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.

Demand Management Process for Steady Material Supply

During one of my stints working for a client in the US, the team was setting up the design for the best practices in demand management. As most of us are aware, the performance of any company reflects on how the demand management process works. Demand is the point of entry for the rest of the operation. If inventory is building, lead times are increasing and delivery dates are being missed, then the demand management is the first place that the folks have to understand and control. The strategies used for demand management is dependent on industries – as retail industries look for solution to capture the POS data to get a real-time semblance of the demand pattern. Asset intensive industries are dependent on how well they manage the S&OP planning process to determine the market addressable based on the rough cut capacity planning.

During the design planning session a team consisting of sales, planning, marketing and IT were gathered in a room. As we have probably realized that demand, itself, is an ambiguous term. People talk about – forecast (shipment forecast, sales forecast, booking forecast, unconstraint forecast), sales orders, inter company transfer orders, procurement forecast and purchase orders. It took the team a while to differentiate between the various types of forecast and what has to be the prime driver to manage the sales and operations planning process.

The other challenge for companies is the capture the information for all these types of demand. The most common element of the forecast is the shipment information that is historically archived. In a commodity business this is a good start to create a forecast during the annual planning process. The forecast based on the shipment is constraint based, clearly indicating what the company has shipped in the past, and is a good measure of generating a forecast for the future demand. The sales and marketing teams can use this forecast as the starting point to modify based on market intelligence reports and changes in the customer buying pattern. The modified forecast becomes the actual sales forecast that the business planners have to corroborate and conduct the rough cut capacity planning.

The following discussion will be mostly about the forecasting process. The bookings forecast, as conducted by sales department, on the other hand used in many companies are a way to hedge the sales forecast errors. Bookings forecast can be higher than the sales forecast if the sales think that a new order may show up before the end of the month or at the beginning of the next month. However, the bookings is not evil that has to be eliminated but should be controlled by the planning team. In the commodity business, where the demand is cyclical and seasonal, it is essential to level the production based on the demand variability. The planner has to determine the build up of the inventory or booking of capacity to meet future demand.

There are several best practices in managing the forecast, but based on my experience the key elements that a forecaster has to grasp is the reliability and the repeatability of the forecast. Assuming that the forecast is reliable with a high degree of forecast accuracy, which can be measured, based on the company business and processes and proper risk mitigation strategies should be applied. From a repeatability point of view, if the forecast is fairly level, it is easy to plan the supply to meet the demand and control the level of inventory in WIP as well as in the finished goods. When the demand is seasonal e.g. spikes in the demand at the end of a period, it should be treated carefully to ensure a steady supply without causing a situation of a stock-out. If the supply is flexible and reliable then the process can be run with minimum inventory. The risk for Just-In-Time increases as the rate of consumption increases and the supply has to keep up with the consumption. Best practices suggest that a steady supply is the best way to operate which will mitigate the risk of stock outs. Inventory planning, based on the repeatability of the forecast, plays a critical part to determine the level of inventory to maintain, which will keep the cost of inventory down as well as maintain high customer service levels. The repeatability of the forecast can help the inventory planner to size the finished goods inventory in the warehouse and the distribution centers thus promoting steady supply and high customer service levels. If there are any feedbacks or questions, please let me know.

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?

The Control Room – Next Generation of Managers

Computing horsepower has increased tremendously over the years. I was at NASA Houston recently, and was amazed to see how little technology was used to put the first man on the moon. I was informed that the entire operation was controlled by the horse power equivalent to 3 PC’s. The amount of copper to lay the wiring was equivalent to the length of going around the earth almost 3 times.

Not sure how to interpret the decision – If 3 pc’s can put a man on the moon then do we really need all that extra memories to run a factory. A typical manufacturing factory will have at least 10 – 20 servers with memory ranging from 2 - 10 GB of RAM.

If we target the main thrust of change over the years, it has been the transformation of information sharing. One of my clients claimed that it would take 3 - 4 weeks to get a report for the entire spend in the organization. This induces latency in the decision making process and reduces the flexibility of the company to react to changes quickly.
The main thrust of technology is not only helping in solving complex problems but the dissemination of gigabytes of information quickly and in real time to enable fast decision making. To enable such massive amount of data flowing between equipment, operations, maintenance, engineering and corporate it requires substantial bandwidth and RAM to process and distribute the information to the stakeholders.

The role of “Autonomation” – which is the inclusion of human intelligence in operations – will become an important aspect of manufacturing. Toyota developed the technique of self-correcting operations where the operation would stop automatically when a defect is detected. This process allows management of multiple machines by fewer people. The role of technology to enable operations to be automated is also related to processing of information. The real time status of the equipment including capturing the signals from active and passive sensors and processing them intelligently to a digestible metric enhances the ability of the company to manage the company with fewer individuals on the floor.

The classic example is Wall-Street. The value of currency is changing by the second depending on multitude of factors from around the world. The currency valuations are available real-time to everyone and decisions on buy & sell are almost real-time, even by a common person sitting in a remote place – while sipping margarita in Cancun. If Wall-Street can do it, so can manufacturing companies. I see the next generation of manufacturing managers sitting in a Control Room – making decisions based on the real-time feedback from the operation. The decisions will be implemented and the results will be visible real-time for the next set of corrective actions.

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.

Support Structure for Sales Effectiveness

I have been involved in several sales cycles for software and services over the last 11 years. It has usually been grueling affair trying to manage the whole process and working 80 hours week to bring it completion. Over the years, having worked in consulting and sales, I have come to the conclusion that selling is the most difficult task for an organization. I have grown to respect sales organization and the effort that they put to bring it to a closure, not only for their effort but also working in an environment of uncertainty.

This piece is not about the sales process but the support structure required making the sales process effective. The three key dimensions that organizations should focus on are Marketing, References/Case Studies and Customer Testimonials.

Customers have become savvier buyer of software and services over the years. Although some customers fall into the category of Leaders/Innovators, who are open to new ideas and willing to try out new innovative solutions, a great majority of them usually are followers who are primarily looking for success stories. Empowered with a list of references, the sales team can quickly gain the confidence of the buyer. Customers usually prefer references in similar solution areas and similar industries. References and case studies help to clear the first hurdle whether the experience of the software and services has been successful in a similar environment. It removes the first line of skepticism and the customer moves to the next step of analysis.

Once the references veil has been lifted the next thing the next step to bring the customer at ease is existing customer testimonials. In order to create a positive customer testimonial, three things has to be in place. The first one is a successful implementation and experience where the existing customer is willing to stand and vouch for the product and service. The second is a strong personality within the existing customer base who can help influence the community and the third a user community, blogs, discussion sites where the new customer can visit and gather perspectives. A positive customer testimonial goes a long way in increasing the effectiveness of sales process.

The Marketing organization in a software and services company holds a significantly important role is creating messaging and disseminating the message across the community. The first step for the marketing group is to create an effective and simple message that comprehensively describes the offerings that the company has to offer. The message should be simple and effective which the sales team can easily explain in a form of an elevator speech. The second step is to work with analyst and publications editors to get the message across. The analyst and publications are very powerful and have existing customer base that are eager to hear/read about the new solutions and practices. On several occasions when I have visited customers, we tend to discuss the new trends and technology. Customers would inevitably turn out some document that were written by analysts and would want to understand how our solutions fit into the model. Being in the top quadrant requires not only implementation successes but close alignment of the company’s message with the analyst. The other medium to disseminate the message is attending community conferences and organizations. Executives and managers attend conferences to listen to new trends and this is the best place where you can talk one-on-one in an outside location.

In summary – the Marketing, References and Customer Testimonials play a key role is enabling sales. The software and services SG&A are one of the highest in the industry. A small change in the effectiveness of the process can reduce the overall cost of sales and increase the margins.

Like to hear of other support organization and structures which will increase the sales effectiveness.

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.