Supply Chain Risks

A quotation from Harold Sirkin, Vice President of the Boston Consulting Group: "As the economy changes, as competition becomes more global, it's no longer company versus company but supply chain versus supply chain." This quote resonates well with enterprises that are globally diversified as they step into the global environment trying to emulate the Wal-Mart’s and the Dells.

One of the top concerns that companies have been preoccupied - is evaluating the risk assessment of their complex supply chains. A fall out in the supply chain can have devastating effect on the bottom line of the company and the recovery process can be very time consuming. When hurricane Katrina hit the Louisiana coast, a significant number of refineries were affected which resulted in an immediate increase in the price of gas. "Many of the key risk factors have developed from a pressure to enhance productivity, eliminate waste, remove supply chain duplication, and drive for cost improvement," as quoted by William L. Michels, CEO of consulting firm ADR North America, Ann Arbor, Mich. Companies need to cope with such uncertainties in their supply chains and should develop strategies to mitigate any supply chain disruption risks. No longer can cost reduction activities can be implemented in isolation cause it may increase the risk of the supply chain e.g. the decision to outsource manufacturing to low cost countries requires balancing competing priorities of increased inventory/lead times while heavily dependents on the logistics efficiency and total cost of ownership.

In the current environment the principal threats that companies are besieged with are supplier disruption, natural disaster, strategic risk, political risks, compliance and logistics failure. Supplier risks can range between prices control, supply variability, supplier company stability, and lead times among others. Supplier disruptions risks are usually the highest priority across all industries. Natural disaster risks are a top priority for the chemical and the oil and gas industry where most of the refineries are based around the coastal areas. Pharmaceutical companies also consider risk evaluation studies for disease control after natural disasters. Strategic risk evaluation is critical for companies in the High Tech space where the product life cycle is very short. Companies have to make good strategic investments and understand the market for consumption or reaction of the introduction of a new product. The aerospace and defense industry, construction and the oil and gas industry are primarily susceptible to political risks. As political climate changes in the war, terrorism, dictatorship ridden economies – it affects the entire global economy. Compliance from financial regulations to SOx based compliance is also critical for Pharmaceutical and other industry where traceability of their product has to be determined in case of recalls. Retail industry and the advent of outsourced manufacturing in other industries are placing a lot at risk on the logistics and movement of goods.

Companies can take a four pronged approach to mitigate supply chain risk strategies. The first element for a company is to understand the strategic implication of their supply chain. A classification of products or categories may provide insights to material risk profiles that can degrade the operational performance. Diversify the procurement across few but multiple suppliers that can hedge the company against supply disruption. Manufacturing capacity can also be analyzed to meet the global/regional demand. A flexible supply chain should be designed which can buffer against uncertainties through strategic lean six sigma thinking. The second element is to create a collaborative and cooperative manufacturing and supplier network. Continuous visibility of metrics and constant communication/collaboration will enable companies to be proactive and reduce the impact of disruptions. Supply chain risk managers have to frequently work with colleagues from other departments such as purchasing, logistics, maintenance and quality to proactively create risk mitigating strategies. The third element is the ability for companies to consider and analyze the tradeoffs during decision making addressing the root causes and not the symptoms. Companies have to understand the difference between the service levels and cost reduction strategies that could negatively affect the operational performance. The last element is to show relentless passion for risk elimination. Create analyze and use up the company brainpower to come up with metrics and strategies for quantify the risk and implement risk mitigating strategies. Supply chain risks have become deeply embedded into the fabric of extended supply chain network. If neglected, it can have devastating effect on the supply chain – as quoted earlier the battle is not between enterprises but between supply chains.

Lean Procurement Improvement Strategies

Global commerce has changed the dynamics of supply chain management in recent times. Global procurement although has its advantages of low cost sourcing, but increases the overall risk and cost of the supply chain with increased lead times and inventory. Large companies have already initiated programs to get visibility of the extended supply chain to squeeze out additional cost. If the goal is trying to utilize the natural resources effectively, we should all look at material from “extraction” to “recycled”.

In the demand driven world with ever shortening of product life cycle, it has become challenging for the procurement organization to ensure the right material is always available in the right quantity and quality. Procurement organizations can no longer afford long material lead-times which leads to increased inventory and susceptible to forecast accuracy. Supplier performances are continuously being measured and suppliers who cannot deliver consistently on time and quality are quickly replaced. To reduce the overall cost of the supply network, companies have embraced lean and six-sigma process improvement techniques to eliminate redundancies and wasteful practices.

The key challenges for the procurement organization are 1) preventing shortages of material when required, 2) maintaining high quality standards, 3) reducing inventory investments, 4) reducing supply side lead times and 5) Embarking on a continuous process improvement practice.

The top three things that have been identified by companies to step into a procurement improvement program are visibility, improved business processes and inventory management. Visibilities to supplier performance, inventory, quality & inspections, lead times, on-time delivery, contract compliance are extremely important. Maintenance of supplier related content and keeping it updated, though an added task, is imperative to improve the overall business processes. Visibility and real time inventory update by location helps to make prudent decisions on purchasing and purchasing process latency. Business processes are hard to change but a key source for non-value added tasks. Companies need to identify steps in their business processes are that are redundant and adding lead time to the procurement process. Reducing the need for entering purchase order information can be an example of business process change. A practice of generating a purchase order based on material consumption can save a lot of time and effort. Inventory management practices have to be in place to reduce the overall cost. Classifications of procured items into groups of high runners, low runners, high risk and low risk have to be identified to determine the level inventory that has to be maintained without the risk of shortages and efficient operational performance.

Companies who have excelled in Lean procurement practices have moved from a “push” to a “pull” environment with increased visibility and building a collaborative environment with their suppliers. There is less reliance on ad-hoc phone calls but have the system generate orders based on material movement. The material depletion at the consumer are used as a medium to send signal for the supplier to replenish material. Companies have also improved on the past practices of replenish order quantity where a large batch of material is ordered each time when the material goes below a critical level. Frequent smaller batches of orders can not only provide a signal to suppliers but help the supply chain to reduce the level of inventory. The other strategy for companies is to develop a responsive supply chain. The demand should be propagated not only within the enterprise but across the network. Proper processes should be in place to propagate the demand variability across the network so that inventory levels are sized correctly to reduce the disruption in operations. A responsive supply chain will help reduce the lead times and help proactively manage shortages. Companies should also eliminate all waste in the procurement process. Buyers spend a significant amount of time entering purchase orders, tracking order status, maintaining private excel sheets which consume time from actually doing effective work. Creation of a procurement hub which is transparent across the network and integrated with the individual supplier systems are some of the steps taken by high performing companies.

Stability of Supply Chains

Recently I had some interesting discussions with executives from numerous companies who are at different stages of moving forward in their Lean journey. The business drivers for most of these clients are how to reduce cost and the manufacturing lead times.

After meeting with several clients and doing a bit of research it seems that if there is one metric that companies should focus on is the lead time reduction. Lead time is the core metric that influences the health of the operations. People familiar with “Little’s Law” would quickly grasp that there is a direct correlation between Lead time and WIP in the system. As the WIP is steadily increased in the system the Lead time does not change. This indicates that some level of WIP is good for the supply chain, and the operations can keep running with the same level of operational performance. But at the inflexion point, any increase in WIP will adversely affect the Lead time. What it indicates that some level of WIP is definitely good but in excess it is the cause of the increase in the cost of operation. Excess WIP, requires more handling cost, loss of material, increased material movement, more quality problems due to handling and an overall increase in the complex decision making for scheduling.

Where is your operation with respect to the inflexion point? A typical company never reaches the efficiency as dictated by Little’s Law. It is a theoretical limit and gives perspective for companies to compare their operations to the theoretical limit. The typical reasons for a company to deviate from the limits are a) Increase in product mix, b) batching requirement are each operation, c) volatility of the supply and demand, d) setups and e) not producing parts/components based on customer requirement.

In this highly variable environment, what can companies do to run effectively? Notice – I mention effective and not efficient. Companies can run their operations efficiently by producing material at the resource capacity. This does not mean that the products they are producing are based on customer needs. The end customer can be the next operation, distribution centers, channel customers or end customers. Running effective operations indicate good business practice and produce the right mix of material that can run their operations efficiently as well as meet the customer demand.

The main crux of the manufacturing effectiveness is the 3rd principle of Lean as defined by “James Womach” in his book “Lean Thinking,” which is making the material flow through the system. These concepts are not new, we see this in real life with fluids dynamics. The only way to reduce the residence time of the fluid is to make it flow, thus reducing the stagnation points as defined as “Sinks”. The same thought process can be applied in Manufacturing – we want to avoid “Sink” or material stagnation points. I am not preaching that the sinks should not be there, it is necessary to have these sinks to manage product portfolio, variability in supply and demand, or the manufacturing scheduling constraints e.g. calendar mismatch, rate of production, required mix of production etc. It is however a good process to determine the size of these “sinks” and manage them so that we do not loose control.

This gets us to a new point – how do you compensate or measure the operations managers to run “effective” operations. Do you measure them based on the deviation from the predicted “sinks” or inventory buffer target or do you measure them on resource utilization?

CIA of Operation Management

Well since I have your attention and you may be wondering what CIA has to do with operations. CIA was the termed coined by one of my clients as “Central Item Allocation” during an enterprise transformational project. Large manufacturing companies face three prominent challenges that are rated very highly in customer surveys. The top three challenges are resistance due to cultural challenges, managing proliferation of IT systems and coping with Mergers and Acquisitions.

This article discusses the third challenge of merger and acquisition, particularly with respect to operational efficiency. In the last 10 years there has been a proliferation of companies going global. The reasons are varied and range from 1) access to low cost resources, 2) access to new markets and 3) a way to hedge the market by diversifying. However these acquisitions have created a monster of a problem to the COO and the CIO. Millions of dollars are being spent on building a common standard business processes across cross cultural and national boundaries. One of the key decisions that come up during due diligence efforts is whether to build a single instance or a distributed set of systems across the enterprise. Single instance is beneficial from a TCO (Total Cost of Ownership) point of view, but causes two problems. It takes the ability from the individual sites to manage their manufacturing. It takes the individuality away from the plants which have unique characteristics and strengths. The best people to manage the operation are usually the people at the plant who breathe and live the production on a daily basis. With the single standard across the enterprise, they have to comply with the corporate standards. The second problem is a situation where the company may decide to divest a manufacturing unit; it becomes a highly complex process to separate the IT infrastructure.

Integration of the acquisition is a nightmare and has to be managed diligently. The challenge faced by the COO is to determine the best way to utilize the distributed capacity “effectively” to serve the variable market demand. CIA was coined to develop a common order taking process that would consider the demand characteristics and allocate the orders intelligently to the individual manufacturing sites.

Some of the key factors that were considered during the design phase were 1) How to create a level capacity loading, 2) How to promise profitability, 3) How to promise based on logistics costs, 4) How to accommodate customer preferences and 5) Can the small lot orders be aggregated in bigger lots before promising. Overall the CIA function can become very complex if all the decisions have to be considered during order promising. The challenges are to accommodate all the logic within a short interval of time to ensure that customers and sales representatives do not have to wait for an inordinate amount of time to get a promise date. To make this happen, some basic fundamentals have to be in place, to develop this solution in a multi plant environment. This cannot be done without the standardization of products and processes – thus the single instance of an enterprise application plays a critical part.

A comprehensive successful implementation of CIA will help in better utilization of the capacity across multiple plants, balanced production and load leveling, reduction in delays and shortened cycle times, aggregation of small lot orders and improved customer service.

The Art of Prediction – Manage Risk

We have all heard about the famous Deming Cycle – PDCA (Plan Do Check Act)। The closed loop process developed as a preemptive action to mitigate manufacturing and quality related risks. Globalization of manufacturing in the recent times has taken the battle for efficiency to another level. As we have heard this before – “The battle is no longer between companies or organizations but between Supply Chains”. The outsourcing of manufacturing to the low cost countries has challenged the ones in the developed world to squeeze additional cost out of their supply chain to remain competitive in the new world.

Can we predict failure? Prediction is an art and not a science. However, with new technology and tools we can come close to predicting failure. The successful companies are the ones that can take corrective actions faster. The financial industry has developed a series of metrics to evaluate company’s performance and constantly monitor the metrics to make decisions to buy or sell. Some quantitative hedge funds base their decisions simply on numbers from their quantitative models but the outstanding ones can correlate the metrics with experience and make better and faster decisions. I always begin by analyzing the human body or an automobile. As we grow older, predictive maintenance becomes an important facet of our lives. We go to the doctor on a regular interval, trying to judge the condition of our health. The main reason for doing so is to reduce the future cost and lead a healthy lifestyle. The doctor goes through a series of tests and measurements and provides warnings based on the results. These tests have been standardized and customized based on the individuals’ age and gender. The best doctors take the data and make recommendation based on their experience.

The key learning from visiting a doctor are similar to a supply chain risk management. There are several key components that have to be in place to enable a medium of managing risk in operations. The five key components are 1) Metrics, 2) Real Time Data Gathering & Monitoring, 3) Experience (History), 4) Corrective actions and 5) Perfection.

The most difficult task is defining a standard set of metrics. Identifying the right metrics at the right level of detail is the first step to help decision making. Just like in the medical community, the metrics vary for manufacturing companies. The segmentation of the companies can be in the form of industry, size, innovations and market perception. Today, there are many software vendors who have developed standardized metrics for financial and operations effectiveness. Companies should however, understand each metric and revisit them in regular intervals to ensure that these are still valid based on the current state of the company.

The challenge 30 years ago was the readily availability of the data to monitor the pulse of the company. With new technology it is possible to constantly monitor the resources (equipment, inventory, order, customer, supplier) and generate consequential results that are constructive in decision making. The interval of monitoring and real time data gathering can be set based on the risk of failure or the impact of failure. The technical challenge on processing massive volumes of data and making sense out of it is a reality in the current internet world and will only improve.

As we have all heard before – learn from history. History and experience is a valuable commodity that we cannot ignore. I still remember the dot-com boom era where all of us thought for a period that we were better in investing that the professionals. We were quickly brought to earth during the bust – where most of us were not prepared to get out of the market in the right time. Manufacturing companies also have similar executives and managers who have precious past experiences. All the data and analysis without a context and perspective can all go to waste.

The dot-com boom and bust made me realize the basic art of investing is to know when to get out. The art of decision making to make gutsy calls to make quick corrective actions is mostly based on the individual just like while driving a car in snow, the driver would slow down to prevent any mishaps. As soon as the car skids, the driver takes quick actions to minimize the loss of control. These action at the level of a company are still valid and in a much larger scale. Corrective actions require real time metrics, data and experience to make judicious decisions.

Perfection is a word that I have borrowed from the Lean community. All the above processes can be built and can give significant benefits. To create a sustainable engine the processes of measuring, monitoring and taking corrective action should be built into the DNA of the company. The pursuit of perfection can only be attained if the processes are standardized and accepted as a norm by the entire workforce.

We must be aware that like Deming’s PDCA cycle it is a closed loop process. Each cycle the learning’s should be incorporated into the new knowledgebase and the cycle should continue. Risk management is about proactively measuring and monitoring the right data and taking corrective actions when required. There is a cost associated with laying such a foundation but the benefits of preventing a failure far outweighs the cost of the implementation.

Promising in Finer Time Buckets

Depending on the industry vertical and the “lead time” of manufacturing or services, the promising of orders are in days, weeks or months. The aerospace industry will promise the next airplane delivery in months, the steel industry in weeks, the auto parts industry in days and the IT project implementation in months. The question that the VP of operations often poses is how to promise better in finer time buckets.

During one of my stints in Asia, the CIO who came from a manufacturing background wanted a solution/strategy to promise his customers in days instead of the usual way of operating which was weeks. The benefits of promising and delivering in days was very simple – it would take away a week of inventory from the supply chain which would reduce the lead times and also leave extra cash of the table that can be put to more productive use rather than being tied in inventory.

Though the reasons for promising delivery is finer buckets is very simple – but the task of achieving it is pretty complex. During further investigation on why the company was promising in weekly buckets we found that there were basically 3 main reasons. The first reason was that the extra buffer of time was to cover the unreliability of the operations, the second reason was that each operation in the manufacturing chain was scheduled to maximize the utilization of the resource thus sometimes resulting in the production of unwanted material or producing material before hand and the third reason was that they wanted to ship in large quantities aggregating to reduce the shipping cost.

The first task at hand is to investigate the root causes of reliability. The reason can be varied, ranging from quality problems, machine uptime, poor planning and demand variability. The key to eliminate reliability is to systematically eliminate all the root causes. The other way to manage reliability issues is by creating a buffer of safety stock that can sustain the variability. Although safety stock is additional capital tied up in inventory – it does enable creating a flow of material through the manufacturing chain. The key to any manufacturer is to decide on the safety stock level and not just any stock – but a predetermined amount for a mix of stock. Safety stock is definitely not the panacea to eliminate reliability, but it does help bringing stability and consistency to the production. As further actions are taken to eliminate reliability, the safety stock can be reduced and the capital released to be used elsewhere.

The second factor is the fascination about utilization, of machines and people, by operations manager. The relentless focus on utilization reduces the focus on flexibility. No operation is perfect in the imperfect world. Creating a plan for 100% utilization increases the risk for unplanned disruptions. A small hiccup in the operation can lead to a ripple effect which can last a significant amount of time with loss of customer service, escalation of orders, complex decision making for available capacity and overall stress on the people and machines. All of this results in nervousness in the supply chain and results in the increase in inventory. In the imperfect world the advantages of running an operation at 85-90% capacity far supersedes the benefits of running at 100% capacity. It provides flexibility to take care of unforeseen interruptions and allows the goal of providing excellent customer services at a lower cost. The concept of process design and line design by industrial engineers take into account the variability in demand before setting up the manufacturing process. The premise of the design is to enable flow of material through the line thus reducing the latency within the production line. However, the rate of change in the business climate has increased several folds over the years. The original typewriter had a lifecycle of over 30 years – while the current technologies have a much shorter lifecycle. Business processes and manufacturing lines have to be reconfigured to align to the new business climate every so often to keep itself tunes to the new dance. Running an operation at less than 100% capacity provides the ability to react and accommodate incremental changes in the business while maintaining excellent customer service.

The third factor as explained was the consolidation of shipment into large batches. This is again a counterintuitive approach to improve efficiency. Larger batches do help reduce the cost per unit. But there are inherent costs associated with accumulating goods to reduce shipping costs. Material have a tendency of not adhering to the planned timeline and a delay to a portion of the shipments will delay the entire shipment. Keeping goods in the warehouse, while waiting for the batch to be complete, increases the risk of goods being stolen, lost or damaged. Increase in goods as resident increases overall material handling costs – tracking and tracing, inventory management data entries, not finding the right material and others. A smaller shipment can keep the customer operating, while waiting for a large batch before shipping increases the risk for the customer. An unplanned event during the shipment can derail the entire shipment while if shipped in smaller batches can reduce the overall risk for the customer.

The benefits for promising in finer time buckets are great, but require discipline in bringing stability, consistency, repeatability and sustainability to manufacturing. Operations Manager should systematically address and eliminate the root causes of reliability, run the operation smoothly and below 100% capacity and ship in smaller batches.

I would love to hear from you about your experiences.

Running Operations Lean

The story exemplified in Ely Goldratt in his famous book “The Goal” about a team of “Scouts” on a camping trip was an excellent example exhibiting the role of a bottleneck and its impact on the overall progress of the team. The slowest member in the chain controls the pace of the progress and the key focus of TOC (Theory of Constraint) is to manage and improve the slowest member or the bottleneck. TOC helps manufacturing companies to identify the bottleneck and focus resources to elevate the constraint. Lean experts look at the same example a different way. Lean fundamentals explore and understand the supply chain. Lean would have taken the same team of “Scouts” and determined the rate of each member – analyzed the “takt” time and balanced the carrying load for each member of the team so that the entire team moves at a uniform pace. Lean approach to manufacturing is ensuring that the processes are balanced and run per the “takt” time as determined for the customer demand.

Lean principles will enable the team to move at a uniform pace with minimum amount of inventory (distance) between the members. Lean takes a holistic approach to design the effective supply chain (line balance) and recognizes the nuances in the supply chain constraints to create a uniform flow across every unit in the chain. TOC on the other hand is a more focused approach to address the bottleneck. TOC is a good solution for factories which have less control or foresight into the demand product mix and are continually re-planning to determine the optimal way to schedule the demand to meet delivery performance. Usually this model, the variability in production causes reliability issues for the people, process, machine and materials in order to satisfy the four requirements of an efficient and effective supply chain is cost, quality, safety and delivery performance.

A good analogy of a Lean and TOC practice is the human body. Every person has a different metabolism of absorbing the calorie intake. In a Lean model, the person has knowledge of its metabolism and creates a corresponding diet plan. The diet plan, if maintained, will ensure that the body remains lean. The diet becomes a habit and all corresponding activities of ensuring the right diet is available and regular health checkup are planned easily. A regular exercise schedule is laid out which ensures that the body stays in shape. The exercise schedule is based on the variability in the calories intake. If the variability is high then a regular strenuous exercise is laid out – which buffers that body against the variability. Variability in the diet is taken into account while planning the exercise routine. TOC model is useful when there is a lack of regimental schedule and the body has to react to the changes in the diet. The emphasis is not on the calorie intake but on the process of burning the calories. If on a certain day the calorie intake is high, the body meter indicates that the exercise schedule has to be strenuous. If TOC determines that exercise is the bottleneck, it will plan for extra time on the stair-master, to burn the extra calories. Lean and TOC both address the metabolism and try to keep the body lean. Lean dictates that the body metabolism has to be understood and set up all the activities, including diet and exercise plan, to meet the body’s metabolism requirement, while TOC will quickly address the variability by addressing the bottleneck and focus on making it more efficient. Both the processes require continual evaluations to reset the regiment. Although it may look better on paper that one could only focus on the bottleneck rather than take a holistic approach, it causes uncertainty and irregularity in the schedule which can become cost prohibitive in the long run.

The human body is an embodiment of perfect manufacturing environment. It is a learning system which processes massive amounts of data, provides visibility, makes decisions and reacts to variability.

Love to hear if you agree or disagree.