@ Supply Chain Management

Supply & Demand Chain Executive magazine has an article about the Six Key Trends Changing Supply Chain Management Today. Whatever be the success rate of prognosticators or prophets like Tim Vaio, your own success is predicated by your ability to spot successful trends, sport mastery of those trends and support others in acquiring mastery over those same trends. So here are Tim’s six trends that are changing Supply Chain Management:

Trend 1 – Demand Planning Begins at the End of the Cycle

Tim writes that:

…as sources and capacities for manufacturing have increased, more companies have moved away from focusing efforts on plant-level production planning and are adopting more of a demand-driven focus of trying to influence and manage demand more efficiently.

What does this sort of Demand Planning boil down to?

Companies should conduct an enterprise-wide internal Demand Review to gather information from all aspects of the organization. Goals are then set to gain consensus on what will be sold each month for each product line or category and the resulting revenue. Of course, the driver of the Demand Review process is continuous improvement of forecast accuracy.

Peel away all the language and that’s what is at the core of demand planning – Forecasting : with better accuracy, more sophistication, more integration with other functional areas within the firm. Like I have indicated elsewhere, there are two diametrically opposite ways of fulfilling demand. If you take the “forecasting” route, the competency that the firm focuses on would center around better information gathering mechanisms, tweaking forecast models and the like. The demand fulfillment capability of the firm i.e. its manufacturing or procurement or whatever other function it has will work to the forecast no matter how good the forecast or forecast frequency i.e. how often forecasts are updated – daily, weekly, biweekly, monthly, quarterly etc. On the other hand, if you take the “lean” route, the competency that the firm focuses on is its demand fulfillment capability. Sure, such a focus would make use of forecasts but forecasts would serve a confirmatory role rather than a directive role which is the key difference. The severe irony of the matter is that while lead times are being increased (with outsourcing et al) for manufacturers, forecasting is being reintroduced albeit in a more sophisticated (and perhaps) and complete/holistic fashion. Such timing indicates that for the right kind of inventory now being factored into the supply chain (because of long lead times), the benefits are quite substantial but for the wrong kind of inventory now being factored into the supply chain, the benefits are quite dismal, even counterproductive.

Trend 2 – Globalization

In elucidating this particular trend, Tim is very focused on one aspect of Globalization – the inbound part of the Globalization scheme of things. Globalization as a trend is irrefutably true and its effect manifests not in one but two directions. Globalizations affects not only how and where companies acquire/produce their products or raw materials but also how and where they sell their products. On the acquisition side of Globalization, a firm’s supply chain is affected by longer lead times, bottlenecks at ports and transshipment points, increased reliance on logistics (and perhaps the reappearance of logistics as a source for competitive advantage), cheaper raw material or production costs and a whole slew of other effects. Tim’s thoughts on the matter are as follows:

A well thought-out supply chain network design can optimize the supply chain network and the flow of materials through the network. In doing so, network design captures the costs of the supply chain with a “total landed cost” perspective and applies advanced mathematical technology to determine optimal answers to both strategic and tactical questions.
The following are strategic questions answered by a well thought-out network design:
Where should facilities be located?
How many facilities should I have, and what capabilities should they have?
What kind of capacity should they have?
What products and services should they handle?
Whose manufacturing and distribution orbit should they source?
Which contract packers or contract manufacturers should I use?
How can I achieve operations synergies through integrating acquisitions?

This is the stuff that makes up my bread and butter on a daily basis. I consult using advanced mathematical optimization techniques in order to answer precisely all of the above questions in a systematic fashion. I should blog about this and that’s one of the posts sitting in my pipeline – How to adapt mathematical optimization to Supply Chain Network design and implementation.
The other aspect of Globalization is that demand is now worldwide. That means that there is a whole set of capabilities that one has to develop in order to successfully sell, compete (with local competitors) and thrive in a foreign land. Note the tremendous success that both Toyota and Honda have had selling within the US. The point to note is that they produce a significant portion of their demand for local markets locally i.e. lead times are shrunk instead of expanded. That’s something to think about.

Trend 3 – Increased Competition and Price Pressures

I would not really think of this as a trend but as a consequence of pervasive globalization. If everyone has jumped on the Globalization bandwagon, then it follows that they’ve or they’re in the process of leveraging significant cost advantages. Tim writes that:

Product innovation and brand equity no longer allowed them to command a higher price in the market. In order to continue to compete with that commoditized product the firm made significant cost improvements with supply chain redesign and technology.

So how are companies adjusting to this consequence of pervasive globalization?

Companies are looking to their supply chains in two ways to help offset this trend. First, they are looking at ways to reduce cost and are creating a more efficient value chain to remain cost competitive. Second, companies are looking at ways they can provide value-added services to meet the demands of more sophisticated customers.

I can’t see how a streamlined supply chain would be the answer to increased competition and price pressure. There are only a limited number of modes for transportation between low cost manufacturing/procurement and end markets, in fact, only shipping exists as a mode for those who are looking at mass production avenues overseas and end markets in the developed world. Given that ports are congested and transportation prices continue to go through the roof, there is little that a firm can do in order to mitigate these effects from a cost perspective. In my opinion, the viable alternative is creating a more efficient value chain. If one goes back in history awhile, one would find that Japanese manufacturers were in precisely this situation – end markets being largely overseas and having a low cost manufacturing base. Their source of competitive advantage focused on quality and being lean – that’s a generalization but I think a largely true one. Fast forward fifty odd years, I hear very little about supply chain quality but I do hear a lot about supply chain processes. Is there such a thing as Supply Chain Quality?

Trend 4 – Outsourcing

Since I work for a warehousing cum 3PL firm, I am quite familiar with outsourcing. As Tim writes:

As many companies step back and examine their core competencies some realize that outsourcing parts or all of a supply chain can be advantageous. With marketplace improvements around (1) information mediums and systems (2) cost and quality of global manufacturing and distribution and (3) product design capabilities companies are gaining additional synergies by outsourcing all or parts of their supply chain.

This is a trend that is happening right now and I’d think that we’re well into a five year cycle of this trend playing out. I wonder if having outsourced all or most of a firm’s supply chain and/or manufacturing, there is a way to compete on the basis of R&D or superior product development or marketing. There might be a way to compete but I am not convinced of the sustainability of such competition or so derived competitive advantages.

Trend 5 – Shortened and More Complex Product Life Cycles

Around the time that globalization was beginning to make its debut as a buzzword, mass customization was also a buzzword. You could hear about how you could customize, mix and match, tailor, add, subtract from your particular product. If you saunter down to any car manufacturer’s website – say Mercedes, Acura etc, there is no dearth of options that you could play around with. Compare that with the Apple iPod series (an unquestionable megahit) and you can have that in two colors and quite a limited number of hard disk sizes. What’s up with that? I’m guessing that MP3s have not reached the point of commoditization – there’s still a cool zip factor associated with MP3s.
Tim writes:

Today many companies are under pressure to develop innovative products and bring them to market more rapidly while minimizing cannibalization of existing products, which are still in high demand. In order to meet the needs of both customers and consumers, companies need more efficient product lifecycle management processes.

I’m pretty sure that PLM is going to be an ongoing trend. It is often said that a person can manage three or four variables in their head at a time but that’s simply insufficient with today’s myriad interrelated and interacting processes.

Trend 6 – Collaboration Between Stakeholders in the Extended Supply Chain

I’ve heard of collaboration in supply chains from day one. However, collaboration that one encounters in real world supply chains are spotty and sporadic. Tim writes:

As supply chains continue to develop and mature there has been a move toward more intense collaboration between customers and suppliers. The level of collaboration goes beyond linking information systems to fully integrating business processes and organization structures across companies that comprise the full value chain. The ultimate goal of collaboration is to increase visibility throughout the value chain in an effort to make better management decisions and to ultimately decrease value chain costs. With the right tools, processes and organizational structure in place collaboration provides key people throughout the value chain with the information needed to make business-critical decisions with the best available information.

And,

Companies that expand the usage of sales and operations planning have greater visibility across their owner enterprise and respective value chain, gain the agility necessary to improve the PLM process, improve promotional planning, minimize unnecessary buildups of inventory, increase revenue predictability and execute customer service expectations.
The S&OP activity enables information systems to connect the value chain participants around key demand information, such as customer forecasts, and around key supply information, such as supplier inventories and capacities.

The kind of collaboration is absolutely necessary but one must keep in mind the underlying philosophy of demand fulfilment or how is it that the firm is planning to execute the demand fulfillment activity. The above trend (an ongoing and probably going to intensify) drives collaboration through a mathematical version of reality driving up the risks from uncertainties that are spread throughout the supply chain.
Tim also writes about the role of supporting technologies in the coming supply chain management future. Among the usual suspects are represented quite well:

As supply chain networks have become more complex the need for greater and improved supply chain technology solutions has become critical. Enterprise resource planning (ERP) and best-of-breed supply chain management (SCM) solution providers have made significant investments in developing solutions to address the needs of manufacturing and distribution companies in areas, such as:
Network and Inventory Optimization
Product Lifecycle Management
Sales and Operations Planning
Manufacturing Optimization
Logistics Optimization
RFID
Procurement
Business Intelligence

These technologies have enabled the supply chain