The New Supply Chain Agenda Blog

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

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