@ Supply Chain Management

This article by SC Digest: Supply Chain Network Design – By the Book is about a new kid on the block (a book: Supply Chain Network Design: Applying Optimization and Analytics to the Global Supply Chain) as far as Supply Chain Modeling and Optimization goes.

As you might be aware I’m not really that keen on the adoption of optimization in businesses even though I’m sold on the absolute necessity of it. I’ve outlined several reasons over several posts on this blog : Coming off a tough tough project (for starters).

Some of the ideas in the article are tried and tested – as in I was employing them in Supply Chain Consulting way back in 2004-06 timeframe.

Better late that never – I came across a SaaS forecasting technology provider named Lokad in one of my sojourns on the interwebs. I must confess at the very outset though that I’m a biased reviewer at best. Biased, how and why? Two salient points:

1. I am of the firm belief (note the word) that forecasting is best done in hindsight where it may do the least harm. Forecast all you wish about the past – I have no issue with you.I have no problems with economists creating all sorts of economic models to forecast the state of the economy because I rarely if ever pay any attention to them. So also the Raputre – same thing. This thread of skepticism pervades everything from the macro to the micro forecasting world. That’s the first point – Do no harm.

2. I am firm believer (note the word again) in the primacy of execution – the best forecast that I can think of is the one that creates the world ahead because of the design, of the plan, of the intent to dominate etc. As you may imagine, this is restricted to the world of growth and not the world of maturity and decline of a product’s lifecycle. While each of these three phases of a product’s lifecycle have their own specific variables and levers of interest, my mantra here is not to predict the world but to respond to it in the least amount of time. Thus, I’m not a big fan of long lead times, centralized planning et al.

Please do keep in mind these points as I delve into this review.

"We benchmarked Lokad on client data (a beverage distributor) against a model we specifically developed for the case. Following a deep analysis of the data we combined different forecasting techniques like ARIMA, VAR, LOESS, HOLT-WINTER and others using R, the statistical computing software. Lokad performed very good, the values of MAPE were similar to our results, after 3 months of analysis of the case. I am really impressed of this accuracy. Lokad is also very fast and provides a high level of automation." Mauro Coletto, Business Intelligence Consultant

Empiricism – always a good idea.

The good practices that I see at Lokad’s forecasting engine

1. Getting as close to the point of demand data as possible – vital for execution and even more so for forecasting. But from the looks of it, if you as the client of forecasting as a service don’t have really granular data, then Lokad’s service can only be as good as your own execution efforts are likely to be. The implication here is that you really can’t expect Lokad to improve your sorry ass case of datatitis.

Our technology is designed to deal with your data in their current form.

One point to note here though is that most companies firmly believe that they’ve got a good handle on data. That’s until they see how their industry/segment leaders benchmark at.

Verdict: Neutral.

2. Getting the statistician(s) out of your firm. Spouting statistics on this and that is a finely honed skill that has considerable usefulness to your career progression – the higher you go, the more access you have to utterly useless statistical gordian knots. I don’t think that I would be so far off the mark as to say that higher honchos who browbeat you with statistics quantitatively know how poor their own competence and consequent results are without having any insights on what qualitative actions can be taken to surmount, nay transcend the current set of pitfalls marked on the pareto charts. While you can outsource the real statisticians and their professional output to Lokad – this may be an opportunity that Lokad is leaving on the table. Statisticians both inside and outside a firm are quite likely to be treated as black boxes anyway – so why incur the cost of having that black box on your payroll? I can predict quite easily that as Lokad grows, they will go after the opportunity on the table and I believe that can be a big big opportunity. The real competitors for Lokad in that space are the business/operations consultants. Upsell the interpretation once you have the lock on the statistical computation service.

Verdict: A big plus for Lokad.

3. The use of computational power – Call it the cloud, compute storm, global warming – whatever? What cloud computing does for every client is a very old idea in new clothes. That is to say, when you need the burst of computational power to solve a multi-variable (in the millions of them) for a short period of time, doesn’t it make better sense to pay for your slice of time rather than buying the whole set of computers and storing them in the basement? Companies like Lokad that are doing this today are all set to ride a power wave of such adoption – the time and assets to solve these large problems are now shared. Talk about cooperation without actually talking about it. Lokad is riding the wave and that’s a good way to piggyback on the successes of others riding the same wave.

Verditc: A plus for Lokad

4. Finally the Technology – The nitty gritty of the technology. First up, Quantile forecasting. I did struggle more than a bit to understand this and I’m not entirely sure that I understand it (Has that ever troubled me in blustering on but I digress…). The idea here seems to me to introduce a weight (that is correlated to the difference in payoffs for the positive vs negative realization of a particular event). To me, this is a part of modeling i.e. appreciating the sensitivity of a forecast and erring on the side of the lower cost. Makes sense.

Now, how can it be applied?

This Lokad blog post examines that (a little scroll down in the post) : Quantile Forecasting Technology

What I understand about the use of quantiles in forecasting is the improvement (marginal or more) that one gets from a better extrapolation of the expected demand predicted by a normal distribution over a cost weighted distribution? Is this the heart of it? Over 1 SKU the delta between a normal distribution and weighted distribution is probably quite small but extend that over 1000s of SKUs and the numbers begin to add up.

Verdict: A plus for Lokad (Remains a plus if it is what I understand it to be as above)

In all, I find such a move by Lokad quite an interesting thing. Validated empiricism would make it compelling as well. However, as I outlined above, my biases and experience is on execution. Good execution with good forecasting in your frontal view rather than in the rear view mirror is something of a mythical beast but strange things are beginning to happen in the world of the cloud.

In this final part of the analysis of the PRTM study finding, I want to look at Challenges 4 & 5 as recounted in the study. The earlier parts of this series can be found in the posts – PRTM Study: Five Key Supply Chain Challenges – Challenge 1 & 2 and PRTM Study: Five Key Supply Chain Challenges – Challenge 3 & 4.

Challenge 4: Risk Management Involves the End-t0-end Supply Chain

Risk management, to me it seems, has grown by leaps and bounds since the financial crisis – finding applicability everywhere and dare I say rightly so.

During the global financial crisis, many companies operated with the fear that suppliers would be forced into default, cutting off critical sources of components and increasing the cost of introducing alternative suppliers.

Yet, the following observation flies in the face of the purported effort to manage risks within the supply chain.

Dealing with cost pressures of their own, many customers have increased their efforts in asset management and have started shifting supply chain risks upstream to their suppliers.

Is this managing risk or passing the buck? Isn’t the end result of this that the supply chain risks are passed back to the production point? The purpose of inventory within the supply chain is to buffer variability that occurs. In the case of offshored/outsource supply chains, significantly greater amounts of inventory is required to buffer variability because of the longer lead times. Shifting supply chain risks upstream just means that the lead times that are currently experienced (which are long) are about to get longer. You’re about to enter the twilight zone – of worsening lead times that is. Why?

Variability in lead times, require greater amounts of inventory to cover it but the greater requirement for inventory is what causes the worsening lead time in the first place. If this is true, then the consequent observation (a few quarters down the road) will be that offshored/outsourced production centers are buzzing to the brim but there is all sort of snafus in the supply chain downstream from the production point. And that is the consequence of passing the risk instead of managing it.

C’mon folks – If you’ve committed to the long lead time supply chain, inventory is a fact of life. Maybe, the fact of life. If the volatility of demand from the consumer (straining under the economic headline of the day, week or month) is getting to you, the response cannot be to cut inventory because that is the only thing that is keeping the risk of supply chain disruption at bay. Interesting times indeed!!!

At this point, the decisions based on unit costs don’t look very good – this is what is meant by the phrase “There’s no free lunch.”

Volatility and risk can become intolerable at which point, there will be sufficient reason to realign the global supply chains towards more regional supply chains.

 Challenge 5: Existing Supply Chain Organizations are not truly Integrated and Empowered

Yeah, and which organization is truly integrated and empowered? Thankfully, we have work to do just because of this facet of organizational gaps.

At long last, I am posting the review of this book The Supply-Based advantage by Stephen Rogers about which the author had contributed a summary some time ago. Actually, this is the second time I am writing the review because unfortunately, the first one was deleted from my hard drive (pesky, pesky little thing).

When reading this book, the first thing that jumped out at me is that the book is really divided into two parts – the first three chapters are a sort of conceptual and definitional gambit. The fourth chapter is a short introduction into what the blueprint for a supply-based advantage should look like and the rest of the chapters in the book are a study in erecting the different elements of a successful supply based strategy illuminated through the metaphor of a house i.e. foundation, walls, roof, utilities. you get the rough picture.

In the first part of the book, Steve introduces the concepts of competitive advantage, value, complexity and risk (rapid change not being a concept but a reality). It is a good idea to keep those concepts in mind (but because they’re in some way detached from the metaphor of constructing a good house, they float somewhere in the ether and you need to suffuse your reading with the implicit relation to these concepts).

There are some interesting questions asked in the first part of the book (that which I pored over in my previous review but will only touch on briefly now):

1. Why do smaller companies understand better how to structure a good relationship with suppliers and larger companies (and even smaller companies that grow large) forget this? Steve’s answer takes the form that in most small businesses, owners are usually spending their own money and therefore seek to get the most value of their spending. I think that is a good observation. I would only add that a small business entrepreneur is risking everything with the idea that there is something about a particular niche or segment that is uniquely appreciated by him and he proposes to fill that gap with the expectation of reward. Therefore, I infer, that if deriving supply advantages are part of that gap equation, then the owner will set about creating some measure of defensible value that will add to his overall advantage. Now, as the company grows, others come in that do not share the owner’s appreciation of the gap or of the value – the further the owners are pushed from this basic equation, the less of an understanding the organization now possesses of the situation. However, those who add to the firm’s headcount bring along their own ideas of what is really important to the equation or their understanding of the equation – sometimes better and sometimes not.

2. The importance of timing. This important idea is illustrated through the example of P&G before the American Civil War and how the owners of the firm seized the import of securing the supply of a key component before the outbreak of war that served them well through and after the war. In fact, the claim goes that the additional profits generated from this strategic move funded their future operations and growth. This is a lesson of life – cut your losers short before they consume you but press your winners home before they are undone by others.

As for the second part of the book, there is a litany of plans, activities and processes that can be marshaled towards building up (or conversely breaking down) supply-based advantages. These chapters deal with the nitty-gritty of structuring these activities and processes for success. Also, what I found helpful in the reading is the well distributed “Practitioner’s take” in grey boxes that provide reflections every step of the way which by itself renders these chapters within the framework of “Here’s a good way to structure things” – “Oh! by the way, here’s how I found it”. Now of course, your straddle upon this framework is going to be different but you have a reference point in these appraisals of salient supplier planning and engagement processes.

Lastly, a shortcoming of the book is the use of an overarching metaphor (of constructing a home) which on the surface seemed very useful but as one gets through the chapters, the metaphor finds little depth beyond the first paragraph of a chapter. Metaphors are tricky to begin with but a good metaphor not only permeates but also reaches deep into a subject and allows a reader to connect beyond the prose so that long after the particulars have escaped one’s grasp, the metaphor resonates and its particulars return on a superficial recounting.

Overall, I think its a worthwhile addition to your library as a reference if you work in the supply management field.

P.S: I am on vacation till mid-June and that will explain the lack of updates. Not that I have explained the lack of updates this month but I am just saying. I have  reason this time. Wish you all well!!

As you might know, I am an IBMer now by way of acquisition of my erstwhile firm ILOG. In addition to reading The Supply-Based Advantage: How to Link Suppliers to Your Organization’s Corporate Strategy which was discussed in the last guest post – Supply Based Management in Tough Times, I am also reading All Customers Are Irrational: Understanding What They Think, What They Feel, and What Keeps Them Coming Back by William J. Cusick.

One of the opening insights that Bill presents in this book is the idea of Brand Promise. He talks about Brand Promise in the following way:

To be clear, when I say, "brand promise," I’m not asking about positioning, which is more a strategic discussion, wherein you map out the market position of you competitors and contemplate how you can carve out a position or spot in the market and in your propect’s mind. Determining your positioning is a key discussion in your company, but it is more cut and dried; it is purely a business consideration. Brand promise moves to a different, more emotional level. Positioning is really about pure strategy Brand promise is about an appeal to the customer.

and further,

We feel it’s absolutely critical to understand what it is that this particular company is promising to prospective and existing customers. What, in other words, are the customers’ expectation whey "buy" (whatever that might mean). What is the distinctive value proposition? Some might even describe it as the company’s soul. Surely a company that generates billions of dollars in revenues each year begins all work and initiatives from a common, consistent, and unique brand promise – a raison d’etre, if you will – right?

So I’ve been through the IBM orientation and having worked for IBM (my client) as a consultant before that – take a look at one of the latest ads that I’m sure that you’ve seen on the TV every now and then:

Then tell me, What is the Brand Promise here?

My answer:

Read the rest of this entry »

Supply Based Management is a new book by Stephen Rogers that I’m reading right now – a review to follow shortly. In the meantime, I have the pleasure of posting an excerpt by the author himself about supply based management in these difficult times.

SUPPLY-BASED MANAGEMENT IN TOUGH TIMES

In today’s deep recession, customer vulnerability and top line revenue declines need to set the tone for the actions that create advantage not merely survival.Cutting costs is vital to your competitiveness but the knee jerk reaction to squeeze suppliers, as much as you fear your customers will squeeze you, will not create a business model that rises above survival.