@ Supply Chain Management


What is throughput accounting?

If you’re even slightly familiar with “Lean thinking”, then you would have heard the phrase – “Lean is all about flow!”. There is a good deal of sense in capturing the essence of Lean in that pithy way. (And if you’re familiar with linear programming as well) You might also aver that “Lean is about eliminating waste” – the latter phraseology being the dual of the former i.e. maximizing flow does minimize waste. Observations like these are exciting because, Lean thinking and Optimization borrow insights from each other pointing towards a unity that very much doesn’t exist in the business planning and optimization of an enterprise but exists very much in the fundamental aspects of both disciplines.
In any case, this post is about throughput accounting. I took some time out to familiarize myself with the Theory of Constraints which is where I came across the term and description of Throughput Accounting. Pascal van Cauwenberghe of Thinking for a Change has posted an article at his site that summarizes the key aspects of Throughput Accounting.
Pascal outlines the three basic variables of throughput accounting:

  1. Throughput = fresh money coming in from sales.
  2. Operating Expense = money going out to keep the company going. Once spent, the money is gone (wages, energy, rent

Middle East logistics: high opportunity in a complex region

Logistics Management has a new article that outlines why the Middle East is a booming regiong for logisitics and supply chain services. At least, that is the conclusion of a recent study released by the research firm – Transport Intelligence.

The logistics sector has been benefited as companies invest in upstream and downstream infrastructure projects. And, other opportunities are presenting themselves from investment in construction including tourism (hotels, amenities etc), reconstruction of Iraq, and transportation projects (ports, logistics parks and airports etc). In addition, the importance of consumer markets is increasing as GDP per head soars throughout the region.

That is the key takeaway from the article and I can personally attest to that having visited the Middle East not more than a few months ago on a supply chain consulting engagement. There’s a lot of oil money flowing in the region and that is being put to work building up infrastructure of all kinds. In short the area has been booming for a few years and could concievably continue to do so for a little longer. Current events, notwithstanding, this part of the world is pretty critical to the rest of the world and if there is something that a supply chain fits in nicely with – are the critical things that power/drive the rest of the world.

Categorized as: News_, Supply Chain Management_, Logistics_
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Theory of Base6© – Successfully Implementing the Lean Supply Chain

A featured story (in three parts no less) at the Council of Supply Chain Management’s website describes the Theory of Base6 – Successfully implementing the lean supply chain. The authors of the article are Robert Martichenko and Dr. Thomas Goldsby. In the first part of the article, a list of persistent ideas in business are listed on account o fthe fact that these ideas have some value proposition. The list includes:

  1. Total Quality Management – Dr. W. Edwards Deming influence
  2. Six Sigma – Dr. W. Edwards Deming influence – Motorola and GE developed
  3. Lean Manufacturing – Dr. W. Edwards Deming influence -Taiichi Ohno, Eiji Toyoda, Shigeo Shingo, Toyota Motor Manufacturing developed
  4. Theory of Constraints – Eliyahu Goldratt
  5. ISO Certification – influenced by engineering groups from many countries
  6. Good to Great – Jim Collins
  7. Seven Habits of Highly Effective People – Steven Covey

Further, they distil the above business ideas around six common themes (hence, i suppose the term Base6) which are:

  1. Customer Focus
  2. Vision Deployment
  3. Process Management
  4. Teamwork
  5. Quality at the Root
  6. Continuous Improvement

Each theme is then expanded briefly in their article. I am waiting for the next part in the series to see how these themes are fleshed out in greater detail and how these themes are linked up towards developing and implementing a lean supply chain.

Categorized as: Reviews_, Lean_, Supply Chain Managment_, Process Management_
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The False God of the Almighty algorithm

Evolving Excellence has a great article (that gave me some pause when I read it) about the False God of the Almighty algorithm. The reason that I read the article at least twice and then all the following comments as well is because I do have a deep interest in algorithms as well as lean principles and the article made it seem as the twain shall never meet. Perhaps, they should and perhaps they shouldn’t but a larger point about invoking, adopting and implementing ERP systems was made which I find quite relevant. I am of the opinion that ERP systems are bound to face radical competition but I didn’t think about the source of that radical competition. The reasons for holding this opinion are as follows:
1. They’re too cumbersome to implement and consequently the failure rate is high for firms that go that route
2. The firm has to adapt its processes to what the ERP is mostly configured to do (No, you won’t hear that from any vendor. In fact, you’d hear exactly the opposite). This is quite akin to Ford’s famous quip a while ago, “You can have your car in any color as long as its black.”
But that is not what the article is really about. In a nutshell, the following quotes illustrate what the story is really about:

“These are two radically opposite worlds … One is the tech-savvy and IT-powered optimization world and the other is the pencil-and-paper problem-solving world. Which world should we live in?”


“What do we know about SAP, and how well it integrates with lean principles (or lean implementations).”

The first thing to note is that optimization problems are notorious to handle all by themselves (but elegant in the formulations that have been drawn up) but when they’re applied to real world problems, the modeler first creates a system (an artificial world), then models the problem within the system and finally attempts to solve (hopefully) the problem to optimality (hopefully) in a brief flurry of command line code instructions. And voila, you have an optimal answer. However, the model, the answer and the system are first and foremost matters of interpretation. Why there is a lot of WIP sitting between two furious machines is not a matter of interpretation as much as it is a matter of fact. The other (secret and don’t you ever say that I said it) shady part of optimization applied to real world problems is that not all of what is called ‘optimal’ is truly optimal (or mathematically optimal) but no salesman will ever tell you that either out of sheer ignorance or cognizance that its the best that can be done. If I were to peer behind any ERP vendors so called optimization algorithms, I’d be sure to find (hopefully) a hybrid of optimization and heuristic algorithms embedded within that are spitting out answers. So that’s what really happens on the optimization side of things.
On the lean side of things (and as lean goes, I shall be very brief in my answer) – you work in a philosophical framework that is bent on eliminating waste in a real system.
So what happens when the optimization world of IT clashes against the problem solving world of lean (or at least that’s the way the clash is cast):

wasteful processes being proceduralized in algorithmic stone, monstrous amounts of extra inventory generated to accommodate the cascading “schedule risk” of individual operations, and of course implementation costs that can exceed $100 million buckaroos. And interestingly enough, several people chimed in with how they have gone back to using simple visual controls and Excel spreadsheets to schedule complex operations.

If one wants to clarify the clash, it would be instructive to consider some real evidence (as opposed to the neat tick-tock world of a an optimization/heuristic modeler) and that evidence is Toyota:

About the most complex type of factory is one that makes almost a thousand cars with several hundred permutations every day. And Toyota does it with no MRP-type shopfloor control. MRP is used to handle financials, inventory costing, and the like… but shop floor control is pure manual pull with a small number of e-kanban type applications.

This kind of evidence is particularly damning because in contrast to the system that the optimization resides in, the application of lean on a shop floor deals with reality – a tangible profit creating and wealth generating reality. You can’t explain that away. And,

Excellence through simplicity.” To me that quote from Lao Tzu has always epitomized one of the fundamental tenets of real lean. Don’t proceduralize complexity, and don’t make something more complex than it needs to be. Manufacturing really isn’t all that hard… you make something, preferably one of it, and you get it out of the operation as quick as possible. Once you remove the loads of WIP from the floor by focusing on the velocity of the single unit, you begin to realize how so much of that perceived complexity is due to not having an unwavering desire to get a product through the flow as quickly as possible.

The above discussion (or polemic, depending on how you see it) is why I go hmmmm… because ERP is asking for competition. So what am I going to do? That is the only question.

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Where the Supply Chain Planning Players are at?

Gartner Research has published its magic quadrant (nothing magical about it but its an informative quadrant though) about the relative competitive position of Supply Chain Planning software vendors for the first half of 2006.

There are three key sectors (Process Manufacturing, Discrete Manufacturing and Distribution Intensive) for which the quadrants were created. They’re available free of charge at Oracle’s site (Magic Quadrants for Supply Chain Planning) at the following links:
1. Magic Quadrant for Supply Chain Planning in Process Manufacturing Industries, 1H06
2. Magic Quadrant for Supply Chain Planning in Discrete Manufacturing Industries, 1H06
3. Magic Quadrant for Supply Chain Planning in Distribution-Intensive Industries, 1H06
What I wanted to determine from perusing these quadrants was the criteria by which certain firms’ SCP software was categorized as visionary and others as followers or laggards. Here is the summary of firms seen as visionaries (as opposed to niche players) in various segments of the SCP marketplace.

Process Manufacturing Discrete Manufacturing Distribution Intensive
Aspen i2 i2
Manugistics Oracle Logility

According to the report, a visionary has to demonstrate:

  • A developing global support strategy
  • Five customer references in each targeted vertical industry
  • Differentiated vertical-industry domain expertise and unique industry-specific functionality
  • Development beyond a third vertical-industry-specific solution
  • Development support for a multi-enterprise architecture on an SOA platform
  • A targeted presence leading to influence and activity into how aspects of the market evolve

Making sense of the alphabets (ERP, SCM, MRP, MRP II, CRM, PLM… hmmmm)

There is no doubt in my mind that if I were to ever come up with a product offering in one or all of the above spaces, I’d christen it hmmmm without thinking a second time – market research be damned. Then again, the world is spared the notion by the appropriate coincidence that I haven’t come up with such a product offering but boy its getting there. There is little doubt in my mind that I detest jargon of every kind except the kind that I understand. Jargon introduces a threshold in conversations as well as shorthand to getting things across. If you were to talk to me day long about ERP systems, not only should you expect diminished returns of attentiveness over the course of the whole day but also an increased willingness to employ violence towards the end of dat. But remember, I know something about ERP. So what about those genteel people of the world who know nothing or next to nothing about ERP not to say anything about the rest of the alphabet soup? I will not even mention those who have been through an ERP implementation and a still smaller group who have been through a successful implementation of an ERP system.
So, first of all a clarification of the alphabet soup:
PLMProduct Lifecycle Management: How do you manage the entire lifecycle of the product from conception, to design, to manufacturing, to after market parts and lastly obsolescence? I ask myself who is responsible for thinking that products are the lifeblood of a company? Let’s see – do accountants think like this, do finance people think like this, do marketers think like this (may be), does customer support think like this, do engineers think like this (you betcha), do logistics people think like this? I’d hazard a guess that PLM was developed by engineers for engineers and has suddenly found broad acceptance in a whole stratum of jargonists for whom Excel just would not do. But I’m being very creative here with my guessing.
ERPEnterprise Resource Planning: A while ago, I read an article at Darwin magazine that ERP was neither about Resource nor about Planning, it was about Enterprise. And that puts a sharp axe to everything that you might read about from an ERP vendor’s colorful brochures no matter the breadth of applications and features that an ERP possesses. ERP bothers itself about the whole enterprise from sales and marketing to manufacturing and supply management, transportation and warehousing to finance and accounting – the whole gamut. When such is the scope, then failure is not only possible but also lurking at every corner to make a lunge at such an enterprise wide transformation. Methinks that ERP is ripe for competition (Can elephants dance?) – radical competition. Hence, hmmmm…!!
MRP (& MRP-II)Material Requirement Planning (Manufacturing Resource Planning): Before ERP was, MRP (& MRP-II) was the order of the day. Material Requirement Planning (MRP) was developed for manufacturing companies in order to calculate what materials were required, at what time in the optimal quantities. That morphed into Manufacturing Resource Planning (MRP-II) with the idea that true MRP required a more broad based approach that included shop floor control, planning and scheduling etc. The other major introduction with MRP-II was the closed-loop model with the aim to compare forecasts with output and thus improve the required processes.
CRMCustomer Relationship Management: As the name implies, this type of (software + methodology + capability) is aimed at better management of a firm’s relationship with customers. Rather than just powered by a software, it is a structured interaction with a firm’s customers that is systematic and intentional. The functions that are most impacted by CRM include marketing, sales and customer service with allied functions such as BI (Business Intelligence) etc.
SCMSupply Chain Management: Saved the best for last! Some might be of the view that supply chain management is all about managing suppliers. Perhaps this is why some insist on calling this field Demand Chain Management because it is all about fulfilling demand but that is not all that accurate either. Perhaps, it is better called Chain Management because that is what it really encompasses is a whole gamut of activities from suppliers to manufacturers to transportation to warehousing and inventory to sales and forecasting – a chain of activities that need to be deployed, changed or reworked at a moment’s notice. Oh by the way, just when it was getting manageable, everybody decided to outsource to China. A few years ago, it would have been common for people to say that SCM sits on top of ERP systems – today, it is the ERP system.

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Product Lifecycle Management (PLM) – What is it?

Another buzzword, another hyped up same ol’ thing or something new, looking at an age old problem with new glasses – what is PLM exactly all about? I came across Arena solutions which is in the business of selling PLM tools and went through their demos to ascertain what they’re upto. In a nutshell, PLM software:Products as ERP:Finance and CRM:Customers. Attendant to the described associations is an underlying definition that no vendor of the latter products might sign up to because they’re in the business of extending their solutions/services into the PLM space or any other space that one can think up.

Mark Holman of Arena solutions in his demo seeks to explain how PLM can:
1. Accelerate time to market
2. Streamline collaboration in the supply chain
3. Ship profitable products

Mark also compares the current state of PLM software with traditional PLM software based on the Client-Server model as opposed to the PLM as a service (SOA approach?) model – meaning that all you need is a internet connection and a web browser (Web 2.0?), that they follow.
A first cut review of the demo leads me to think of PLM as a information exchange and, product related control routing and processing tool that uses SOA to deliver its content. I’m sure that ERP vendors are hot on their heels adopting the same technology wholesale into their myriad functionalities or extending their current capabilities in that direction. Gleaning information from the demo, I’d classify PLM as an analytic tool that brings into a firm adopting it a host of its own preferred method of structuring product management, cost reductions, collaboration etc.
However, something that struck me that if ERP seeks to subsume PLM, might PLM instead replace ERP itself simply because of the ease of adoption, focus on product management rather than financial mumbo jumbo and accounting? Could PLM and CRM taken together as an integrated SOA render ERP irrelevant?

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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