@ Supply Chain Management

David Margulius writes about the recent McKinsey Quarterly (registration required) article about the data capture for supply chain in his column titled Fine-tuning your supply chain. Just reading the headline made me think about i2\’s ABPP system post wherein I was thinking about whether it was really “fine tuning” or “fine tinkering” that managers are upto in the supply chain.McKinsey research offers:

The problem, according to the McKinsey research, is that companies today not only buy more from far-flung third parties in an effort to cut costs, but they also rely more on third-party contractors to move these goods around the globe. That means critical supply chain data (such as quality, inventory, and capacity) is “locked up in the IT systems or spreadsheets of a dozen or more companies.”

I think this was always a problem (I blame Microsoft for the Excel program) especially with technically clueless managers who have just gotten trained on some spreadsheet or powerpoint tool and know only how to deploy such tools. Another source of the problem is as David himself outlines:

Although the McKinsey report makes sense, it misses the boat in one key area: human nature. Companies, as do people, sometimes don’t want to pass information on to partners for competitive reasons, control reasons, or just for no reason at all.

If you\’ve worked in the business world, you just know that this is true – its just human behavior.McKinsey outlines its view of best practices for reuniting supply chain data:

1. Fit information flows to supply chain types. For fashion-oriented products such as iPods, for example, focus on IT connections that help you “chase demand rapidly by providing repaid coordination between designers and suppliers.” But for commodities such as TV tubes, focus on cost and inventory data.

In other words, customize your supply chain operating model (that should ideally integrate a supply chain information and data exchange mode) with your business strategy.

2. Develop deep monitoring capabilities, or systems that allow you to pull key data from both your suppliers’ systems and their suppliers’ systems (you’ll probably have to give suppliers incentives to invest in this, McKinsey warns).

How about “bull-whipping” your suppliers as an incentive to developing deep monitoring capabilities. This should really be the only incentive for suppliers to cooperate with you and anything above and beyond that is a premium that you\’re paying out for reducing the uncertainty for suppliers for free.

3. Think cross-functionally and use detailed scorecards. Your purchasing people may be rewarded for selecting the lowest-cost supplier, but the manufacturing group may be rewarded for keeping inventory low and fill-rates high. They must get in a room and agree on performance metrics to make sure you get all the data you need from your suppliers.

Basic supply chain execution meaning that the supply chain is here and not here. By definition a chain is not one link though the strength of the chain is limited by the strength of its weakest link. If two functional departments are operating together, it makes sense not to incentivize or measure them in contradictory or incoherent ways. There is a thing to be mentioned here about truth – it needs to be repeated or else it is forgottten.

InformationWeek’s Q&A with UC professor Peter Navarro about Riding the Business Cycle more wisely…
According to the professor,

Enterprises can be more competitive by better managing the ups and downs of the business cycle, notably via sharper control of inventory and capital outlays such as technology spending.

Well, that’s something that harkens me back to my days working in the semiconductor equipment industry which is notorious for its expansion and contraction cycles. I went through two cycles of expansion and contraction which was more magnified in the South-East than in the US. The management in my firm was very keen on synchronizing their business decisions with the cycle because it was simply impossible to sit on equipment worth sometimes a quarter of a million swiss francs each and hope to ride out the cycle. The cycles in that time were getting shorter and shorter in time periods. However, my firm had one foot stuck firmly in the past as they manufactured their machines exclusively in Switzerland which meant that even though the quality of the machines were well acknowledged, agility and speed to market were not up to the competition. The market had no problem informing us of the same too.
Professor Navarro avers:

But timing, very often, is as [important] or more important. In terms of inventory-type management, the kind of micro approach to managing inventory is to increase your inventory turnovers as much as possible all of the time. In fact, what you want to do going into or out of a recession is to cut inventory more subtly. When you are coming out of a recession, you want to be building up because you want to be the first on the stock shelves and have the opportunity to sell.

Easier said than done. Imagine the plight of an inventory manager acting contrary to all the information he is getting from the marketplace and his peers in the industry. I’m a fan of contrarian investing but I’ve also found that investing contrary to the market is no easy thing – fear, herd mentality, emotion – they just overpower the rational decision making process. However, there is something else that is missing – in stock trading parlance, it would be, “Never catch a falling knife” or “Don’t try to call the bottom”. If you called the bottom or the top as the case maybe, you’d reap the maximum benefit but then you’d also be trying to catch the falling knife. Nothing like this could work without involvement of the top management but then again that would mean that if the timing were wrong it would be their heads on the chopping block with inventory write-offs and the like. I don’t think that they like their heads getting chopped no matter the bounty of future reward.

You can’t wait until good times are back. Moreover, recessions tend to be shorter than expansions, so there is a window of opportunity there. If you move three, six or nine months faster than your rivals, then you’ve got them.

Well, that’s probably true from government statistics but I don’t think thats the case with reality (Or that’s what I think of government statistics). Official recessions are short and recovery is swift. Take a look at this chart and then tell me that recessions have been swift uniformly.

One thing is certain as we speak. Looking ahead, there seems to be a real chance of a recession looming not in the distant future (like the end of the year). That means that companies ought to be tightening up right now but then government data reports some of the lowest unemployment rates (Ok, I have a quibble with the government data on how unemployment is measured) and from my experience firms have opened up their hiring again. So who’s cutting back right now in the industry at large? I’m seeing more furious M&A activities at this moment instead.
So what should business executives be paying attention to according to the professor:

One of the things I preach is that executives need to be attentive to economic information on a daily basis, and it does not take a lot of time compared to the payoff. The weekly Economic Cycle Research Institute (ECRI) has two really good indices for businesses to keep their eyes on. The first is the Weekly Leading Index, and the second is the Future Inflation Gauge. Together, they provide executives with a simple but powerful forecasting tool.
In addition, the yield curve, which measures the relationship between short-term and long-term interest rates, has a tremendous amount of information in it. The Federal Reserve determines short-term rates, while long-term rates are basically determined by thousands of savvy investors betting billions of dollars on the direction of the economy. When you get the unusual case of an inverted yield curve, where longer-term rates are actually lower than short-term rates, this is can be a sign of a coming recession. An inverted yield curve has, in fact, predicted five out of the last six recessions. …

Here’s something more that Professor Navarro has to say about using the supply chains themselves as forecasting tool:

A well-constructed supply and distribution chain can be its own forecasting tool. I urge your readers not to think of the goal of supply-chain management to always inventory as slow as possible just to tighten, tighten and tighten. In times of recovery, economic recovery and expansion, you actually want to decrease your inventory turnover ratio. But that is not the goal in and of itself. The goal essentially is to move more products into the sales channel at a time when you think demand is going to be moving upward. That way, you can push out your competitors and take advantage of the pent-up demand that gets unleashed. This goes to the point of macro-managing vs. micro-managing your inventory. I think that is a really important distinction, because businesses tend to focus on micro-managing their supply chain, in a sense that they are always trying to squeeze things down, when in fact it is often better to move things up.

I think businesses to a great extent do this that is build up inventory in anticipation of great sales coming up but whether they do this in concert with business cycles I cannot say. However, what I have seen is that there is no risk management applied to the efforts to ramp up or ramp down. I’m looking into how I can adapt stochastic optimization into supply chain design and development and that would address the matters of uncertainty that crop up with business cycle forecasting.
In conclusion, I think that the Professor has some great points and insights to offer but then again do those recommendations jive with the behavior of man in general. I think what the Professor is advocating is contrarian business cycle management or efforts that go towards that. But there’s a reason why there are only a few good contrarian investors and that’s because there are only a few good investors to begin with.

Bill Waddell at Lean Affiliates writes about Principles for Real Manufacturing Transformation:

Sixteen years ago, Peter Drucker’s article, “The Emerging Theory of Manufacturing”, appeared in the Harvard Business Review. That is probably about the right incubation period for the rest of us to catch up to his thinking. Drucker points to four principles that defines what’s needed for real transformation, and establishes the critical role of the chief executive. These principles are:

1. Integrate the factory into the total value stream
2. Instill a statistical quality focus across the entire company
3. Implement a completely new accounting model
4. Treat the entire business as a system

Remember that Drucker is writing this at about the time that Six Sigma had just appeared on the scene but his recommendation seems to be spot on. Bill goes on to elucidate the differences between looking lean and being lean and how the above principles, proposed by Drucker in his “The Emerging Theory of Manufacturing” are essential to a lean transformation.
1. Integrate the factor into the total value stream: A quote from Taiichi Ohno of Toyota captures the central thought here –

All we are doing is looking at the time line, from the moment the customer gives us an order to the point where we collect the cash. And we are reducing the time line by reducing the non-value adding wastes.

. Bill calls this idea – “from call to cash”, meaning that every activity that occurs in the intervening period and process space is evaluated on the basis of its integrity with respect to the value to customer that each activity confers. Such totality begs for C-level executive involvement, not in sense of micro management but in the authority conferred to such a process overhaul.
2. Instill a statistical quality focus across the entire company: Ever since the surpassing of Newtonian physics, scientists have been engaged in the description of the natural world through statistical techniques. However, the education system relies primarily on the promulgation of facts implying the completeness of the description which actually only statistically implied. Its nice to see that businesses that imbibe this statistical approach to their activities are achieving coherence with the kind of descriptive and prescriptive pattern inference also called science. Though, I think that the day is so far off into the future when accountants shall describe a firms financial activities in statistical terms – what a sea change that would be? The other key takeaway is the relentless focus on quality that such statistical processes describe.
3. Implement a completely new accounting model: Accounting is quite integral to how management decisions are made and how they’re represented to the world at large. However, if even half as much continual transformation and improvement were carried out in the accounting departments as are carried out in the manufacturing department, the manufacturing department might be four times better than it is today. Yes, the ratios of supposed benefit are imaginary. However, that management often makes decisions based on accounting gimmickry is and should be the object of scorn because accounting doesn’t report information in a way that lends itself to decision making. While accounting should be about informing business decisions, I suspect accounting is really about accounting. And that’s Drucker’s view as well though I suppose I am twice as cynical as he is prescient.
4. Treat the Entire Business as a System:The central point here is that the manufacturer within his ecosystem provides a solution over and above providing a product/widget/service. Therefore, a manufacturer is as much part of the solution as he is part of the problem that crops up because of a particular deficiency in the solution that he provides. The expectation of a customer is not how finely finished a product might be (if that were the sole contribution of the manufacturer) but that it meets or exceeds his expectations of product peformance and value.

In the end, abstractions such as performance and value are what the manufacturer or business is aiming at fulfilling. The problem with abstraction is that people abstract without particular attention to reason or logic. One part of the business should be about addressing those abstractions in a value laden way but another part of the business should be about clarifying the abstractions, informing and educating the customer as well.

If I were to saunter down to a manufacturing/operations floor and impress upon the line managers that what they should really be doing in their operations is creating competitive advantage, chances are I’d be shown the door toute suite. Perhaps, I should be. A wise consultant does not get his head chopped off by spouting well worn academic/business terminology even if it is essential to business survival.
T’is something that I have learnt from working with managers – a commandment to savor – Thou shall not confuse the managers you seek to change.
What is the Competitive Advantage Model of Michael Porter?

Competitive strategy is about taking offensive or defensive action to create a defendable position in an industry in order to cope successfully with competitive forces and generate a superior return on investment (ROI).

And more or less:

The basis of above-average performance within an industry is sustainable competitive advantage of which there are two essential types:
1. Cost leadership (low cost)
2. Differentiation
No matter the scope of the above two types, the resultant competitive strategy is:
3. Focus

If one were to adpat such a model into one’s framework of developing a supply chain, it is quite obvious that both cost leadership and differentiation can be adapted.
Here’s a view of how a firm can create sustainable competitive advantage by Innovation labs.

The only way a competitive advantage of any kind can be made to sustain is through innovation.
This might logically lead you to ask how we define innovation. In our view, innovation is improvement in the value that a company offers to its customers, or reduction in the cost of delivering value to customers.

They go on to differentiate continuous innovation which is characterized as small and incremental and discontinuous innovation which is characterized by breakthroughs and disruptions. But is there any reason to think that even innovation can be sustainable ad infinitum – I think not. How about the process of continuous and discontinuous innovation? Perhaps, they can be sustained a little longer than the actual service/product created.
Going back to the outline from Porter’s model:
More than cost leadership, which may be a function of continuous improvement and strategic decision making to outsource or offshore low-value added activities, differentiation – real differentiation, seems to be the more significant lever of creating true sustained competitive advantage. How? – I’ll try to elucidate that in the next few posts.

The article deals with a new book put out by two partners at PRTM – Shoshanah Cohen and Joseph Roussel called Supply Chain Management: The 5 Disciplines for Top Performance.

Too many senior officers don’t view their supply chain as a strategic business asset,” commented Cohen, co-author and partner at PRTM. “But when aligned with the overall business strategy, supply chain management provides major opportunities to impact both the top- and bottom-lines.”

The above is probably because there is a disconnect between business strategy (which thanks to Porter’s work) and supply chain strategy which has always been seen as an operational thingy that happens regardless. The companies that have successfully competed using their supply chains (eg: Dell, Walmart) as a competitive advantage view things slightly differently.
According to the authors,

The five core disciplines for top supply chain performance are:
1. View your supply chain as a strategic asset
2. Develop an end-to-end process architecture
3. Design your organization for performance
4. Build the right collaborative model
5. Use metrics to drive business success

Again, here the operational thingy of a supply chain seems to figure prominently and perhaps for the right reason – because a top performing supply chain is primarily about execution and getting things done. However, what about the very structure of the supply chain, which components should be finely tuned and focussed on relentlessly etc etc? You can only get things done within the framework that is imposed on from above by a company culture, philosopy or business strategy. As more and more companies turn onto the quest of using their supply chains as a strategic asset, I’d hope to see the supply chain strategy rise up to the level of being a business strategy.
And that should be a whole lot of fun!