@ Supply Chain Management

Logility Inc is hosting a Webinar on September 28th on this very topic : Is your Inventory a Competitive Advantage? The write up of the webinar promises:

Every supply chain faces inventory challenges which impact the bottom-line. High inventory levels tie up working capital, and stock-outs decrease revenue. When inventory levels need to be optimized across a multi-echelon manufacturing and distribution network, the complexities become even more challenging. Inventory optimization right-sizes inventory levels, boosts competitive response and grows market share during the economic recovery.

The webinar is presented by:

Sean Willems Ph.D. Associate Professor of Operations Management, Boston University

and

Michael Martin Manager, Global Supply Planning Strategy, Stanley Black & Decker

My quick take on the subject is that neither Inventory nor Inventory Optimization (which I think will be the focus of this webinar) are competitive advantages. Competitive advantage has a very specific meaning and I’ve spent considerable time and effort delving into it. The simple reason that these actions don’t qualify as competitive advantage is that their easily duplicated across the breadth of the competitors.

For my views on Competitive Advantage and the Supply Chain:

Supply Chain Network Optimization and Competitive Advantage – Part 1

Supply Chain Network Optimization and Competitive Advantage – Part 2

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.

In this ongoing series about the five key supply chain challenges as reported by PRTM a few weeks ago, I am going to look at Challenges 2 and 3. If you missed the earlier posts in the series, here they are: PRTM Study: Five Key Supply Chain Challenges – Challenge 1 and PRTM study highlights five key supply chain challenges.

Challenge 2: Securing growth requires truly global customer and supplier networks

Most survey participants expect that future business growth will come primarily from new international customers and products that are customized to meet their needs. As a result, more than 85% of companies expect the complexity of their supply chains to grow significantly by 2012.

This I don’t understand – where are the respondents coming from? If business growth is going to come primarily from new international customers, what does that mean other than the fact that overseas growth is going to be met largely by overseas means of production. In that case, the complexity in the supply chain decreases not increases. The control of the supply chain from overseers stateside is going to be more difficult but why must it be controlled from far away?

Nearly 30% of respondents expect the number of manufacturing facilities to decline until 2012, which reflects the expectation that their companies will increase outsourcing to external partners. Similarly, a nearly 30% decline in the number of strategic suppliers indicates that many companies expect to further consolidate their supplier bases. In general, companies in North America and Europe will consolidate their manufacturing and distribution footprint, while companies in Asia will further expand their entire supply chain network.

I don’t really understand this challenge at all. In fact, it is an observation that the trend of offshoring and outsourcing is going to continue, perhaps, even increase. The first stage of outsourcing and offshoring was primarily driven by the need to improve profit margins vis a vis the consumer in the developed world (who was for quite a period on a debt fueled binge). Today, that consumer in the developed world is all but tapped out – well, the answer to that is the consumer overseas whose consumption habits have yet to be tapped to the fullest potential.

Challenge 3: Market dynamics demand regional, cost-optimized supply chain configurations

Survey respondents seem confident that they will be able to deliver substantial gross margin improvements over the next two years. As was the case during the downturn, gains will not come from price increases, but from further reductions of end-to-end supply chain costs.

Unfortunately, few firms will confess that this is not a strategy of their choosing but one of the times imposed on them i.e. there is very little by way of pricing power to be had and therefore it is time to resort to the strong arm tactics of squeezing out your suppliers.

What I found interesting here is the comment from a VP of supply chain of a leading industrial electronics company. He recounts:

“Unit costs are easy to measure. When we move to a ‘less expensive’ supplier, we can see the improvement right away. But a lot of costs are hidden—costs associated with things like quality, site visits, and the loss of flexibility. We often spend more expediting parts from a ‘less expensive’ supplier than we save on the material cost.”

Well, methinks that he has it quite backwards – Unit costs are impossible to measure (especially after the fact let alone before the fact) whereas hidden and unexpected costs can be easily determined (after the fact). This GM-Sloan mentality of calculating, nay, obsessing about unit costs is downright silly simply because it is a fiction cooked up by accountants at the behest of managers who want to be seen doing addition and subtraction.

And on top of that, he has bought into the idea of a free lunch.

The odd thing about these two challenges is that they are seemingly at odds with each other. The modern supply chain is not as regional as it is global. Perhaps, the implication is that it is directed at emerging markets rather than developed ones, the growth in the supply chain has regional constraints on its mind rather than global ones. That does leave the global supply chains originating state side in a nice pickle. No?

In conclusion, there is one observation here and one challenge.

The observation (emanating from Challenge 2) is that offshoring and outsourcing are set to continue for different reasons and possibly at an increased pace. In fact, I would think that this is the decade when a number of corporations are going to become transnational.

The challenge for the supply chain is that it is going to become decentralized in a big way – regional markets, regional supply chains.

I’ve frequently said on this blog that these global supply chains don’t have to exist and it looks like that this prediction is beginning to come to pass. Do you know where you supply chain passport is?

In my previous post, PRTM study highlights five key supply chain challenges, I highlighted a recent study by the supply chain management consulting firm. In this post, I want to delve a little deeper into those key challenges. Again, the highlighted challenges were:

1. Supply chain volatility and uncertainty have permanently increased
2. Securing growth requires truly global customer and supplier networks
3. Market dynamics demand regional, cost-optimized supply chain configurations
4. Risk management involves the end-to-end supply chain
5. Existing supply chain organization are not truly integrated and empowered

Supply chain volatility and uncertainty have permanently increased

So what is the situation with supply chain volatility and uncertainty?

Survey results clearly show that concerns about continued demand volatility hamper companies’ ability to effectively manage supply chains in an upturn. In fact, three-fourths of respondents consider demand and supply volatility and poor forecast accuracy to be the biggest roadblocks they currently face. Volatility concerns were not assuaged during the recession, nor have most companies successfully implemented strategies for managing volatility in the years ahead. Recent shortages, such as those in electronic components and selected raw materials, indicate that many companies do not have the flexibility to meet an increasingly volatile demand. The rapid ramp up or ramp down of capacities seems to be a big challenge for many study participants.

The biggest roadblocks faced by respondents are demand and supply volatility and poor forecast accuracy. But surely, one is the cause of the other and this can only be exacerbated in a global supply chain with long manufacturing and transportation lead times. Does not poor forecasting of demand beget supply volatility whereas demand volatility is a function of the economic cycle? Now, when both situations occur simultaneously, then it is quite believable that firms are in for a rough time.

The actions that respondents plan to take doesn’t make much sense to me – they don’t hurt but more importantly, they don’t help. The action items can be broken down as follows:

The best-performing companies have already taken steps to improve supply chain response time and visibility across all supply chain partners.

I believe this is the key to cutting down volatility – reducing the supply chain response time and if no reduction is possible, then at least making certain of it. Both the magnitude and variation of supply chain response time create uncertainty (and consequently volatility).

Others plan to implement new strategies within the next two years. Companies are focusing primarily on deepening collaboration with key customers to reduce unanticipated changes in demand.

I believe that this is a no-go. Key customers themselves face volatility and therefore partnering with customers to reduce one’s own volatility is unlikely to bear fruit unless the key customer’s customers are not creating volatility. The first point above i.e. reducing supply chain response time is the more important factor.

Half of participants plan to implement joint “real-time” planning with their key customers by 2012, and nearly half plan to develop processes for improved demand sensing—that is, understanding the market rate of demand in real time, rather than having to wait for after-the-fact reporting.

Again, real-time planning is quite useless when you cannot obtain real-time response. You can create a plan as soon as a trend/micro trend is recognized but if you cannot create a response to it, then you’re just printing numbers.

In Rainmakers… Part 2, I want to go through the list and Q&A of the Rainmakers identified by DC Velocity in their article Who are this year’s Rainmakers?. The previous post in this series is here: Rainmakers… Part 1.

So let’s get started,

Judy McReynolds [Arkansas Best Corp]

Q: You have taken the reins of Arkansas Best during a very challenging time for the economy, transportation, and the LTL segment in particular. LTL faces overcapacity, soft demand, and ongoing price wars. What is your strategy for steering Arkansas Best and ABF through this?
A: Both the industry and our company have been severely impacted by the length and depth of this recession. Our most experienced officers will tell you they have never seen a business climate as challenging as this one. Fortunately, we have managed the company conservatively and that has provided us with flexibility. We have remained focused on understanding what is important to our customers and finding a way to be an essential element of their distribution networks. Those are the things that have sustained us during this challenging period and will allow us to be successful in the future.

Summary: My, how times have changed. During the period immediately before this recession/depression, trucking was booming, drivers were scarce even while oil prices were high. Now, this industry is muddling through the trough laden with overcapacity. Even if and when the broader economy recovers, trucking will continue to remain in the doldrums until the excess capacity is discarded. If as Judy mentioned, that Arkansas Best has been managed conservatively, then it should be well positioned to ride out the lean years which in my opinion could last quite a while longer than people expect and especially for the trucking industry.

Steve Mulaik [Progress Group]

Q: What one key piece of advice would you offer a supply chain manager looking to set up a logistics network in India?
A: Always have a Plan B in your pocket. Things happen fast or they never happen at all in India. The problem is you never know which until the last second. Risk management is child’s play in the United States compared to what it’s like on the [Indian] subcontinent. Make it your organization’s mission to be prepared.

Summary: Now, I’m from India and have a fair idea of the business practices in my country and it is refreshing to hear a reflection on the enormous differences in the way things are done in different countries. And I agree strongly that Risk management here is child’s play in the US compared to other parts of the world. Just last week, I was at a party hosted by my uncle who spent a great deal of time with a non-profit in Sierra Leone (in the years leading up to the coup and war i.e. 1990s). There was one memorable line that I think captures the polar opposites of how different cultures operate – “Six days for the thief man, one day for the master.” The phrase means that workers might spend six days thieving from the master while the master has only one day to discover and put an end to it – lopsided, wouldn’t you say?

What I’ve always found surprising about the global supply chain is that it works. Somehow. Some sort of a shifting but workable common ground is found upon which this global supply chain marches forward. Corporations that are engaged in this global dance have somehow managed to persevere where decades and millennia of human endeavor has sallied and failed. I think there is an important reason for this – the transnational corporation has an operational sub-culture that in all matters non-operational is dissociated from the collision of cultures that is constantly taking place. What I’m saying is that as long as it was the members of the culture that attempted to create long supply chains, it kept tailing because culture carried a currency that rarely extended far beyond the borders of that culture. The transnational corporation is one of the ways in which this former feature of human experience has been transcended. And that is a significant breakthrough.

Wesley Randall [Auburn University]

Q: What advice would you offer a young person considering a career in logistics or supply chain?
A: Work hard, learn the basics, find a mentor, be willing to take a lateral job to learn a new skill, and don’t be afraid to go international. For my family, the time spent internationally was some of the best of our lives. And care about the people around you. I recently heard an executive from The Container Store say, "Culture eats strategy for breakfast". How true that is. There is an emerging realization that attracting and keeping talent is critical to sustained competitive advantage.

Summary: “Culture eats strategy for breakfast.” That’s some major pawnage.

Rich Thompson [Jones Lang LaSalle]

Q: The conventional wisdom has been that the industrial property segment skirted much of the damage inflicted on the real estate market in the past two years. Is the other shoe about to drop, or has it already dropped?
A: In general, real estate values are down 30 percent across the board, and industrial properties have suffered as with the rest of the commercial real estate market.

Over the past five quarters, the majority of U.S. industrial markets have experienced rising vacancy rates, creating the potential for landlord cash flow issues. Based on how the debt is structured on properties experiencing these problems, we expect to see more foreclosures, loan defaults and public disclosure of these problems in the industrial market in 2010 and 2011.

Summary: If you’ve been following this blog, I think you’d easily agree that I’ve been harping about the implosion and non-recovery in the housing market, broader economy etc. In fact, for the better part of the past 12 months, this has been the constant on this blog. This is simply because, this implosion is ongoing – it’s not in the public eye because negativity (even if true) has a limited shelf life while positivity does not. As Rich says, these problems in the industrial and commercial can be expected to continue in 2010 and 2011. Well, I’d expect the real estate oversupply to last longer than that until some major driver of growth appears.

One anecdotal observation that I make is that people are snapping up real estate thinking that there are good deals available. It’s true that there has been a 20-25% decrease in property values but my study of asset values post bubbles is that it has to reach the point that it is considered a dead end and I just don’t think that it has reached that point stateside. Couple that with the fact that residential real estate is still largely unaffordable evidenced by the need for loans still offered at 3.5% down (FHA) and even 5% by private lenders – this market is still on life support. Consequently, when the most important investment that middle class families makes is treading water, what are the implications for the broader economy and the supply chains at large?

Of course, the new iPhone is selling like hot cakes – so go figure?

Who are this year’s Rainmakers? is a recent article about thought leaders identified by DC Velocity for 2010.

This year’s selections represent many different segments of the supply chain discipline: practitioners, academics, consultants, and vendors. But they’re also united by some common threads, including an emphasis on education, training, and people. Through word and deed, our 2010 honorees more than live up to the Rainmakers’ legacy of making a lasting contribution to the profession.

There is also a short Q&A with these professional’s, a sampling of comments that I found interesting are below:

Catherine Cooper [Ozburn-Hessey Logistics]:

Q: What do you consider to be the greatest obstacles to supply chain optimization?
A: One of the great challenges facing our industry is managing a supply chain with the new credit market constraints. With a restriction on working capital, we are seeing lower inventory levels than ever before, resulting in reduced supply chain cycle times and the need for networkwide item visibility. OHL’s customers are making radical changes in SKU [stock-keeping unit] assortments and sourcing methods. The old model of abundance has been replaced with one of scarcity, impacting every part of our industry.

Summary: Volatility is here. Is network visibility the answer? A very small “Yes” but what matters more is the network configuration. Some networks are more susceptible to volatility while others are not – I’ll leave that as an open question for my readers.

Mike Duffy [Cardinal Health]:

Q: What have you found to be the key differences between managing a consumer goods supply chain and a health-care supply chain?
A: For me, a supply chain is a supply chain. The vernacular is very similar, the principles are similar. The biggest difference is where an industry is when it comes to recognizing the role the supply chain can play in driving business performance. In consumer goods and other industries, we’ve identified the supply chain as a key enabler to driving business results. Health care is at a different place on the continuum. Most health-care providers came into existence to take care of patients first and were thrown into the business side of health care second. As a result, the industry as a whole is working to adopt best practices from the consumer products and other industries in order to leverage the supply chain to drive efficiencies and performance.

Summary: A supply chain is a supply chain. Except there is one significant difference arising this past year. The big government is about to slap its paw print over the healthcare supply chain. Anyone thinking about that?

Charlie Guardiola [Burlington Coat Factory]

Q: If you could offer one piece of advice to someone looking to jump-start their career in distribution or supply chain management, what would it be?
A: My advice would be to be a great businessperson first and then apply that business knowledge to the supply chain discipline. I believe that the best supply chain people are those who are great business people. Back when it was called "logistics" and not "supply chain," we were seen as warehouse guys who moved boxes from point A to point B. But things have really changed over the years, and now supply chain is seen as an integral contributor far beyond the four walls of the DC.

Summary: That is some really sound advice. Some of the others identified here talk about greater visibility, confronting volatility etc – that’s something that businesspersons don’t seem to understand all that well. I mean, they get the list of it but they don’t get the gist of it.

Peter D. Gibbons [Starbucks Corp.]

Q: What do you consider to be the greatest obstacles to supply chain optimization?
A: Two things come to mind: talent and coordination across the supply chain. The logistics field needs more well-educated logistics professionals with early hands-on experience who can understand quickly what needs to change and can implement change without negatively impacting customer service and cost.

On top of that, the ability to manage "total cost to serve" from product development all the way through to delivery onto a customer’s shelf is essential. The major change in the Starbucks food offerings over the last two years is a great example of balancing improvements to product quality with a supply chain solution that improved total costs and margin but allowed cost trade-offs, including better ingredients and quality.

Summary: I don’t think that he can say it but I can – Over the last two years, Starbucks learnt the lesson that practically every growth company learns sooner than later: Growth doesn’t last forever. But Starbucks has survived, somewhat, despite the threats from competitors because they’ve taken the value route. And the above is a précis of what initial steps of value discovery looks like.

Read the rest of this entry »

Acceleration of Eco-Operation is a new report published (free report : the kind I like) by the Business Performance Management Forum.  I think it would be well worth your time to register and download the report if you want to keep up with the trendiness of green washing everything. I will read and review the report a little later but in reading the executive summary, two comments caught my eye:

"Building better links in high-tech supply chains.the sprawl and complexity of such networks have made it harder to manage end-to-end operations smoothly. Many technology companies are grappling with volatility and disruptions across their supply networks and eliminating waste from duplicative efforts is an ongoing challenge. As product
life cycles shrink, we see inventory build-ups in the supply chains of some companies, while others cope with rising distribution costs, ontime delivery problems, or delays in getting new products to market."
The McKinsey Quarterly

Becoming green is no longer an end in and of itself, but the byproduct of optimizing a supply chain. At the same time, transitioning to a Green Supply Chain while also maximizing efficiency is not a clear-cut process."
Industry Week – Diamond Management & Technology Consultants

There is so much confusion in the above two posts that I can’t help but roll my eyes.

In the first snippet, there is a lot of talk about eliminating waste. If you collapse the global supply chain into a simple manufacturing floor and pretend for a moment that various work centers were indeed different countries and ports, then you would see that all the effort of bygone years that went into batch size reductions, reducing setup times and inefficient steps and processes, reducing physical movement times by workers (all lean related activities) on the manufacturing floor have been turned to naught. We’re back again to big batches, carrying work items from one end of the floor to the other end and then sending it back half way across the floor because we’ve decided to outsource and increase lead times. If anything that is the one root cause of everything that is outlined in the snippet from The McKinsey Quarterly. In short, you cannot eliminate waste on the one hand by creating mounds of it with the other hand. All these management consultants have been doing this for a decade now – I hope that one of the upcoming articles in the quarterly will be titled – "We were wrong to recommend outsourcing," but I’m not holding my breath here.

In the second snippet, ask yourself this question – Would you subject one of the most critical aspect of your operations to some befuddling calculation of carbon emissions sustained in your activity, calculations that no one can even agree on whether they’re the right ones? And it’s not just calculations, but using these calculations to dictate what you would do? This is precisely the back assed way of doing things. Give me a way/technology that surmounts your latest world is ending dogma and I’ll move to it; just don’t ask me to end the world on account of your dogmatism. Archimedes once said, ‘If you give me a lever and a place to stand, I can move the world.’ Today, we’re told, "If you cut your emissions, you can save the world." But cutting emissions means that the industrial activity of the world would decline (and rapidly) across the world returning many parts of the world to the poverty they were just leaving behind barring some new technology that effectively and efficiently replaces the carbon based energy source. And to those who would say that this technology (batteries, wind, solar, geothermal etc) would do it – all I would say is that on your next transatlantic conference or vacation either use one of your "this technologies" in making the trip or use a carbon neutral sail boat or raft. I really don’t believe in nor have the time for first class or corporate jet traveling world messiahs who want me to cut down on my carbon emissions. Neither should you!

And that’s before reading this report. Those are my initial conditions. Now, let me read the report and be enlightened.