The New Supply Chain Agenda Blog

May 15 2010

Supply Chain Collaboration with Suppliers and Customers

Collaboration with suppliers and customers is the fourth pillar along the pathway to building a strategy to deliver supply chain excellence. Senior executives and their supply chain staffs should pay special attention to the best practices for collaboration outlined in this chapter to ensure collaboration success. Unfortunately, as one executive sadly told us when describing the failed efforts at collaboration in his firm, “When all was said and done, there was far more said than done.” His firm made some fundamental mistakes in their collaboration initiatives. But other companies have shown that success is possible. In the examples below we show how the hard work of collaboration can produce outstanding results.

What Does External Collaboration Mean?

External collaboration consists of a supplier and a customer working together to achieve mutual improvement. That’s easy to say, but very difficult to do. In this chapter, we present several examples of successful collaborations that achieved impressive results. Unfortunately, in our work with hundreds of firms, we see far more examples of adversarial relationships than collaborative partnerships. For the minority of firms that do collaborate successfully, we see three stages in their evolving relationships:

Stage One: This stage starts with recognition by both parties of the potential power of collaboration, which requires some supply chain sophistication on both sides. Senior executive support and encouragement also is a common factor in early collaborative relationships. And finally, success in getting started depends on the acknowledgement by both parties that it will involve a lot of time and effort.

 

Stage Two: The companies in this stage now have a supply chain strategy with collaboration being one of the core elements of that strategy. The partners have worked together enough to develop the trust to openly share data and strategies with their partner. And they have a mutual plan to sustain the effort as people inevitably change jobs over time.

Stage Three: The case studies later in the chapter have strong elements of Stage Three. In this stage, the parties mutually develop key performance indicators, and they jointly measure success as a common group. In the final level of maturity, they agree to equitably share the savings from their joint improvement efforts.  In our experience, companies who reach stage three drive better fill rates, lower inventories, and lower cost, and thus higher economic profit.

 

The Role of the CEO in Achieving the Breakthrough Benefits of Collaboration

Firms like Lowes, OfficeMax, Avery Dennison, Michelin, and West Marine described in the cases below see huge benefits of collaboration, both inside their firm, and with their outside partners  They often see improvement in all economic profit drivers such as improved fill rates, reduced lead times, lower inventories, and lower cost. No matter how good your supply chain strategy is or how talented your supply chain leader is, this rarely happens unless the CEO sets the right tone; and  almost always, he needs guidance from his supply chain staff to know what to emphasize to most effectively support supplier collaboration efforts. Without visible support, the CEO may be crippling the efforts that will enable the firm meet and surpass competition. Functional alignment, discussed in the last chapter, is a critical precursor to developing the ability to collaborate externally; and as we discussed, the CEO, with the advice of the supply chain leadership, can facilitate this by aligning objectives across major functional areas. The CEO must create an environment for collaboration with suppliers and customers to flourish.

Do CEO’s understand their role in this regard? One CEO of a multi-billion dollar consumer goods manufacturer said he liked to see the friction and tension between functions, and encouraged intense debate in his meetings. He further demanded a “tough-guy” approach with suppliers, encouraging aggressive demands without sharing any information or strategy insights. In our experience, this approach virtually eliminates suggestions for improvements from suppliers, leading to delivery problems, long lead times, and quality issues, all destroyers of economic profit. But a still small, but growing number of CEOs we talk with now see the advantage of cooperation with partners due in large part because they hear from their supply chain organizations about the major benefits being achieved in other firms, benefits like those described in the cases below. This chapter in effect contains a road map for how senior executives and supply chain leaders can move their organizations toward breakthrough performance by setting the foundation for external collaboration.

Does Collaboration Pay Off?

As part of the revival of the Whirlpool Corporation supply chain that we participated in and which we’ll examine in detail in Chapter 8, [i] one of the corner stones involved developing collaborative forecasts with its three biggest customers, including its largest customer, Sears. (At that time Sears represented nearly a third of Whirlpool’s revenue in North America.) Whirlpool approached Sears and proposed that a joint forecast be developed. The new process consisted of three elements:

  1. Each firm developed the best four-month forecast possible for the business.
  2. They compared forecasts at the SKU level, and limited their focus to areas where differences between the SKU forecasts for the two companies exceeded 10 percent to keep the time commitment reasonable.
  3. A weekly meeting occurred with Whirlpool and Sears’ teams together discussing the reason for the differences.

 

For example, in one situation, Sears believed that a certain washing machine model would sell 15,000 units in March. The Whirlpool forecast for the same model was only 3,000 units, a 400 percent difference! When the teams discussed the reasons for such an extreme gap they discovered that Sears was planning a promotion for March that Whirlpool did not know about yet. Interchanges like this, occurring on a weekly basis, caused an immediate breakthrough in forecast accuracy. Accuracy at the SKU level improved by nearly 50 percent within a few months!

The Sears/Whirlpool supply chain relationship blossomed over time. The headquarters of both Whirlpool and Sears were separated only by the waters of Lake Michigan, and rested on a long history with no formal contract in place. We often heard executives from both companies joking that “The relationship is like a handshake across Lake Michigan … with the trigger finger drawn.” But over time, as we participated in many monthly face to face meetings, each side grew to trust the other, and together we launched a number of mutually beneficial supply chain projects. 


[i] Slone, Reuben, “Leading a Supply Chain Turnaround”, Harvard Business Review, October, 2004.

May 06 2010

Internal Collaboration for Supply Chain Excellence

Successful internal collaboration occurs when sales, marketing, and operations find a way to align and focus on serving the customer in a way that maximizes economic profit. Each function in the firm plays a critical role in a successful supply chain.

Are All Firms Cursed by Functional Silos?

Functional silos exist in every firm. They are not necessarily bad, in that they serve as a foundation to build deep process expertise, as well as a vehicle to establish firm accountability.  The problem occurs when they become barriers to supply chain excellence.  In fact, the important point for building a supply chain excellence strategy is to understand how impermeable the functional silos can be to a smooth operating supply chain.  To illustrate, at the university, we offer a Supply Chain Audit service which involves extensive analysis of company data, followed by many interviews inside the firm as well interviews with customers and suppliers. Then, the audit compares the findings to a database of best practices consisting of hundreds of companies. The eight most recent supply chain audits in our database included:

  • A major automotive manufacturer
  • A major defense contractor
  • A leading cosmetics firm
  • An automotive parts manufacturer
  • A pet supplies maker
  • An apparel maker
  • A large tire producer
  • An industrial pump supplier

 

Company size in this sample ranged from $100 million in annual sales to over $30 billion. Although the firms audited were tremendously diverse and profitable, they all suffered from functional silo problems ranging from moderate to severe. As one frustrated executive said to us, “How can you manage horizontally when you are organized vertically?” The supply chain process is the ultimate horizontal process with links stretching from suppliers across the firm to customers. Even within the firm, the interfaces require a daunting degree of coordination from product design to marketing to procurement to manufacturing to logistics to sales, enabled by finance and IT.

The CEO is at the Eye of the Storm

Only the CEO can make sure all functions in the company are on the same page. The supply chain leader must help the  CEO and the executive team understand that if they want to move toward a world class supply chain capability, all areas of the company need to be rowing in the same direction with the same cadence. This takes an intense dedicated effort to bridge the inevitable gulf between the operations and the revenue generation sides of the company. The CEO must take on the burden of cross-functional alignment, to avoid the curse of functional silo and its crippling impact on the supply chain.

 

In a consumer products firm we audited, the CEO made a valiant attempt to overcome entrenched functional silos by eliminating all offices!  He literally set up his own work area as a desk in the middle of a large open bay. He could stand up and see his VPs scattered around the room. But still the problem persisted. As long as misaligned objectives drove his V.P.’s compensation, the location of their desks of course really didn’t matter.

At a hard goods company, the senior executive team tried to address the functional silo problem by creating a cross functional business team, called the Operations Management Team (Ops Team). The team consisted of director level members from each function. They met weekly to make the tactical supply and demand management decisions required to guide the firm throughout the year.  Each member of the team held a big stake in its successful performance. Forty percent of their individual rating on an overall evaluation depended on the performance of the Ops Team in delivering cost reduction, inventory reduction, and product availability improvement. In our work with many firms, we rarely see this much motivation to align across functions. In spite of that, the underlying disease still persisted. As one team member observed, “When the going got tough, the tough got functional.” In other words, any conflict inevitably drove the players back to their functional sanctuaries.

In our database of best practices developed though extensive analysis from audits and projects across hundreds of firms, we have identified a number of approaches that are working. In this journey, we find that leading companies start at the beginning, with the initial design of their products.

Apr 20 2010

Supply Chain Technology

 Supply chain technology stands as one of the primary pillars of a supply chain excellence strategy. However, improperly understood or implemented, it can cause severe damage rather than improvement. You must be careful in how technology is selected and applied.  

Technology Can Be the Foundation of Competitive Advantage

Many firms have found that they can make major reductions in cost by leveraging their warehouse and transportation management systems, and using bar codes, advanced picking and even RFID technologies. Other firms have dramatically reduced inventory and improved customer service by using advanced planning and scheduling systems. Still others have saved millions by performing an in-depth facility network optimization analysis. Many companies have balanced the pain versus the gain of new technology and achieved huge benefits. Properly applied, technology can be a major part of turning your supply chain into a generator of economic profit, enabling companies to cut cost and inventory as well as enhance customer service.

For example, in 2005, Coca-Cola Bottling Company Consolidated drastically upgraded their demand planning and collaboration capabilities with a new inventory management processes supported by software from JDA. Coca-Cola Bottling reduced inventory levels by 50 percent, while still improving fill rates by 15 percent, and won Sam’s Club supplier of the year in 2006. In addition, they simultaneously absorbed a staggering 300 percent increase in product offerings. This certainly drove an economic profit surge by greatly reducing assets, while supporting growth in revenue due to the enhanced product availability. 

Black and Decker implemented a demand and master planning technology and saw a major improvement in forecast accuracy.  But more importantly that translated into a huge reduction in production cycle time, from two weeks to four hours. As a result they improved order fill rates to major customers like Home Depot and Lowes, while being able to hold less inventory than their competitors. Again, this stoked the economic profit engine as fill rates supported revenue growth, while inventory was being reduced.

Pain versus Gain

A wide array of supply chain technology exists, and the benefits can be huge as illustrated above. Yet serious risks lurk near by. For example, a supply chain professional from a retailer specializing in children’s toys told of trying to implement a new fulfillment system that went far over schedule and budget.  The Christmas spike exploded before the fulfillment system was complete, resulting in an inability to process orders. People throughout the company worked 50 days straight, including Sundays to try to stay ahead, yet the firm was forced to send thousands of letters saying, “Sorry your toy order will not arrive before Christmas.”

In another alarming example, a candy maker spent over $100 million installing a new supply chain decision support system. The “go-live” for this project slipped from April to September. As the Halloween spike approached, the firm pushed the system into operation before it was ready, and subsequently missed $150 million of sales.  The stock dropped 45 percent.  In yet another situation, a shoe manufacturer installed a complex new system to run its supply chain. Again, there were major delays. The company’s CEO announced that there would be a $100 million sales shortfall due to this new software, causing the stock to fall 20 percent.

Is there a fundamental cause at the root of these problems? One theory holds that supply chain projects fail due to a lack of internal collaboration, discussed in detail in Chapter Five. In some firms the supply chain organization simply doesn’t have a broad enough span of control to drive the improvements needed, with supply chain functions fragmented throughout the organization. In a home appliance manufacturer for example, manufacturing, procurement, logistics, and planning all report to totally different functional VPs.  On the other hand, in firms like Cummins Parts and Service, the leader of the global supply chain organization has broad authority for manufacturing, procurement, logistics, and planning. Clearly this facilitates project success; although it’s only one variable in the mix.

Another hypothesis endorses the idea that failure results from an over-focus on the technology, not the underlying process changes.  Projects often fall short due to change management deficiencies, not technical or process problems. Some firms have a culture of driving so relentlessly to meet schedule and budget, that they often skip the soft, but ironically more important, change management tasks. “On time, on budget, but not used” does not equal success.

This chapter leaves the details of that technology to other sources and will instead focus on the keys to managing supply chain technology. And Chapter Seven covers the topic of “getting things done” with practical advice on how to implement supply chain projects. With the relentless advance in technology, supply chain professions have no choice but to leverage new technology to avoid competitive disadvantage. The landscape of new supply chain technology can be intimidating. As indicated in the examples above, firms face the real danger of a failed application which could severely cripple their company to say nothing of the career of supply chain and other executives. Before discussing how to avoid the pitfalls, a high level review of the supply chain technology landscape is in order.

Supply Chain Technology: What’s New?

It is useful to think of technology in the four buckets of software, e-business technologies, visibility and productivity, and process advances as outlined in Chapter Two, and summarized in the Table 4-1 below:

Technology  Category Description
Software Includes IT systems for activities such as forecasting, transportation, warehousing, inventory management, collaboration, et cetera.
e-business technologies Includes such technologies as automatic ship notices, EDI, web portals, electronic invoicing and payment tied to shipping, et cetera
Visibility and productivity Consists of technologies such as advanced bar codes, RFID, voice and light picking systems, event management, et cetera
Process advances Includes process advances applied to the entire end to end supply chain, such as Lean, Six Sigma, collaborative planning forecasting and replenishment, et cetera

Table 4-1: Summary of supply chain technology categories

 

The inclusion of process advances in the above table is not meant to lump them together with pure technology plays. In fact, we feel that processes should be addressed first, and then enabled later with software and other technology

Firms vary widely in applying such technologies. For example, in our experience, over half of all warehouses still run on paper based, manual systems; but many others have adopted the most advanced warehouse management software and product location and tracking technologies. Generally larger firms implement more sophisticated technologies, but not always.  For example, a one billion dollar automotive parts manufacturer still warehouses thousands of SKUs without even using bar codes. Yet a technology surge is waiting to explode. As indicated earlier, AMR Research forecasts a major increase in spending on supply chain management applications. 

What is the next big thing that will shape supply chain technology? We believe it will be technology that clearly drives economic profit, both short term and long term, and it will be heavily influenced by the external environment. For example, if transportation costs in the long run increase much faster than overall inflation, companies will need to apply increasingly powerful technology which can answer questions such as these:

  • What are the best locations for my warehouses?
  • How should I place inventory in the network?
  • How can I plan transportation to minimize cost, and maximize service?

 

If customers of the future require more choice and customization, it is safe to say that firms will need to handle and react to increasingly large volumes of data, and customize supply chain service and product solutions for individual markets.

As software capability continues to advance, availability of leading software solutions will become more convenient with concepts such as “software as a service” (SaaS). Optimization technology will also become more prevalent, allowing firms to maximize economic profit while simultaneously considering constraints such as customer product availability requirements.

Kevin O’Marah, Chief Strategy Officer of AMR Research says, “The most important emerging technology is the enormously powerful data processing capability available today. Very complex problems can be solved in minutes, not hours or days. Huge simulation and optimization engines can be built practically today.”[i] The assumptions of executives about what is possible can become obsolete almost overnight. Therefore, staying abreast of the rapidly changing technology environment is a must.


[i]  Kevin O’Marah, Executive, AMR Research

Apr 13 2010

Supply Chain Talent

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.

 

Unique Skills Are Needed to Manage the Supply Chain Process versus the Function

In several conversations with executives of multi-billion dollar firms in 2007-2008, we found a surprising lack of understanding of the true modern nature of the supply chain process. In some cases, a number of those interviewed defined supply chain extremely narrowly as simply the process of dealing with the firms suppliers! Unfortunately, many firms still live with just such an outmoded view.

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.[i]

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. But 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, which we describe in detail below. In our interactions, we find many firms have not yet come to grips with that realization. And, in an AMR study, 60 percent of companies still do not have an executive officer who manages even the normal set of supply chain functions.[ii]  Further, in our experience, of the 40 percent who do have such a position, the vast majority still have not tasked that executive with full authority to coordinate the end to end process.

 The CEO especially should understand that the battle for top supply chain talent must be focused on acquiring people with process expertise, not simply functional competence. The mental shift to supply chain-as-a-process leads inevitably to the shift of the role of the supply chain executive from a functional focus to process focused, and to supply chain becoming part of the executive team.

Supply Chain as Part of the Executive Team

 Today, in a growing but still small number of firms, the supply chain chiefs of high-performance companies 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 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, as well as functional responsibility for activities like procurement, logistics and production planning, and customer service. He 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.

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. “The supply chain has elevated itself to one of the major items on an enterprise risk spectrum that is discussed at even audit committees and board of director meetings,” said Mayo A. Shattuck III, Chairman, President and CEO of Constellation Energy. “The CEO really has to be a supply chain expert and can not just delegate that completely to someone else.” [iii]  And 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.


[i] IBM Global Chief Supply Chain Officer Study, March 2009: “Right now, most senior supply chain leaders are overseeing traditional functions like logistics (77 percent), demand/supply planning (72 percent), and sourcing/procurement 963 percent). But some are beginning to play a role in strategy development (38 percent).

[ii] The Fifth Annual Global Survey of Supply Chain Progress. Computer Sciences Corporation, Supply Chain Management Review, and Michigan State University. 2007.

[iii] A Study of the Challenges Facing the Next Generation of CEOs: Interviews conducted by Dr. Vicky Gordon, Senior Executive Coach, Founder and CEO, the Gordon Group. Dr. Gordon conducted the interviews March – August 2008.

Apr 06 2010

Is Your Supply Chain at Risk

Is Your Supply Chain at Risk?

 

Is your supply chain at risk?  Your IT people do disaster contingency planning, but what about your supply chain organization? In research here at the University of Tennessee, we often find the lack of any process to identify, prioritize, manage, and mitigate risks.  In our data base, consisting of hundreds of companies, we frankly find that most firms ignore risks, sometimes with dire consequences. We discuss this in greater depth in our book, the New Supply Chain Agenda, coming in May from Harvard Business Publishing.

The recent Toyota gas pedal disaster is an example of a massive failure in product design magnified by supply chain lead time. Current cost estimates total at least two billion dollars, not including future lost sales from the damage to consumer confidence.  When quality problems like this occur, supply chain lead time often determines the time required to resolve the problem. The cycle times in a vast global supply chain like that of Toyota further increase the problem.

Given the potentially devastating consequences, we wonder why firms don’t have a process to evaluate and manage supply chain risk.  The modern supply chain executive 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 fast, leaving little time to consider risk.

But, since the life blood of the corporation flows through its supply chain, any changes to it can carry huge risk. Supply chain disruptions can result in a devastating impact on shareholder value; with one study showing an average 40 percent decline in share price due to the supply chain disruptions in the study.[i]

Only Ten Percent Consider Risk When Outsourcing

Clearly, it is extremely important that a supply chain outsourcing strategy identify risks. But, we find that to be extremely rare in most of the many firms we have worked with. For example, when companies analyze global 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 very long global supply chains.

 

Supply Chain Risk is Also a Local Phenomenon

It’s not just the global environment that creates supply risk.  There’s plenty of it in almost every major initiative. For example, a supply chain professional from a retailer specializing in children’s toys told of trying to implement a new fulfillment system that went far over schedule and budget.  The Christmas spike exploded before the fulfillment system was complete, resulting in an inability to process orders. People throughout the company worked 50 days straight, including Sundays to try to stay ahead, yet the firm was forced to send thousands of letters saying, “Sorry your toy order will not arrive before Christmas.”

Conclusions

The supply chain is the lifeblood of the corporation. Sales revenue depends on the supply chain delivering product availability. Sixty to seventy percent of a firm’s cost is typically controlled by the extended supply chain. Inventory is managed by the supply chain, and is at the heart of working capital levels. The supply chain also determines levels of physical capital by managing the utilization of factories, warehouses, and space in retail stores. 

Therefore, the supply chain essentially determines the overall financial health of the firm. Because of that, any risk magnifies in importance. It is essential that firms have a disciplined process in place to identify, prioritize, and manage the wide range of risks that can impact their supply chain.

 

Do you have a supply chain risk management process?


[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,” Production and Operation Management, Vol 14, No. 1, Spring 2005, pp 35-52.

Mar 23 2010

Do You Have a Supply Chain Strategy?

During my many years in the corporate world, I led or participated in the development of a number of supply chain strategies. These exercises surveyed the competitive and technological landscape, analyzed the internal SWOT, and produced a 3-5 year project plan to develop or enhance the supply chain capabilities needed for future success.

When I made the transition to the academic environment, I had the opportunity to work with many companies while doing supply chain consulting work and supply chain assessments.  I must admit I was quite surprised when I discovered how rare supply chain strategies are in industry today.  In only about 15% of the companies could I find a documented supply chain strategy.

Because of that, we felt that we should more formally survey the landscape of supply chain strategy work across industry. To assist in that effort, we have included a survey on this web site. This survey will only take 10-15 minutes of your time, and will ask you a range of questions regarding the state of your supply chain strategy.  If you complete the survey for us, we will send you a personalized report of how your supply chain strategy compares to our complete industry sample. In addition, we will routinely report survey results in future blog postings.

J. Paul Dittmann, Ph.D.