@ 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

In an earlier post: What should an ERP software possess, I was in the process of running up a list of things that an ERP innovator ought to think about. Today, I sat through a presentation of SAP Business One (More information about SAP Business One), an ERP software that SAP targets at Small and Medium sized enterprises (SME) and had the opportunity to brainstorm about critical features that a new ERP system ought to possess. I was expecting a watered down version of mySAP but Business One is a product offering that stands on its own. That particular feature is probably because of the fact that SAP acquired the previous seller of Business One and chose to retain the original offering instead of creating a watered down mySAP. An observation that jumped out at me is the number of forms and drill downs that Business One entailed and it just kept going and going and going and going… There’a lot of information embedded within the system and that’s probably what the system really brings to the table – a data backbone that everyone in the enterprise can use, modify and communicate about.
Meanwhile, I came across the following article: Lies your ERP system tells you. This article deserves a post in its own right but since I want to clarify some of the problems (thus translatable into opportunities) with the current state of ERP software.

“As a result, each year they were overstating the value of their inventory by millions of dollars,” Testa said. “They didn’t know what caused the problem and they didn’t want to find out, so they just wrote off the difference until the parent company called them on it.
“That’s the biggest problem with ERP systems,” Testa said. “People muck with them. They try to make them perform the way they want rather than the way that’s correct.”

What are the sources of the problem here? I can see at least two very readily – one being the lack of discipline when it came to data entry and the second more important one being the lack of understanding of the system. The latter is a point that was raised in the framework for how to think about a new ERP system. The former point about users lacking discipline in entering the data is something that I have frequently encountered while attempting to collect data in the pursuit of some consulting engagement – most of the time, the data sucks big time.

Its power depends on recording and tracking thousands of individual transactions, or events, ranging from sales orders to each component on a bill of materials. It then models how those processes interact with one another. Like dominoes in a row, each new transaction sets off a cascade of new events.

That couldn’t have been put more succintly. In fact, people should not be calling it ERP but information chain with the data layer called the data backbone. That’s what ERP essentially is – setting up a cascade of processes interacting, approving and alerting others is built on top of the information chain and data backbone. The easy way of determining whether a module/factoid/process is critical is to examine what happens to the whole when that little bit is compromised/affected/degraded.

ERP models reflect reality only when each transaction registers true. “Yes, it is costly to enter each transaction,” Testa said. “But as soon as you go around the system, it begins to degrade. Once that happens, people stop trusting it, and then they have another reason not to use it. It’s a death spiral that’s inherent in ERP: If you don’t trust the system, you validate that the system’s data is bad by screwing it up.”

Such remarks remind me about those who repeat – “You can’t manage what you don’t measure.” I’d guess that there is also a propogation of errors (and consequent magnification of errors) as it cascades through the entire set of interacting processes. As incorrect data sloshes throughout the system, it triggers actions and creates beliefs about the current state leading to inefficient decision making – that’s a beast that is difficult to corral.
Here’s a critical observation from the article:

That seems to happen most often when ERP systems reach down to the factory floor. There’s a disconnect.

Why, why, why? I harken back to a book that I am reading right now – Putting Total Quality Management to Work by Marshall Sashkin & Kenneth J Kise, wherein they report on Sam Walton’s (of Walmart fame) observation. The quote from the book reads, “Quality cannot be added on; it must be built in from the start. Mass inspection is completely off the mark. It assumes that quality can be achieved by identifying and then correcting errors. As Walton observes, this means that workers are paid to make errors and then paid again to correct them. This is not to say that workers like this any more than do managers. Deming notes that almost all workers want to do work of high quality, work in which they can feel pride and a sense of accomplishment.”
I am of the conviction that ERP, in its widely found form, is neither about Resource nor about Planning, it is primarily about Enterprise – a whole set of integral and connected processes across the enterprise are brought together under one umbrella (It might be an oddly shaped umbrella but the important thing is that it is one umbrella). The article, sort of, agrees:

Part of the problem is manufacturing complexity. “ERP is great for deploying standardized processes across an enterprise, but it has had a hard time bridging that last mile due to the complexity and disparity of plant operating solutions,” said Russ Fadel, vice president of manufacturing applications at SAP Labs LLC, in Palo Alto, Calif.

Remember, that standardized processes are the route that the current crop of ERP systems have taken – it was a choice in order to get that first “E” of Enterprise. Intuitively, that seems a logical choice but given the observation that there are some practical difficulties, it is wise to return to this original premise. Up to date information exchange is what is desired within an enterprise but it does not logically follow that standardized processes are the only solution. Here’s what really goes on in a wide-swarthe of companies that dot the ERP enabled landscape:

At worst, that means data and process models are scattered everywhere. At best, automated facilities use manufacturing execution systems that harmonize competing models and data, and moderate the flow of manufacturing information to and from the ERP system.

A lot of software providers have sprung up to fill the obvious shortcomings of ERP software. However, that leads to a multiplication and replication of data sources, data models, process models etc. But that’s the real world. Adopters of ERP systems ought to know this even if providers of ERP software do not.
There are three problems described in the article and they are:

“ERP does materials management and resource planning, but if you don’t have accurate shop floor data, ERP forecasts are not much better than putting your finger in the wind,”

and,

“Implementation,” he said, “is the number one, two, and three problem in ERP. It’s not that the systems are inflexible, but that they’re so very flexible.”

and,

“The conflict comes when companies try to reconcile what software says they should be doing with the way they’ve always done things,” Greenbaum said. “Companies that spend millions of dollars on ERP software would like to think that the software works for them and not the other way around.”

The above three reasons and others too are why I think that the business of ERP is in for radical competition. I can imagine that there are many product segments and industries that beg for competition – typically, they’re monopolies/oligopolies of some sort or the other.
But on the flip side, am I barking up the wrong tree? Am I confusing the problem of the technology with the problem of discipline and adaptation? Is the real problem the human element? Here’s why I’m thinking about that:

That sounds daunting. Yet every company operates at least one system where the data is always perfect, Boyer said. It is a system where everyone takes personal responsibility for accuracy. Where they report mistakes immediately. Where no one accepts any lies from their software.
It is, of course, payroll.
When operational personnel take as much responsibility for manufacturing data as they do for their paychecks, they will be able to count on their ERP systems to tell the truth.

Those are observations that are largely true and should give any observer pause. Perhaps the problem lies really at the interface of ERP software and the human being. Consequently perhaps, that’s where the solution must begin.

The expanded list as it stands now:
1. Implementation of the ERP system must be in a timeframe of months (even weeks – am I being rather optimistic) rather than years.
2. IT departments must be minimally involved in the setup and roll out of the ERP system – this is critical because often ERP is an IT project. However, it is an Enterprise project that uses IT as the medium – that’s a big difference.
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/planning philosophy etc.
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. This idea is borrowed from the SCOR model implementation which is a formalized system for supply chain development and implementation.
9. The basis, methodology and guiding philosophy of the ERP system must be laid bare for everyone to encounter, experience and understand.
10. Data is the backbone of an ERP system. Therefore data integrity is critical and ways to preserve/enforce/structure data integrity is critical. Current ERP processes such as back flushing should be avoided as much as possible. One way to minimize (not eliminate data errors or significantly minimize data errors) data errors is to minimize direct key board related data entry by using combo boxes and drop downs instead of text fields for data entry.
11. Integrate the most commonly used software mediums into the system. If there is something that I hate about ERP systems is the Form based GUI. I hate it on two accounts (though at this time I cannot think how to replace it effectively) – first that IT has to be intimately involved in creating/modifying/adapting the GUI as it suits a company and second that you can only do what the form allows you to do even if it means cascading through numerous forms in order to ascertain what you want. What is the most commonly used software tools – it has to be MS Office/Internet Explorer or something of the sort. Ergo, the ability of individuals to use MS Office programs is going to have a distinct advantage over any ERP software providers ability to provide templates or customizable forms.
12. Understand why the interaction between ERP software and human actors causes these well documented problems. What is the solution there?

More to come…

Categorized as: Tools_, Supply Chain Management_
Tags: SCOR, ERP, ERP Software, ERP Implementation, SAP, SAP Business One