Supply Chain Planning

Supply Chain Visibility - Drivers and Requirements

2010-02-01T07:07:00.000-08:00

Why Supply Chain Visibility and Why Now

The last few months has seen an increased demand across industries for Supply Chain Visibility and Business Intelligence solutions. Most organizations have systems that collect and analyse transactional information and present it in regular (e.g. weekly) or on-demand reports. These reports are used by management for business planning or by regulators to ensure compliance. Unfortunately there is often a mismatch between such reporting requirements and what is produced by silo-ed IT systems, a gap that is filled by manual collation of information produced by multiple IT systems. At one organization I know of more than 20 systems producing visibility information and a team of 40 full-time employees are engaged in producing regular and on-demand reports.

While these problems have been around for many years some recent events have increased the urgency for integrated BI systems:

Increased regulatory compliance and vigilance requirements
The recession and credit-crisis
An increased centralization of business functions
Increasing supply chain risk
Inability to reach cost and revenue targets using existing systems

We are working with an organization (hereafter ABC Corporation) to address Supply Chain Visibility problems, where the main driver is increased regulatory requirements with the regulator saying that the current reports are not detailed enough to explain high-level numbers. A secondary driver is to allow management to understand exact operational and financial bottlenecks. The next stage in the journey is using BI systems to drive management by exception, where well-defined processes are triggered by exceptions detected by the BI system.

High-Level Requirements or The What

Large businesses are operationally complex and constantly changing. The plethora of IT systems (each with its own BI) is a reflection of that complexity and change. It would be naive to think that implementing an enterprise BI solution is a simple task. However, there are some key requirements to think about before embarking on the journey.

Open and Extensible. The system will need to gather information from several existing and future transactional systems.
Master Data Management. The system will hold organizational master data and needs to implement processes to create and manage this data.
Data Quality Management. The system needs inbuilt automated/manual processes to solve data quality issues.
BPM capabilities. The system needs to be allow users to design processes around reports or exceptions.
Granular. The system must allow data to be held at the most granular level and also allow aggregation as required.

At ABC Corporation, the first three requirements are particularly important. Master Data Management is a particular problem as there is no centrally-held or even universally-agreed-definition for simple corporate data such as 'Location'. Given upto 20 sources of data, many with their own interpretation of data, the need to be open and the need for data cleansing solutions are apparent. Their current IT systems can produce many different answers to basic questions such as "Total Revenue" or "Total Volume" depending on source systems and views. There is an urgent need for a single system to define and produce "One version of the truth" within the organization.

Optimal Visibility or "What you don't know can't hurt you"

As the classic "Beer Game" showed us in Supply Chain or Operations classes, 'visibility' by itself can often lead to sub-optimal solutions. In the Beer Game we saw that when demand and inventory data was shared across all players in the supply chain, overall inventory actually went up instead of going down. Thus the solution isnt simply increased visbility but also "intelligent consumption of information". Key to intelligent consumption is the concept of 'management by exception' where business processes are triggered by exceptions. At ABC corporation there are upto 90 million operational events every day. Only a tiny fraction of events require management intervention or changes to monthly or weekly plans. The goal of a BI system is to discover and report these exceptions.

The other factor to think about is the requirement for 'real time'. It is sometimes technically very hard and expensive to present certain kinds of information in real-time. Before placing such a requirement on a BI system it is important to consider the effect of this information being available on a daily rather than hourly basis. Typically, information that impacts monthly or weekly planning decisions are not required on a real-time basis.

The Last Word

Solving the problems of information discovery, aggregation, analysis, and presentation are complex. In a future post, I will discuss BI software systems and how such systems abstract and provide technical solutions to these problems. Building an Information System requires the participation of the best business and IT brains in an organization. Few companies get it right but those that do reap disproportionate rewards. An example of best practice is at a renowned international beverage manufacturer, where the BI system is capable of providing instant, accurate and upto-date price and volume information for any product at any location.

The Long Tail in Supply Chain Management

2009-09-09T14:20:00.000-07:00

The Long Tail is a term used to describe a common feature of many natural and economic systems that follow a Pareto distribution or 80-20 rule. For example, a small subset (20%) of words in a language are used most (80%) of the time, a small fraction (20%) of the population produces most (80%) of the GDP of a country, and only a few (20%) of students ask most (80%) questions in a class.

In an SCM context the 80-20 rule manifests itself in many contexts. 20% of products or customers generate 80% of a firms revenue. 20% of suppliers provide 80% of the required raw-materials. This is what drives the well-known ABC classification of products/customers/suppliers in a supply chain. Using this classification, businesses have traditionally allocated most marketing, manufacturing, distribution, and management resources to the top 20% products, customers, or suppliers. The reason is simple: economies of scale. It is not profitable to devote resources on the vast majority of products or customers that generate only a minor fraction of a firm's revenue. Over the years firms have not only ignored the long tail, they have tried to push customers away from it through marketing strategies that 'consolidate brand portfolios' and 'shape demand' to herd all consumers towards the 20% products and services that have scale.

But the accumulated long tail (or the unimportant 20%) that firms have ignored can add up to a substantial portion of the market. And the internet has allowed several companies to reach this market and generate revenue substantial enough to become game-changers in their domains. Google, for example, makes most of its money from small companies (the long tail of the advertising world), and online music vendors make most of their money from tracks that fall in the 80% rarely listened to tracks. The attached article has several insights into the rise of the long tail in the business world and the basic rules of the game in this new world. One of the interesting observations is how the recommendation engines ('if you liked Britney Spears, you'll also like ...') can drive customers down the long tail in a reversal of traditional marketing. Thus more and more consumers discover their own niches and businesses edge closer to true mass customization.

Of course this has only been possible because in the virtual world the costs of distributing a product are negligible and because online distribution can deliver to a widely dispersed market, compared to a CD store that will only sell within about a 5 to 10-mile radius. However it is possible to take this to the physical world as firms in the books and movies business as Amazon, EBay, and Netflix have used innovative IT and supply chain strategies to stock and deliver products in the long tail to customers in the long tail.

Traditional businesses however continue to ignore the long-tail because their business models and supply chain models are just not designed to cater to the 'trivial' 80% that bring 20% of the revenue. However, instead of completely ignoring this 20% of revenue businesses can use technology to manage the 20% better. Advances in technology and new supply chain management software tools allow businesses to plan and optimize the demand/supply/inventory of the entire customer and product base. Planners no longer need to restrict themselves to just the A and B segment, they can set planning rules and alerts for all products, customers, and suppliers including the ones in the C segment.

As customers become more demanding and niche markets become more prevalent the long-tail is likely to expand and businesses will need to start thinking of market segments they earlier ignored. Have you seen this happening in your domain? How does your customer do ABC classification and how do they handle the C segment?

Supply Chain Planning Mastery

2009-08-01T09:50:00.000-07:00

Accenture's microsite on Supply Chain Mastery has some interesting reports based on their research into what differentiates the masters (i.e. those with SCM KPI metrics in the top 10%) from the laggards. This post is a viewpoint on the research paper titled "Insights into Supply Chain Planning Mastery" based on a global survey of 240 companies: https://microsite.accenture.com/supplychainmastery/Get_the_Report/Pages/default.aspx

Mastery in Supply Chain planning is difficult to achieve. It needs serious commitment from senior management and the willingness to place planning at the centre of strategy. Only a handful of companies in each sector achieve mastery in their supply chain planning functions but they usually report KPIs and ROIs disproportionately higher than their competitors.

A good example of this phenomenon is Asian paints, the leading paint manufacturer in India. This indigenous company, a relatively new entrant, has far overtaken established multinationals like ICI and Berger in a short time. Although several other factors (e.g. splendid targeted marketing campaigns) have contributed to its success, the contribution of their much superior supply chain planning capabilities is hard to deny. They were one of the first companies in India to implement Advanced Planning and Optimization software from i2, but most importantly they have an experienced and extremely competent planning team who are very clear about what technology can or should provide, and what should be achieved through human insights and consensus.

Accenture's paper points out four reasons why planning has just became tougher and yet more critical:
1. Globalization of supply and demand
2. More product variety and shorter product lifecycles
3. Increased volatility in global commodity and financial markets
4. Environmental regulations and sustainability

All these factors make the tasks of supply and demand planners much more complex. As the paper points out, the focus of planning has shifted from accuracy/optimization of long-term forecasts/plans to the ability to monitor actuals and react to changes more effectively. Leaders have made the transition more quickly than the laggards. The report points out seven activities in which leaders consistently outperformed laggards:
1. Customer and Supplier Collaboration
2. Creating a Dynamic Planning Model
3. Demand Sensing and Shaping
4. Total Product Life Cycle Planning
5. Segmenting the Supply Chain
6. Adopting New Technology, Processes, and Operation Models
7. Managing Planning Talent Globally

While some of these are fairly obvious, I'd like to expand on the following points which have some interesting elements.

- Creating a Dynamic Planning model: I know of companies that update their demand plans on a weekly basis instead of the normal monthly or bi-monthly. An international computer manufacturer is known to update demand plans daily and intends to move to even more granular updates. Being able to respond to changes at such a granular level needs very agile planning and execution capabilities. However, the rewards are clearly massive as these companies are able to react much quicker than competitors.

- Total Product Life Cycle Planning: Most companies I have worked with do consider age of the product while creating demand plans. This report says that leaders are far more proactive - managing plans during new product introductions, using promotions to extend the life of products, and managing down inventory at end of life.

- Adopting New Technology and Operating Models: The value of technology in supply chain planning is often debated. Companies have often said that complex, expensive, multi-year planning software implementations have added little value. In my experience, organizations that benefit most from planning software implementations are the ones who have sufficiently mature planning processes to realize that it is time-consuming and error-prone to manually create and update plans in complex supply chains. Leaders extract value from software to further enhance their advanced planning capabilities, they dont use software to bypass human intelligence.

Accenture draws three overarching conclusions from their survey:
Managing in increased volatility requires the ability to adapt rather than the ability to generate long-term forecasts. Planning must happen faster and more frequently.
Planning must be integrated with other business functions such marketing, finance, NPD, IT both at a process-level (e.g. S&OP meetings need to be attended by all functions) and at the technology level (e.g. pricing/promotion information must flow to planning systems as quickly as possible).

The world of planning professionals, consultants, and software providers is increasingly complex but patterns are emerging of what is 'good practice' in a changing world.

Supply chain management ideas in difficult times

2009-07-29T09:43:00.000-07:00

A recent whitepaper by Deloitte Consulting Canada outlines some ideas to navigate the 'choppy seas of recession'. The main thesis of this paper is that supply chain managers should shift focus from customer-service-driven operational areas to cash management. The ideas therefore include strategies to extract as much working capital from the supply chain as possible.

The paper also suggests that this dearth of credit may stay with us for a while, so that some of these ideas may turn out to be more than mere short-term measures. This view that the current recession may be 'permanent' has been discussed elsewhere (http://blog.kinaxis.com/2009/06/recession-or-reset/) and many economists now predict that the world may never return to the conditions of 2003-2006.

The main ideas are as follows:

Focus on the cash-to-cash conversion cycle: Plan a co-ordinated approach to managing the three elements of working capital - inventory, payables, and receivables
Think like a CFO: Manage your supply chain as if working capital availability was the main constraint, not as if maximizing customer-service was the main objective.
Focus on inventory reduction: Use demand planning, supply planning, and safety-stock policy adjustments to try to reduce inventory levels with minimum impact to customer service.
Extend payables intelligently: Work with suppliers to understand and agree delayed payments where possible.
Manage and expedite receivables: Ensure timely and correct invoicing. Improve the rigour of collection processes.
Audit payable and receivables transactions: Make sure you are paying and receiving right amounts for the right quantity of goods. Ensure you are taking advantage of any discounts.
Consider alternate supply chain financing options: Use receivables as collateral for short-term financing. Offer customers a discount for early payment.
Robust framework to manage supply chain risk: Find out if any customers or suppliers are in financial trouble. Review how you are protected in international transactions.
Eliminate fixed costs: Swap fixed costs for variable costs whereever possible by selling fixed assets and leasing equipment, trucks, and warehouses.
Think beyond your four walls: Consider the impact of your actions (e.g. reducing inventory) on the entire supply chain i.e. your customers and suppliers as some of them may be at risk.

While some experts (particularly in the finance community) have advocated the kind of conservatism outlined in this paper, there are others who are looking at strategies that will ensure that organizations dont deplete inventories or production capacity so much that they are unable to serve any resurgent customer demand. While some ideas in the Deloitte paper (e.g. managing supply chain risk or auditing transactions) are applicable to any economic scenario, others (e.g. eliminating fixed costs) need to be approached more cautiously.

What are your thoughts? How can supply chain managers navigate the recession and still ensure they are well-placed to benefit from a recovery.