The New Supply Chain Agenda Blog

Nov 20 2010

Back to Basics

Back to Basics

 

J. Paul Dittmann, Ph.D.

Director, Corporate Partnerships

University of Tennessee

 

 

Back to Basics:

What are the “basics” for supply chain managers today?  Ten years ago, the supply chain leader in most companies held a title such as “vice president of logistics.” It was a largely functional role that relied on technical proficiency in discrete areas: knowledge of shipping routes, familiarity with warehousing equipment and distribution-center locations and footprints, and a solid grasp of freight rates and fuel costs. He reported to the chief operating officer or chief financial officer, had few prospects of advancing further, and had no exposure to the executive committee. The way companies need to think of the modern supply chain executive has changed dramatically.

Today, the Need Goes Well Beyond Functional Expertise.

Supply chain executives still need to be experts at managing supply chain functions such as transportation, warehousing, inventory management and production planning. And, the faculty at the University of Tennessee in a series to be released in the coming weeks will summarize for you what you need to know about the traditional basics of supply chain.

But since the supply chain process extends end to end and even outside the firm, including the relationships with suppliers and customers on a global basis, leading firms now see the supply chain functional leader as the necessary executive to coordinate the end to end supply chain process, even though he or she does not control it all. Because of that added dimension of cross-function, cross-company coordination, senior supply chain executives must possess a number of unique characteristics and skill sets that go beyond the traditional basics.

The supply chain isn’t just trucks, pallets and warehouses. But being trapped in a traditional view is one of the primary reasons that few companies are taking advantage of the shareholder value opportunity presented by supply chain excellence. Some may be skeptical that investing in this new, expansive vision of a supply chain is worth it. But there is an unequivocal link between supply chain excellence and shareholder value.

The Supply Chain Drives Shareholder Value

In an increasing, but still small number of firms, the CEO and the Board understand the value of the supply chain to their firm. But many other CEOs, battered by an immense range of items competing for their attention, do not see this link clearly. Yet the link is there. In most firms the supply chain controls most of the inventory; manages 60-70 percent of the cost; provides the foundation to generate revenue by providing outstanding product availability; and it manages many of the physical assets of the firm.

The Great Recession of 2008-2010 will increase the focus on supply chain’s impact on the financial health of the firm. In an era of tighter credit, supply chain levers can be used to free cash reserves from balance sheets rather than depending on restricted credit markets. The opportunity to increase shareholder value in the future even more than the past will be to take care of both the income statement and balance sheet through supply chain excellence.

Supply Chain as Part of the Executive Team

Because of this expanding role in driving a firm’s financial health, a growing but still small number of firms, make sure that the supply chain chiefs don’t just have access to the executive team ― they’re part of it. That role requires the need to bring value in terms not only of educating the CEO and the Board and giving them the vocabulary to talk about supply chain subjects and its critical role in creating economic profit, but in finding and driving opportunities to increase economic profit. The job in those progressive firms is no longer a mostly functional one, but instead plays a key strategic role that can influence as noted above 60 to 70 percent of a company’s total costs, all of its inventory, and most aspects of customer service.

The supply chain leader in these progressive firms has global responsibility for coordinating processes across functional silos like sales, R&D, and Finance, Manufacturing as well as functional responsibility for activities like procurement, logistics and production planning, and customer service. He/she pays as much attention to the demand side as to production and materials planning, and knows what it takes to reliably deliver products to customers and to build mechanisms to learn what customers have to say. In some firms, the role of the senior supply chain executive expands so much that he essentially becomes the COO, especially in those companies where the COO does not traditionally have responsibility for Sales, Marketing, or Merchandising.

Does the CEO Get It?
In this transformed world, even CEOs, who previously had little contact with the supply chain leader, must now demonstrate supply chain expertise. Indeed, supply chain chiefs have even become viable candidates for CEO succession. Wal-Mart’s past CEO Lee Scott, who previously headed transportation, distribution and then logistics for the retailer, is just one example. Mike Duke, the successor to Lee Scott, also has a big dose of supply chain experience in his background. It’s up to the company’s supply chain professionals to find ways to educate the CEO.  For example, one supply chain leader told us that after much badgering, he talked his boss, the E.V.P. of Operations, into scheduling a monthly supply chain update with the CEO. Now after eight months of those reviews, he says that the CEO clearly understands it at a much deeper level, with supply chain advances mentioned now in most of his public comments.

 

However the majority of firms fall far short of this ideal. Many companies today don’t have a complete end to end process view of their supply chain, and these firms face a big problem if their competitors get it before they do. But, “getting it”, isn’t enough. They also have to win the battle for supply chain talent that possesses a skill set beyond the traditional basics.

The Basics Have Expanded: The New Supply Chain Agenda

In the new book The New Supply Chain Agenda, written by Reuben Slone, Paul Dittmann, and Tom Mentzer, five pillars of excellence form the foundation of the new supply chain agenda. These are not new on the one hand, but they undergoing a rebirth as they are increasingly resonating in the executive suite and in the boardrooms as a critical driven of supply chain excellence.

 

  1. Talent is the first of the five pillars to drive supply chain excellence. If you don’t have the right people in place, you can’t build an appropriate strategy and you certainly can’t execute it. Finding talent for supply chain positions has unique challenges due in large part to the cross-functional and cross-company process challenges faced by supply chain executives today.

 

  1. Technology is always critical, but the real key is making sure you choose the right supply chain technology and successfully implement it. Improperly understood or implemented, technology can cause severe damage rather than improvement. You must be careful in how technology you select and apply the latest supply chain technologies, especially given the extremely complex nature of today’s global supply chains.

 

  1. Internal Collaboration involves each function in your firm playing a critical role in a successful supply chain; and will help you develop a clear vision for how they can work together to achieve supply chain excellence. In the book, there is a self assessment you should complete to honestly evaluate your process for aligning the demand and supply sides of the firm.

 

  1. External Collaboration focuses on how your company can achieve break though results by collaborating externally with both your suppliers and your customers. Best practices for collaboration exist and are being applied by more and more firms.

 

  1. Managing Supply Chain Change addresses the last but equally critical pillar of a supply chain excellence strategy. Everything else is for naught if you don’t execute successfully. You need to learn how to increase your chances of success on the path to supply chain excellence. Because of their cross-functional, cross-company nature, supply chain projects are more difficult to implement than those in other functional areas.

 

Future articles in this University of Tennessee series will focus on each of these five pillars of excellence as well as the traditional basics of supply chain excellence.

Forward to the New Basics

The basics of transportation, warehousing, inventory management, customer service, procurement, et cetera are expanding into a new frontier where supply chain is a core element in the boardroom. Therefore, supply chain executives must speak the language of the boardroom, and demonstrate that the firm’s supply chain is an integral component of driving shareholder value with supply chain excellence.  But, prior to moving forward into this new era of “basics”, supply chain professionals must still demonstrate competence in the traditional areas of warehousing, transportation, procurement, and planning. The next set of articles for University of Tennessee professors will cover what you need to know in these traditional areas.

 

Oct 15 2010

The Supply Chain Drives Shareholder Value

The Supply Chain Drives Shareholder Value

 

J. Paul Dittmann, Ph.D.

Director, Corporate Partnerships

University of Tennessee

 

 

The Supply Chain Drives Shareholder Value

In an increasing, but still small number of firms, the CEO and the Board understand the full value of the supply chain to their firm. But many other CEOs, battered by an immense range of items competing for their attention, do not see this link clearly. Yet the link is there. In most firms the supply chain controls most of the inventory; manages 60-70 percent of the cost; provides the foundation to generate revenue by providing outstanding product availability; and it manages many of the physical assets of the firm.

The Great Recession of 2008-2010 will increase the focus on supply chain’s impact on the financial health of the firm. In an era of tighter credit, supply chain levers can be used to free cash reserves from balance sheets rather than depending on restricted credit markets. The opportunity to increase shareholder value in the future even more than the past will be to take care of both the income statement and balance sheet through supply chain excellence.

Supply Chain as Part of the Executive Team

Because of this expanding role in driving a firm’s financial health, a growing but still small number of firms, make sure that the supply chain chiefs don’t just have access to the executive team ― they’re part of it. That role requires the need to bring value in terms not only of educating the CEO and the Board and giving them the vocabulary to talk about supply chain subjects and its critical role in creating economic profit, but in finding and driving opportunities to increase economic profit. The job in those progressive firms is no longer a mostly functional one, but instead plays a key strategic role that can influence as noted above 60 to 70 percent of a company’s total costs, all of its inventory, and most aspects of customer service.

The supply chain leader in these progressive firms has global responsibility for coordinating processes across functional silos like sales, R&D, and Finance, Manufacturing as well as functional responsibility for activities like procurement, logistics and production planning, and customer service. He/she pays as much attention to the demand side as to production and materials planning, and knows what it takes to reliably deliver products to customers and to build mechanisms to learn what customers have to say. In some firms, the role of the senior supply chain executive expands so much that he essentially becomes the COO, especially in those companies where the COO does not traditionally have responsibility for Sales, Marketing, or Merchandising.

Does the CEO Get It?
In this transformed world, even CEOs, who previously had little contact with the supply chain leader, must now demonstrate supply chain expertise. Indeed, supply chain chiefs have even become viable candidates for CEO succession. Wal-Mart’s past CEO Lee Scott, who previously headed transportation, distribution and then logistics for the retailer, is just one example. Mike Duke, the successor to Lee Scott, also has a big dose of supply chain experience in his background. It’s up to the company’s supply chain professionals to find ways to educate the CEO.  For example, one supply chain leader told us that after much badgering, he talked his boss, the E.V.P. of Operations, into scheduling a monthly supply chain update with the CEO. Now after eight months of those reviews, he says that the CEO clearly understands it at a much deeper level, with supply chain advances mentioned now in most of his public comments.

 

However the majority of firms fall far short of this ideal. Many companies today don’t have a complete end to end process view of their supply chain, and these firms face a big problem if their competitors get it before they do. But, “getting it”, isn’t enough. They also have to win the battle for supply chain talent that possesses a skill set beyond the traditional basics.

The New Supply Chain Agenda

In the new book The New Supply Chain Agenda, (TheNewSupplyChainAgenda.com) written by Reuben Slone, Paul Dittmann, and Tom Mentzer, five pillars of excellence form the foundation of the new supply chain agenda. These are certainly not new on the one hand, but they undergoing a rebirth as they are increasingly resonating in the executive suite and in the boardrooms as a critical driven of supply chain excellence and shareholder value.

 

  1. Talent is the first of the five pillars to drive supply chain excellence. If you don’t have the right people in place, you can’t build an appropriate strategy and you certainly can’t execute it. Finding talent for supply chain positions has unique challenges due in large part to the cross-functional and cross-company process challenges faced by supply chain executives today.

 

  1. Technology is always critical, but the real key is making sure you choose the right supply chain technology and successfully implement it. Improperly understood or implemented, technology can cause severe damage rather than improvement. You must be careful in how technology you select and apply the latest supply chain technologies, especially given the extremely complex nature of today’s global supply chains.

 

  1. Internal Collaboration involves each function in your firm playing a critical role in a successful supply chain; and will help you develop a clear vision for how they can work together to achieve supply chain excellence. In the book, there is a self assessment you should complete to honestly evaluate your process for aligning the demand and supply sides of the firm.

 

  1. External Collaboration focuses on how your company can achieve break though results by collaborating externally with both your suppliers and your customers. Best practices for collaboration exist and are being applied by more and more firms.

 

  1. Managing Supply Chain Change addresses the last but equally critical pillar of a supply chain excellence strategy. Everything else is for naught if you don’t execute successfully. You need to learn how to increase your chances of success on the path to supply chain excellence. Because of their cross-functional, cross-company nature, supply chain projects are more difficult to implement than those in other functional areas.

 

Summary

We supply chain professionals must find a way to establish a new agenda with the executive suite and the boardrooms. This new agenda should be supported by supply chain executive education programs such as those at the University of Tennessee and other prominent supply chain universities. It should also be a key focus in industry forums held at a number of universities. (E.g. the Supply Chain Forum, http://forums.utk.edu.)

In this way more executive suites and boardrooms will resonate with discussions of “how to drive shareholder value with our supply chains.”

 

Sep 03 2010

Book Review by Prof Tom Golby

The New Supply Chain Agenda: The 5 Steps That Drive Real Value

Reuben E. Slone, J. Paul Dittmann, and John T. Mentzer

Book Review

By

Thomas J. Goldsby

Slone, Dittmann, and Mentzer embark on an ambitious endeavor to distill the complexity of supply chain management (SCM) to its essence through five pillars: 1) Hiring the right talent, 2) Selecting the appropriate technology, 3) Collaborating internally, 4) Collaborating externally, and 5) Managing change.  Each of these pillars calls for a book of its own, but the authors manage to convey the essentials, with ample discussion and examples, in just under 200 pages.  How is it possible that such a complex discipline as SCM can be addressed in so few words?  To borrow a quip from one of my former professors: You only truly understand a complex topic if you can explain it to your grandmother.  Essentially, that’s what Slone, Dittman, and Mentzer accomplish through their synthesis.  Fortunately, the authors have a rich reserve of supply chain experience and expertise to draw upon which makes the read not only succinct but enjoyable. 

The book pushes off with a focus on supply chain as a primary driver of shareholder value.  The authors assert that we, as supply chain professionals, must speak the language of the CEO and the business directors.  These corporate leaders understand economic profit and its connection to shareholder value.  Supply chain professionals, however, continue to be looked toward for cost savings only, as they allow others to perceive the supply chain merely as a cost center.  The authors suggest that “the most neglected pathway to increasing shareholder value runs through the supply chain.”  As for which activities compose the supply chain, they note that the supply chain function includes “the activity that manages the flow of information, money, and material across the extended enterprise, from supplier through the functional silos of the firm to customer,” noting that the book generally does not cover manufacturing but rather focuses on the “supply chain outside the four walls of the plant.”  This reader takes that to mean “logistics.”  After coming to terms with this disparity in terminology, one can appreciate the message that improved management of product availability, delivery, inventory, employed assets, and their associated costs can render improvements in economic profit that drives shareholder value.  The authors provide anecdotal evidence and industry data that convincingly back up this assertion. 

Particularly valuable in this opening stanza are the in-depth primer on working capital and the comparison between terminologies used by supply chain personnel and the CEO/board of directors.  For instance, when CEOs speak of working capital, cash flow, and DSO (days sales outstanding), those in supply chain conventionally speak of inventory turnover.  When CEOs speak of NOPAT (net operating profit after taxes) and ROIC (return on invested capital), we tend to speak of fill rate, shipments, and cost.  The authors note that when it comes to economic profit, shareholder value, and price-equity ratio, these terms are rarely used or understood by those in supply chain roles – emphasizing that this must change.  These observations seem consistent with the findings derived from the “Career Patterns in Logistics” studies conducted annually by professors LaLonde and Ginter at The Ohio State University who, for decades, have asked logistics professionals what short courses they would take if given an opportunity to study a topic for 90 days.  Without fail, they find that financial acumen is a weakness that logistics/supply chain professionals would like to address.   

The book transitions from this rousing opening salvo on embracing economic profit to drive shareholder value to implore supply chain executives to devise a supply chain strategy composed of the five pillar elements.  The authors include a short assessment tool to help senior executives quickly identify areas of deficiency.  The tool, devised in a supply chain forum at the University of Tennessee, provides the reader with an immediate sense for areas in need of attention.  Further, the authors provide a synopsis of findings from 35 companies that have completed the assessment.  The findings suggest that a short-term focus on decision-making is “the greatest disease plaguing supply chain effectiveness,” followed by cross-functional misalignment – which I agree are two major barriers to achieving the supply chain dream. 

The successive five chapters (chapters three through seven) address the five pillars toward supply chain excellence.  Assembling the right talent is proposed as the first step.  Assembling supply chain talent is not limited to new hires coming in the door, but also the current personnel, including the senior supply chain leaders.  It is emphasized that supply chain executives must possess expertise within the activities they manage, and that they must also have an ability to coordinate areas that they do not control in the end-to-end supply chain.  This clearly poses challenges for the supply chain leaders who must not only comprehend the challenges faced by other functional areas of the firm (e.g., new product development, sales, finance, and marketing, among others) but to help these “outside” areas to appreciate the capabilities (and limitations) of supply chain operations.  With this in mind, the supply chain executive must be held in the same esteem as the leaders of the interfacing functions.   The ideal supply chain leader, then, embodies the following characteristics: global orientation, systems thinking, inspiring and inspirational leadership, technical savvy, and business skills.  Perhaps most interesting in this embodiment of the modern supply chain leader is the ability to appreciate and accommodate cultural differences in a globally dispersed operation.  Supply chain executives who have worked in other countries and understand the global environment are extremely valuable. 

The discussion of supply chain technology offers a poignant consideration of various IT solutions, and their prospective role in advancing the supply chain agenda.  While technology is posited as a critical contributor to the agenda, the authors assume a “pain versus gain” perspective, recognizing that – for a variety of reasons – technologies employed in supply chain operations/planning often fall (far) short of their anticipated benefit.  Three rules for successful implementation are brought forward: 1) Use leading-edge (beta) technology appropriately, 2) Realize that people issues are tougher than technical issues, and 3) Ensure that the technology project has a business case.  The technology chapter closes with an excellent set of questions that supply chain executives should consider before acquiring or implementing a new piece of technology. 

I found the next two chapters focusing on the collaboration – both internal and external to the firm – to be richest of the five agenda steps.  These chapters address the concept of systems thinking (mentioned previously as an important attribute for the supply chain leader) when applied across the functions of the business and to the larger supply chain beyond the company.  It is here that the “team sport” that is supply chain management must take root, and the authors provide good, practical advice for aligning departments and businesses for the greater good of supply chain performance that creates shareholder value for the focal firm and its fellow supply chain members.  The section on matching supply with demand through sales and operations planning (S&OP) offers real contribution through rich examples and supporting data.  The experience and research of the writing team (as well as colleague Dr. Mark Moon) are apparent in this section.  The inclusion of an S&OP Assessment Test is a worthwhile bonus feature.  Likewise, the examples of successful external collaboration from OfficeMax (where Mr. Slone serves as VP), Lowe’s, and West Marine are especially interesting. 

The last of the five pillars (Managing Change in the Supply Chain) is, in some ways, a compilation of the previous four steps. 

The book closes on a strong note with two detailed case studies chronicling the development and execution of supply chain strategy.  The first case study depicts the setting of Whirlpool North America, where authors Slone and Dittmann were charged with leading a transformation of a supply chain operation paralyzed by a disastrous ERP rollout in the year 2000.  They describe how they achieved buy-in to a supply chain strategy and how they implemented the five pillars to generate payback on a $60 million investment within two years.  The second case study captures the experience at Stage Stores Incorporated (SSI), where the late Dr. Mentzer served as a director, during the company’s aggressive growth throughout the 2000s.  This example is valuable as it portrays similarly positive results to the Whirlpool example in a very different setting – that of a retailer operating on a more regional basis within the United States.  Both examples are compelling and represent a fitting way to close the book.     

While not the final word on all things supply chain, this book is a solid contribution to any supply chain professional or business executive’s collection.  The practical orientation of the book will be appreciated by most readers.  Not only is the book a quick read, but it contains helpful tools, rich examples, supporting statistics (when needed), and chapters that close with a concise series of action steps.  In sum, the book hits a sweet spot by addressing complex issues in a straight-forward fashion with a good dose of experience-based advice.

Jul 07 2010

Managing Change in the Supply Chain

Managing Change in the Supply Chain

J. Paul Dittmann, Ph.D.

University of Tennessee

 

The life of a business professional today means being constantly connected with little downtime to recharge. Supply chain professionals often find themselves at the center of the storm, striving to balance very demanding operational imperatives with the need to satisfy customers and therefore help grow revenue. They must find ways to operate successfully today, yet also improve rapidly to be competitive in the future. And, improvement basically means “managing change”. Change management is the essence of the real work of a business professional.

Ironically, supply chain professionals often find themselves ill equipped to deal with change management, and in fact most have only a vague idea of what it is all about.  Yet, studies show that projects fail more due to human and organizational reasons than technical challenges. A common comment heard from supply chain professionals when asked what it takes to successfully implement initiatives is that it simply requires excellent analysis and a good plan. Many do not naturally gravitate to the softer issues of communication planning and organizational buy-in. Yet failures in these areas are at the root of many initiative failures.

The Project Management Institute statistics on project success are not encouraging:

  • Only 16% of projects come in on time, on-budget, on-benefit
  • 53% complete, but greatly missed time or budget or benefit.
  • 29% never complete
  • 62% of companies has a runaway project that seriously damaged the firm

A CSC Index study is only slightly more encouraging, with successful projects representing 32.1% of the sample.

What creates this dismal track record? Many factors cause the failure of initiatives, from scope mis-management to lack of good project leadership to technical deficiency.  But the experience from working with hundreds of companies at the University of Tennessee strongly indicates that the most significant short-coming is in the change management area.

A major study of change management in the supply chain area was completed at the University of Tennessee and published in the book: Handbook of Global Supply Chain Management by Mentzer, Myers, and Stank, 2007, Sage Publishing. This work was grounded in a complete review of the change management literature as well as data from hundreds of companies in the University of Tennessee databases.

To summarize the results of this study, there are four change management imperatives that must be addressed to ensure success in supply chain initiatives, described below.

Identify Key Stakeholders

One project manager from a major firm leading a major supply chain initiative thought he had designed the perfect change management plan. He introduced the topic with a well-crafted 30 minute presentation to everyone affected. He followed that with a one hour review with everyone directly involved to go deeper into the coming change. About a month after the project began, he issued a newsletter that clearly showed the progress being made and the benefits to be achieved. Finally, as the project neared completion, he managed to get a 600 word article in the company newsletter. This project manager did many things right, but missed in one key area. He did not first identify the individuals critical to the success of his initiative, and design a communication plan specifically for them.

We estimate that companies communicate over two million words to their employees regarding just new initiatives each quarter. The communication plan described above amounts to only one-half of one percent of that mass of information bombarding employees quarterly. Unless the communication process precisely targets the key players, it will not rise above the normal noise level in a large enterprise. There are people in every company for nearly every project that will make or break the project. These people may be anyone from senior executives to critical subject matter experts embedded in the organization. To manage change effectively, these key people must be identified, and exposed to a customized communication plan.

When change management is taught in the supply chain executive education programs at the University of Tennessee, each participant goes through a short exercise. They first identify the most important supply chain project facing them today, and then they place individual names on a grid like the one below:

Highly Influential people

who oppose the initiative

Highly influential people who are taking no apparent position on the initiative Highly influential

People who are enthusiastic

Moderately influential people and opposed to the initiative Moderately influential people who are taking no apparent position on the initiative Moderately influential people who are enthusiastic
People with little influence, but

Oppose the initiative

People with little influence

who are taking no apparent position on the initiative

People with little influence who are enthusiastic

 

The communication plan cannot be designed effectively without first going through this exercise. Once it is done, it is then time to develop a detailed communication process with a targeted message.

Develop a Communication Plan with a Targeted Message

Developing a good communications plan means addressing in detail the seven items in the grid below.

Audience Message Media Frequency Timing Responsibility Feedback

Mechanism

             

 

The message needs to change depending on the audience. In the extreme stereotype, operations people love to hear about cost reduction projects, and sales managers get excited about plans to increase revenue. Although never this simplistic, the message must be tailored to the audience.

The feedback mechanism in the above model needs to be more than an afterthought. Feedback operates on two dimensions. On the one hand, feedback to the project team should drive reasonable changes within the project scope.  But more importantly, feedback to the original audience is the catalyst that creates buy-in.

One project manger told us that she would gather suggestions from the key stakeholders for her project, work them into the project, and then meet again to show the stakeholder how their feedback was being used. This created strong cross-functional ownership, and she found it well worth the substantial time investment.

 

Plan for Good and Bad Resistance

Resistance to new concepts is normal, and that resistance takes two forms. In one case, we heard a project manager lament that her project to improve availability of product was failing because of severe resistance. When asked what form that resistance took, we heard things like key people not coming to project review meetings, pulling a critical person off her team to assign to another project, and simply ignoring the project. This was compounded by highly confrontational statements made at critical times to cause the initiative to lose credibility.

A project cannot succeed in the face of such negative resistance, and actions like these must stop if the project is to make progress. If face-to-face, fact-based reviews and appeals to the individual opposing the effort do not work, then the senior sponsor be leveraged. Senior sponsors earn their keep when they help project managers remove barriers like these.

On the other hand, some level of initial resistance is to be expected and indeed should be viewed as positive. Such actions as open-mined questioning, initially challenging the need and debating alternatives, and questioning the approach can all be important parts of a healthy buy-in process. But, this buy-in process takes time, time not accounted for in most project plans. We strongly recommend that this process be planned for in a formal way. Time for debate should be scheduled as tasks on the project plan or Gantt chart. Otherwise, they will be by-passed too quickly, causing this critical buy-in process to be short circuited. In a rush to stay on schedule with the technical tasks, the soft items often take a back seat. Yet ironically these are the most important factors in the eventual project success.

 

Develop a Plan to Sustain Change

In a major durable goods company, we saw an interesting scenario play out. The CEO decided that it was critical to improve forecast accuracy.  This occurred after someone mistakenly sent him a report showing a 60% forecast error at the SKU location level. He decided that this situation had to be the source of many of the operational inefficiencies in his company, and he then delegated this problem to a young marketing V.P. who was rising rapidly in the firm. When the given the assignment, the V.P. realized that he needed help in a major way, in that he knew nothing about forecasting technology nor even the current basic approach being used in the firm. So, he did a little research and brought in the best consultant he could find.

The consultant conducted an audit and found many deficiencies in the process and the systems used.  He designed a world class process, and brought in state of the art software. He also convinced the V.P. to initiate a forecast collaboration process with the company’s three largest customers.

The plan was outstanding, and worked beautifully. Forecast error fell by one fourth from a 60% error to a 45% error. Room for improvement of course still existed, but the CEO was ecstatic with the process. Of course the CEO was not so pleased that he didn’t demand additional improvement for the next year. The V.P. was on to other problems assuming this one was on the right track. But, by mid year, he checked in and found something very wrong. All of the accuracy improvement had been reversed! By the time the situation stabilized it was too late; and the results for the year came in at an embarrassing level actually worse than the year before.

What went wrong here? The plan for improvement was technically flawless, and indeed it had produced early promising results. A key piece was missing however. The plan to sustain the change was missing.

Our experience shows that sustaining change is often more difficult than implementing it in the first place. Yet, ironically project managers rarely develop a well designed plan to sustain change.

Conclusion

Much has been written on the subject of change management with some excellent models in place. There is John Kotter’s strategic eight step model for transforming organization, Todd Jick’s tactical ten step model for implementing change, and the General Electric seven step model for accelerating change. These have a lot of similarity. But, the analysis at the University of Tennessee based on working with hundreds of companies indicates that the above four areas are the most often deficient.

Very simply, to effectively manage change and successfully implement supply chain initiatives, the project team must identify the key individuals, and design a targeted communication plan specifically for them. The project plan must include sufficient time to deal with healthy debate; and, once the project is implemented, a plan to sustain the change must be executed.

References:

  • Handbook of Global Supply Chain Management, John Mentzer, Matt Myers, Ted Stank, Sage Publishing, 2007, Chapter 31.
  • “Leading Change”, John Kotter, Harvard Business School Press, 1996.
  • “Implementing Change”, Todd Zick, Harvard Business School Press, 1991.
  • “Learning in Action”, David Garvin, Harvard Business School Working Knowledge, 2000.
Jun 07 2010

What’s On the Minds of Supply Chain Professionals Today?

What’s On the Minds of Supply Chain Professionals Today?

Supply chain professionals no doubt feel battered by a series of events that are unprecedented in modern history. From the unbelievable swing in the price of oil to the collapse of the economy, never have supply chain professionals been expected to deliver so much so fast.  When they get together, they have a lot to talk about, and these discussions are indeed intense in such venues as the University of Tennessee’s Supply Chain Forum.

What Common Topics Do Firms Want to Talk About in These Forums Today?

Of course, the major subject front and center today focuses on what companies can do right now to take out cost?  What are the quick hits, the “low hanging fruit?”  There are obviously no easy answers. We often hear, “If it were easy, we would have already done it.” Of course the first reaction is to stop anything new and cut everything.  Budget reductions may be necessary, but they certainly shouldn’t be spread evenly.  Now is the time for careful surgical cuts that don’t cripple a firm for the future. It’s time for tough decisions on what is really important for the future.

Now is the time to make sure the best employees feel valued.  Even in the face of layoffs, the time will never be better to retain and hire talent for the future. As everyone else retrenches, there is an incredible opportunity to find the star performers for the next twenty years.

Now is the time to address those tough cross functional issues that are nearly impossible to deal with in good times.  It’s time to finally cut SKUs and get rid of that obsolete inventory. It’s time to really bring the supply chain folks into the planning of new products. And it’s time to forget organizational politics and get rid of waste, such as an underperforming, but politically connected DC. Now is the time to rise above the sacred cows and make the organizational changes that need to be made.  This is really an opportunity to get things right across the entire business. The Great Recession of 2008-09 is incredibly painful for most firms. It would be a shame to miss the window of opportunity that comes with it.

One of our Supply Chain Forum member firms told how in the early 1980s they were on the verge of bankruptcy. In desperation, they decided to really push decision making down and eliminate the red tape. They gave their people a budget and goals, and that was about it.  The corporate bureaucracy got out of the way and let people perform, and the results were spectacular. Unfortunately once they recovered, the controls went back into effect. Hopefully the breakthrough improvements made in today’s crisis won’t be undone when prosperity returns.

What Common Supply Chain Problems Do Firms Face Regardless of the Economic Situation?

In spite of the intense short term survival orientation apparent in many businesses today, everyone acknowledges that there will be a future.  Indeed, most Forum members know that when others retrench, they have a unique opportunity to build competitive advantage. For example, they know that they can’t tread water on developing their people, while their competitors maintain focus. They know the time will never be better to address the strategic issues they face.  Seven timeless strategic problems that should be addressed today are:

 

1. Too Much Product Complexity

All firms admit they carry too many SKUs, and further concede that they don’t have a good process to eliminate underperforming products. Yet some have broken the code on this intractable issue, and have a disciplined process in place to manage SKU growth, proving that it is possible to manage SKU growth effectively.

 

2. Too Much Slow-Moving and Obsolete Inventory

Companies struggle with stepping up to the problem of disposing of obsolete product in a timely manner.  There is always the resistance to reduce price.  Unfortunately, this product never gets more valuable.  It sits there month after month consuming cash, and incurring inventory holding costs until it is finally scrapped or sold at a steep discount, sometimes literally years afterward. It’s a classic case of pay me now….or pay me more later.

3.Supply Chain Considerations Not Part of the Product Design Process

When product design engineers develop a new product, they rarely consider inventory, transportation, or warehousing issues.  Sometimes small changes in a product configuration can yield big logistics savings. This applies to retailers as well as manufacturers. Retailers should not ignore the new product development process in their suppliers.

 

4.No Supply Chain Strategy

It is surprising that few firms have a documented supply chain strategy.  Such a strategy starts with assessing the future needs of their customers.  The strategy development process then determines the new supply chain capabilities the company will need in the future to meet its customer’s needs.  Eventually specific initiatives need to be chartered to deliver these capabilities. Unfortunately most supply chain organizations are so consumed with the daily battles of cutting cost, managing inventory, and delivering good customer service that that they don’t plan properly for the future, sometimes with disastrous results.

5. Ineffective Matching of Supply with Demand

This problem stems from the classic struggle among functional silos in most companies. On an overly simplistic basis, Sales is driven by revenue generation, while Operations strives to cut cost. Often these goals conflict with each other. Leading firms address this issue by establishing a Sales and Operations Planning process to align the various corporate functions around a plan that matches supply capabilities with demand requirements. Most firms attempt to do this, but most would acknowledge that they still have a long way to go.

 

6. Physical Network Problems

Where should warehouses be placed in this era of incredibly volatile transportation costs?  This question is a very prominent topic today.  Just a few months ago it seems, transportation cost were being driven up rapidly driven by the cost of fuel, driver shortages and other factors.  Now everyone expects that situation to return, but who knows when?  Logisticians are confused to say the least; and the old answers don’t work anymore.  One thing is certain however.  All firms should question their physical network configuration under a wide range of future fuel prices.

7. Global Issues and Outsourcing Problems

The global arena offers an even more confusing picture.  Many firms are re-thinking the mad rush to outsource outside the United States. The long supply lines, incredibly volatile fuel costs, exchange rates, the geopolitical risks have all come home to roust.

Yet few firms consider the total cost of an outsourcing decision, and even fewer incorporate the additional risk of a global source in their analysis.

Conclusion

Since almost all companies face some combination of these seven issues, a rich database of best practices exists that can be transferred across highly diverse industries. It is critical that all firms engage in outreach activities such as forum participation and benchmarking to make sure they understand these best practices.  Once they see how other companies address these issues; they need to develop an urgent action plan to implement the essential changes. Supply chain is the frontier of competition. Only by aggressively addressing challenges like those listed above can firms effectively compete in the increasingly intense global environment of the future.

May 25 2010

Managing Supply Chain Change

Are Supply Chain People Just Too Busy to Get Things Done?

The life of a modern supply chain executive looks just like other senior executives. They are constantly connected with little downtime to recharge. They often find themselves at the center of the storm, striving to balance very demanding operational objectives with the need to satisfy customers, cut costs and help grow revenue. They must find ways to operate successfully today, yet also improve rapidly to be competitive in the future. Improvement basically means getting projects done efficiently and effectively. Supply chain executives operate in the same maelstrom of competing priorities and limited time as their peers—but with the added responsibility of a much broader horizontal responsibility, and less direct control, than many other executives.

Transforming the supply chain to achieve excellence and drive shareholder value requires careful attention to project and change management. Supply chain professionals often find themselves ill equipped to accomplish the task. Partly this stems from a lack of disciplined application of project and change management principles; and in part results from simply being too busy to have the time to do the right things. Many supply chain executives we talk with concede that they don’t have time to do “it” right the first time, and therefore spend their days in a vicious cycle trying to fix problems that could have been avoided. In addition, people don’t stay in their jobs long in the dynamic business environment today. All of the constant turnover and turmoil raise tremendous barriers to getting things done. This means that successful execution of a supply chain excellence strategy requires more than just a competent supply chain executive—it requires the involvement and support of the entire senior management team.

Problems with Supply Chain Projects

In our supply chain audits, we often hear of supply chain initiatives that lost momentum and died. As any good project professional knows, projects fail for many reasons, from scope mismanagement to lack of good project leadership to technical deficiency. But in our experience, supply chain projects have unique issues that make them particularly challenging.

The Supply Chain is So Complex, People Often Fix the Wrong Thing

A line manager from a manufacturing company told us of a chronic problem they experienced consistently in their paint system. Defects such as small dark specks in the paint finish would show up on about 2 percent of the units, causing a huge re-work cost for this plant which produced at a high volume rate every day. The plant manager could hardly contain his frustration as his team launched project after project in a futile attempt to fix this problem, literally spending millions of dollars on possible solutions. As they later discovered, they were simply treating symptoms, not the root cause, and the defects continued unabated. One day, the plant manager out of total frustration gathered his staff and took them on a forced march inch by inch physically through the entire process. They found themselves on the roofs, peering inside ovens, and crawling under conveyor lines. Finally they discovered a simple defect in a roof vent that was allowing dirty air to enter and corrupt the paint process. Fixing the root cause of black specs in the paint meant fixing the roof vent at a cost of a hundred dollars, not millions. Of course, this is just one small example from one small part of a supply chain; but if you amplify this complexity many thousands of times, you can see how difficult it can be to make sure that a supply chain excellence strategy fixes problems rather than creates new ones. 

In spite of huge complexity, executives must challenge themselves to ensure their strategy and execution plan addresses the root cause of problems. And in most cases, nothing beats walking the process, or “riding the truck” and seeing first hand the physical flow. The devil is indeed in the details. Any project is unlikely to be successful if it doesn’t include at least the most senior supply chain executive, if not other members of the senior team, getting up, getting away from the high-level reports and actually seeing the lines and processes operating. This means that the project management plan also needs to include regular “oversight by walking around” check points to make sure that problems obscured or hidden by quantitative reporting are ferreted out.

Supply Chain Project Plans Fail to “Draw a Line in the Sand”

A supply chain project manager from a U.S.-based global company told us that she was asked to take her team from their Chicago offices, and undertake a three month assignment, in Sweden in the middle of winter, where it was even colder and darker than in Chicago!. The project consisted of implementing a supply chain planning process and system in the Swedish factory. This project came close to derailing her career due to her failure to “draw a line in the sand.”

When they were well into the project, the Swedish plant manager called her into his office, and abruptly made a surprising and devastating demand. Unless the project team could provide “daily regeneration capability” (the capability to completely refresh the database every night), he wanted to kill the project. After much discussion and attempted persuasion, the Swedish plant manager remained adamant that this change had to be delivered.

The project manager left the plant manager’s office in a daze, and hurried to meet with her team. She asked them how much it would cost to provide the feature demanded by the plant manager. The estimate from the technical team was 4000 hours. She then asked how much slack existed in the resource plan controlling her team of 20 people, and they told her that in fact 4000 hours of slack existed, but barely. The team thought they could rebalance the resources and still get the project done on schedule and on budget.

So she decided to agree to the change, all the while having a very uneasy feeling. When the dust settled, her intuition proved right. The change actually took over 10,000 hours instead of the forecasted 4,000 hours, and caused the project to be three months over schedule and 20 percent over budget. Where did she go wrong? What could she have done differently?

As we’ve seen, supply chain excellence requires an expansive view of the supply chain from raw materials to customers. As a result, supply chain excellence projects are so complex that it’s easy to let a project grow too big and become unmanageable. Scope management is crucial in any project, but the nature of supply chain projects makes it especially important. In the case above, the project leader later realized that had she set a new expectation at the time, there might have been some initial disappointment at the Corporate office, but nothing like the grief she faced by going three months over schedule and $450,000 over budget! (And that did not include the personal cost to her team of spending three additional months away from home.).

 

There’s Trouble Ahead If a Supply Chain Professional Can’t Quantify the Benefits of the Change

As we stated in Chapter Four, “benefits that are not quantified equal worthless benefits.” Since most of the cost and inventory in a firm depend on how efficiently the supply chain functions, there are often economic profit benefits associated with improvement initiatives. Yet many supply chain professionals lack a financial orientation, and struggle to quantify benefits. Their comfort zone consists of making real physical and process changes, and leaving score-keeping to others. Many supply chain projects have been derailed because the benefits were not clearly measured, articulated and tracked.

On the other hand, we met one supply chain executive that had a real gift in this area. He had a cost/benefit model in his head, and passionately felt that any supply chain initiative must deliver benefits in three critical areas. First he said that the initiative must provide better product availability, followed by working capital (inventory) improvement, and thirdly, cost reduction, all key drivers of economic profit. All of the people in his organization learned the drill. If you propose a project to the boss, you had better be able to show him benefits in availability, working capital, and cost in that order. If you didn’t, it was back to the drawing board. The supply chain leader kept his superiors and his subordinates constantly focused on the economic profit prize, absolutely critical to delivering and sustaining complex supply chain projects.

Supply Chain Experts are in Short Supply

A project manager implementing a new inventory management system told us that he estimated that a key expert in the inventory management area would need to spend 30 percent of his time on the initiative over four months. Although he documented this requirement in the project plan, he admitted that he failed to get full buy-in from the inventory expert and his supervisor. He said, “I found myself holding the bag at a critical stage of the project. When crunch hit, they were totally consumed by priorities on their home turf, and the project simply could not proceed without this one guy.”

The few key people who have focused supply chain expertise are definitely scarce as we discussed in the Chapter Three. Supply chain projects must be planned around these critical resources. Excessively overloading these scarce resources leads to frustration, missed details, missed deadlines and often failure.

 

Supply Chain Initiatives Often Carry Significant Risk that Must be Carefully Mitigated

Since the supply chain is the life blood of the corporation, any changes to it can carry huge risk. As mentioned earlier, supply chain disruptions can result in a devastating impact on shareholder value; with one study we referenced earlier showing an average 40 percent decline in share price due to the supply chain disruptions in the study.[i] A common blind spot for many firms is the inadequate or non-existent management of the risk associated with supply chain initiatives. There are numerous examples, but it seems especially evident with global outsourcing initiatives.

For example, a dishwasher manufacturer told us that they decided to outsource the production of water seals to China. The net savings considering all known costs was nearly $0.75 per unit, and totaled a $2 million annual savings. But soon after the arrangement was made, the Chinese supplier changed to a different rubber supplier, resulting in a catastrophic problem. The seals made from this new rubber were found to leak in dry climates, causing nearly a 10 percent failure rate. When the problem was discovered, over two million dishwashers had been produced with the defective seal. When the seal failed and the unit leaked water onto the kitchen floor, it took an average cost of $125 to fix, which included some compensation for water damage to kitchen floors to maintain goodwill, and to try to salvage some of the manufacturer’s reputation. The total cost to the company once the dust settled was north of $7 million. This one event wiped out savings from the outsourcing initiative for over three years! The company thought they had taken all factors into consideration. But they failed spectacularly in considering the potential risks.

Clearly, it is extremely important that a supply chain excellence strategy identify risks and that the change management plan appropriately mitigates those risks. Amazingly we find that to be extremely rare in most of the hundreds of firms we have worked with. For example, when companies analyze outsourcing decisions, we find that they fall into three categories:

  • Category One (35 percent): Look at unit cost plus transportation only
  • Category Two (55 percent): Include inventory as part of the assessment
  • Category Three (10 percent): Add a risk assessment

 

In other words, 90 percent of the firms do not consider risk when outsourcing production. Yet, sourcing offshore carries a myriad of additional risks such as political instability, port disruptions, currency swings, demand swings, et cetera. Unforeseen events occur more frequently in the very long global supply chains, as illustrated below:

  • July 2006: 4,700 Mazda’s were trapped in a ship listing on its side off Alaska’s Aleutian Islands.[ii] As a result, inventory stood at 21 Days of Sales (DOS), versus target of 65 DOS, creating a severe availability problem. (That’s $103M in cars lost!)
  • 1992 and 2002: In two separate incidents, 113,000 Nike sneakers were lost, and are still washing up all over beaches in the Pacific Northwest.[iii]
  • 10,000 containers fall off ships annually. Although this is less than 1 percent of total container volume, the 1 percent lost can be enormously disruptive if it’s your “efficient” supply chain. [iv]
  • In 2007 there were 275 pirate attacks on commercial shipping, which increased through 2009. [v]

 

Because of the huge impact on the corporation, supply chain change management plans have to include thorough risk analysis. Plans must include supply chain risks, probability and impact assessments, and risk mitigation plans. Executing this process at the beginning of supply chain projects can avoid much pain later.


[i] Hendricks, Kevin; Singhal, Vinod, “An Empirical Analysis of the Effect of Supply Chain Disruptions on Long-Run Stock Price performance and Equity Risk of the Firm.”, Prodution Operation management, Vol 14, No. 1, Spring 2005, pp 35-52.

[ii] Syracuse.com Newstracker. Posted April 21, 2008

[iii]  National Geographic News, May 7, 2009

[iv] USA Today, August 3, 2006

[v] USA Today, August 3, 2006