. That led me straight to Compiere. A brief scanning of Compeire ERP’s architecture, features and processes led me to think that the seed has not fallen too far from the tree. Compiere is directed at SME (Small and Medium Enterprises) and that’s probably a smart move if you wanted to grow big.
The second stop was at OpenMFG which I found to be a lot more upfront about what it is they intend to achieve, what they offer and how they price it – i.e. a fresh breeze flowing from a vendor. OpenMFG has a lot of features as well which they have summarized smartly in their brochure.
The third (and final) stop was at ERP5. It seemed a lot more comprehensive in scale and scope than the previous two open source ERP offerings. The other thing that stood out was the ease with which ERP5 professed to carry out the installation and the availability of source code for the tool as well. I’ve found what I was looking for now. I’ll be exploring more features of the ERP5 tool now in order to study it in a little more depth and detail.

Several more Open source ERP software providers are listed here. I will take a brief jaunt through them as well in order to see what’s happening there.

As I was surfing the field of open source ERP providers, I came up with the idea of drawing up a list of ideas that would form the core of an ERP tool offering. If any of you reading this have any insight into ERP tools, have used them and would suggest your ideas, they would be more than welcome. My ideas in the next post.
Witnessing, a brief spurt in the offerings of entirely new ERP tools in an arena where the elephants of ERP (SAP and Oracle) reside and trample about leads me to think that the time is right to fell the elephants.

Categorized as: ERP_, Tools_, Supply Chain Management_
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Systems Dynamics and The Beer Game – Got Beer?

Cyber Sam has a post about systems thinking and how it is applied to Supply Chain Management at his site Cyber Sam. if you’ve taken a course in Systems thinking or familiar with the kind of beer that doesn’t leave you all woozy at the end of the night – then you’re used to the Beer game (or the Beer distribution game as it ought to be aptly called – first, its a game with a point to make and second, its about people and their behavior when it comes to basic cooperation). There are several version of the game available – one as a computer simulation across networked PCs or on the web and the other as a basic board game with players huddled at a table – the latter being, in my opinion, the right environs for this game.
If you are playing the game for the very first time, then you’d experience what is commonly termed as the Bullwhip effect. If you’re playing the game for the second or third time, then you’d experience what is commonly termed as the Bullwhip effect too (even with the hindsight provided by the first game).
Here’s a short and sweet description of the Bullwhip effect at Wikipedia.
How does the Bullwhip effect come to be?

Supply chain experts have recognized that the Bullwhip Effect is a problem in forecast-driven supply chains.

The factors that contribute to the Bullwhip effect include:
Factors contributing to the Bullwhip Effect:

  • Forecast Errors
  • Lead Time Variability
  • Batch Ordering
  • Price Fluctuations
  • Product Promotions
  • Inflated Orders

And the solution is:

The alternative is to establish a demand-driven supply chain which reacts to actual customer orders. In manufacturing, this concept is called Kanban.

The Bullwhip effect is not mitigated by a group of intelligent people working together but streamlining the information chain to the point at which forecasting the demand chain is made sufficiently redundant. That’s a fancy way of saying that near total reliance on fancy predictive algorithms in order to drive your production and distribution organization is going to transfer customer and intermediary ordering behavior into your organization with a multiplier effect (the magnitude of the multiplier applied by the intermediaries in your distribution chain is dependent on past fulfillment history, profit margins that can be realized, gut instinct etc etc).
Don’t take my word for it but play the Beer Distribution Game for yourself and you’ll come away from it wiser and perhaps, just perhaps, willing to take a look at systems thinking.

Categorized as: Systems Thinking_
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Lean Accounting vs Throughput Accounting

While hashing through the concepts of Lean Accounting and Throughput Accounting, I came across this presentation that seeks to outline the two concepts, compare and contrast them. The presentation is available for free on the web and was prepared by Peter Milroy of Constraints Management Systems Inc. So let’s dive into the presentation right away:
Peter summarizes Throughput Accounting the following way:

  • Measurement and decision-making tools that align analysis with bottom-line results
  • Simple, common-sense financial categories aligned with generating sales (throughput), improving cash flow (investment) and providing capacity (operating expense)
  • All measurements and decision-making approaches are based on ‘relevant cash flows’ – no allocations are used
  • The system constraint(s) provide the basis for our understanding of which cash flows are relevant at any time

He then goes on to outline a hypothetical case of TA measurements on a month to month basis:

So how does one make ongoing decisions on the basis of Throughput Accounting?
Since there are only three basic variable outlined above, it follows that changes can be made in three main categories namely delta(Througput), delta(Investment) and delta(Operating Expense). As opposed to traditional cost accounting, the decision are not made on the basis of unit costs. I had made an earlier post that talked about Time as a fourth variable in Throughput Accounting and the role that is played by time is in the calculation of profit rate (which is calculated as Throughput per unit/Time per unit).
The essential difference, according to Peter, between Lean Accounting and Throughput Accounting is captured in the slide below:

And further more,

Very interesting, to say the least.

Categorized as: Throughput Accounting_, Lean_, Theory of Constraints_
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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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July 2006