Align the Organization for Improved Supply Chain Performance
Introduction
Today's manufacturing and logistics companies are challenged to increase profit
margins amidst increasingly complex environments. Industry analysts and supply
chain pundits point to more effective supply and demand planning, management,
and execution as the means to unlocking significant gains in margins. However,
often overlooked is the need to align the organization from the top down to
succeed in achieving breakthrough gains in supply chain performance. The journey
begins by establishing an executive team called the Supply Chain Executive Council
(SCEC), which is chartered with organizing and managing the entire supply-demand
system. The SCEC will lead the organization on a journey of continuous improvement
in supply chain performance. The following steps are a road map for conducting
such a journey in any organization:
• Establish the SCEC
• Gather information; set the performance baseline; contrast with competitors
• Build a metric framework for managing the supply-demand system
• Set policies and auto-response rules to empower frontline employees to
prevent problems and manage day-to-day operations
• Monitor and adjust metrics and policies
Figure 1 - The foundation for improved supply chain performance.
Setting the Foundation — Establish the Supply Chain Executive Council
Just as Total Quality Management gurus Deming, Juran, and Crosby defined quality
as a journey, not a goal, so it is with effective Supply Chain Management. As
many organizations learned in the 1990s, implementation of MRP, MRP II, ERP,
and supply chain optimization systems by themselves weren't enough to achieve
breakthrough performance in the supply chain. Rather, the top management team
must get involved and lead the organization to establish effective policies,
business processes, and systems. Cross-functional leadership is requisite to
balancing supply and demand because so many parts of the organization affect
either side of the supply-demand system. Supply management groups cannot be
the back-end of the organization's value chain and still achieve industry-leading
results in conversion costs, cycle times, inventory turnover, and so on. Demand
must be managed just as effectively as supply, which requires accountability
by the head(s) of marketing and/or sales to own managing demand within agreed
constraints. Also, information systems are central enablers to providing insight
into the supply and demand related operations. Marketing participation is key,
so that the supply chain strategy is built to best achieve the company's differentiation
strategy. Product design and supply chain complexity are intertwined as well.
The first step is to establish a team of senior executives as the SCEC, charged
with the following roles:
• Supply Management
• Demand Management
• Information Systems
• Strategic Marketing
• Design Engineering
Figure 2 - Establish the supply chain executive council with cross-functional executives.
The organization chart in Figure 2 gives an example of where the members of the SCEC might reside in an organization. The key is to make the team just large enough to own the entire supply-demand system but not so large that the team cannot make rapid decisions. It's easier to start small and add functions later than to have every functional group in the organization affecting supply or demand. The core SCEC team should remain intact for the long term.
Lack of Organization of Supply-Demand Accountability
In the early 1990s, the personal computer industry was in hyper-growth mode, with several firms leading the new computing revolution. Growth was so fast that factories were being built all over the world by these firms to keep pace with demand. In fact, new models were almost always sold out as demand outstripped supply of internal components, such as processors and memory chips. In these early days there were few variations of computers available and complexity was minimal. Firms rarely turned away or modified orders to improve margins, and eventually began turning to contract manufacturers to supplement their production capacities and speed time to market. This growth period enabled companies to accept orders and build huge inventories without much regard for processes surrounding supply and demand management. However, several years into the growth period, the number of models, different configuration of each model, and the complexity of bills of materials had grown exponentially, causing chaos in the supply and demand areas in these organizations.
How did they get into such a position? As the complexity of offerings grew from the proliferation of new technologies, shortened product lifecycles, and increased competition, sales suddenly found that they had to offer customers an exact configuration in order to be assured of getting the order. The supply side of these organizations found themselves looking nervously at ever-changing sales forecasts and order pipelines, and rapidly escalating inventories as sales continued to accept orders without regard for what inventory was on hand or could be expedited from suppliers. Finally in the late 1990s, several of these firms had inventories which had ballooned into the billions of dollars. One firm even saw inventories grow to over $2 billion - almost 10 percent of sales revenues at the time.
Computer Industry Implements Best Practices
Out of this chaotic environment grew some best practices for effectively managing supply and demand. The sales heads of these firms were chartered with demand management, which included goals such as selling more of what was available and minimizing order changes within lead time. Purchasing, manufacturing, logistics, and materials functions were then headed up under a single supply-side executive accountable for delivery of product to a well managed demand pipeline. The CIO or similar information systems executive was on this team to implement the systems to provide insight into this picture. For many industries, such as consumer packaged goods, a strategic marketing head also participated to provide guidance on plant and logistics site selection proximal to target markets.
Once the SCEC is in place, the first task at hand is to identify the current situation and historical trends as a prerequisite to beginning analysis and strategic planning. That is, gathering critical data, such as global inventory on hand and on order, excess and obsolescence, order-to-customer dock cycle time, number of suppliers, and on-time delivery ratios. This step can often break down due to difficulty in aggregating information from the many silos of information in large organizations (Figure 3). However, it's a fundamental step, and if missed, it is like embarking on a journey without knowing the starting point on a map - lost from the beginning.
Figure 3 - Build a Metric Framework for Managing the Supply-Demand System
Finding out the current state is the first step, but relating it to the competitive landscape and to the extended supply chain is equally crucial. So, the SCEC must next understand where the organization stands relative to the competition on the key metrics they establish. They must also understand where bubbles of inventory, long lead times, unreliable deliveries and unpredictable demand reside within the entire supply/demand system.
With that information in hand, the team will have a view of their supply-demand system and can embark on analysis, strategic planning, organizing, and controlling the system through the establishment of key policies and metrics.
Strategic vs. Tactical
There are both strategic and tactical elements to managing the supply-demand system. Supply chain metrics should be aligned from the top level corporate strategy to the frontline tactical operations.
Strategic supply chain management includes breakthrough innovations that effect competitive advantage usually through cost reductions, cycle time decreases, or supplier relationships providing new flexibility or cost advantage. The SCEC should establish continuous improvement goals for the strategic metrics but also innovate breakthroughs. For example, in the early 1990s, personal computer companies achieved strategic breakthroughs in their cost structures and capacity flexibility by outsourcing some or much of their manufacturing to contract manufacturers. We'll review a few examples of strategic metrics to help put a framework around the breakthrough decisions in this section.
Tactical operations in supply chain management include the day-to-day management of the supply-demand system. An example of a tactical operation would include the measurement of whether inventory for a given order is available or can be met if the order is placed within a certain lead time. Measuring and managing tactical operations requires the use of exception management in order to gain control over the key events in the supply chain of a large, global organization where literally thousands of deliveries, manufacturing lots, returns, orders, shipments, and so on are processed daily.
The SCEC should establish and monitor strategic operations metrics, usually on a monthly or quarterly basis in order to put a framework around making critical long-term decisions.
Southwest Airlines: Aligning Strategies
Aligning the supply chain strategy and associated metrics with corporate strategy is key to achieving competitive differentiation. For example, Southwest Airlines in the 1970s saw a niche market available for short haul flights between the major cities in Texas. They saw their competition more as the alternative of driving than other airlines because at the time one could most often drive between these cities in less time than flying. So their corporate strategy was to be the fastest mode of transportation between cities and competitive in real cost and opportunity cost with the automobile. So, they aligned their supply chain accordingly by making several tradeoffs to achieve breakthrough performance in cycle time, or turnaround time as it's called in the airline industry. These included no assigned seating, no inter-airline baggage or ticketing, and standardized airplanes for quick maintenance between stops. They also made tradeoffs to create a cost structure which enabled them to compete with automobiles.
Tactical Operations
The old saying about Rome reorganizing for 2000 years and only accomplishing the demise of the empire holds true for supply chain management, as well. You can make all the right strategic choices, but if the firm fails to execute in daily operations and tactics, loss is inevitable.
Establishing a tactical operations management system requires rigorous metric setting tied to the strategic supply chain management imperatives. On an hourly, shift, or daily basis, the system performance to these metrics should be evaluated to understand if they are within control limits. Statistical Process Control is a useful way to apply rigorous management to operational metrics and determine if productivity, quality, inventory, and other tactical goals are being met, improved upon, or degraded. Having detailed data from work centers, plants, warehouses, orders, and so on up and down the supply-demand system, enables frontline managers to perform trend analysis, root cause analysis and become better managers of their functional areas.
Metric-Based Tactical Operations: Hard Drive Manufacturer
One of the leading hard disk drive manufacturers established best practices for strategic supply chain management imperatives backed by tactical objectives and processes. After the company determined its key differentiator in a commodity market would be flexibility of manufacturing to customer orders, this company established a Supply Chain Executive Council. The team meets once per week to review orders from leading computer OEMs, channels, and service providers for hard disk drives. The team first creates a demand forecast for all demand that is outside of lead time and then allocates all orders within lead time to the available inventory and capacity. The team then decides the build plans for each of the global manufacturing facilities and contract manufacturers and communicates the true demand picture to their suppliers. Sales then provides the updated commitments to customers with the delivery dates the hard drive manufacturer is able to meet. The customers then negotiate for more or less capacity and the cycle is repeated. This constraints-based planning process utilizes a myriad of systems, executives, and metrics. Notably the firm monitors order fill rate by customer, revenues, inventory turnover, and flexibility to customer upside and downside requests within lead time among other tactical metrics to gauge the success of its supply-demand network.
Frontline Employees Actively Manage Day-to-Day Operations
Once the organization, framework, and metrics are set for managing the supply-demand system, the next step in effecting a systematic process for managing supply and demand is extending standardized business processes and rules that enable and empower frontline employees with the ability to make decisions and execute without management intervention for most of the cases. In other words, processes, conditions, and thresholds need to be set such that employees can manage by exception, acting on conditions that fall outside of the established parameters.
Promoting Visibility of Exceptions
While standardizing responses to events enables an organization to act uniformly and predictably, there are situations that must be escalated. Quantitative thresholds should be established for each of the types of tactical events discussed. When exceeded, management visibility should be provided. If they continue to fall outside of established limits and begin affecting strategic metric performance, the SCEC and other management member should make standard responses. These will often include the appointment of a new factory or subcontract manufacturer when demand forecasts exceed capacity; reducing safety stock levels when order fill rates are extremely high and inventory turnover is too low or not improving; implementing supplier depots near factories to increase stagnant cycle times; and so on.
After these organizational issues, metrics, and systematic processes are addressed, the implementation of SCM software can provide a significant ROI. Software packages exist that can help companies build in such analytic and auto-response systems. Manugistics offers a SCEM solution, Networks Monitor, which enables intelligent exception management. Their analytics solution, Networks OneView, provides much of the necessary logistics and supply chain metrics. However, this hinges on collection, aggregation, and transformation of supply-demand system-wide data.
The Technology Footprint for Organization-Wide Analytics
The ability of the SCEC to move profitability through the supply and demand chain relies on access to the wide variety of data that underlies each of the aforementioned policies and metrics. As this data resides in many disparate applications and systems across and outside of the organization — ERP, order management, third-party distributor, WMS, supplier systems, e-marketplaces, to name a few — this is a daunting task for even the most experienced and well-equipped organizations.
The massive amount of data integration necessary and the need for that integration to be both effective (comprehensive, accurate) and efficient (timely) requires the ability to move data in both batch and real time. It also necessitates extensive knowledge of a virtually unlimited number of systems' data structure and interfaces. To date, most companies have addressed the data integration challenge by either building custom interfaces with an army of specialized and costly application engineers/consultants, or by deploying a host of application-specific integration tools, resulting in compounding the complexity of the integration problem.
However, the reality for most organizations today is that IT departments and projects are coming under intense scrutiny. Funding is being reserved for only those initiatives that can demonstrate a rapid ROI and offer more value at less cost. Similarly, human resources are being reduced and stretched beyond capacity as they try to handle an increasingly complex set of tasks on a daily basis. Both of these issues have made the already relatively ineffective and inefficient aforementioned methods even more unrealistic for most organizations to pursue.
Organizations faced with the need to integrate data for point solutions or connect disparate systems and applications across the extended enterprise are now building master data integration platforms for their organizations. Such platforms would help to maximize their limited resources and deliver a rapid ROI, while still meeting their critical technical requirements, including the ability to:
• Logically define the workflow of data and the rules by which data is moved, accessed or transformed
• Move large amounts of batch data and provide real-time transaction interaction
• Integrate with standard business intelligence and reporting tools
• Provide complex transformations between different data models and application interfaces
• Deployable quickly, while scaling to accommodate future needs
Call to Action
Many of these strategies represent widely accepted supply chain management theory; however, few organizations have actually undertaken this journey. A December 2001 article in Supply Chain Management Review, "Lessons From the Leaders" by Miles Cook and Rob Tyndall, presents pointed evidence that this approach should be adopted.
The Bain and Company study the authors referred to indicates when asked, "Do I have the right organization, strategy, and operational tactics and metrics in place to succeed today?" most often the answer is "No." Bain and Company recently published survey results indicating that fewer than 25 percent of the managers surveyed had what they would describe as full information on their supply chains. Moreover, 44 percent had only basic or very little data related to their supply chains. It's no wonder most companies have seen very little improvement in company-wide supply chain related financial metrics and too often we hear of large write downs in excess inventory as Nike and Cisco experienced in 2001.
Another survey from Bain and Company and the U.S. Department of Commerce found that most industries have made little or no progress on inventory turnover since 1988. Yet billions of dollars have been spent on software technology, modern manufacturing techniques, and outsourcing programs to improve this key indicator. So, it's time to get back to the basics. It all starts with ready access to data so that you can monitor your performance and can measure your progress against benchmarks.
