Before the Software
by Gerald Najarian
Now that Supply Chain Management has entered the consciousness of manufacturing managers, we are experiencing the inevitable rush to apply a software solution to implementation of a fully integrated chain of activities from the top to the bottom of the materials flow. But supply chain management is much more than software. It is the adoption of an over arching approach to the management of the modern manufacturing (or distribution) enterprise. Much like MRP or JIT, supply chain management requires a commitment to doing business in a new and more enlightened paradigm. To be sure, software can help facilitate the management of a seamless flow of goods throughout the supply chain, but its use must be preceded by (or, at least be concurrent with) recognition of the new way of life and be connected to the markets and products and strategy of the enterprise.
MORE THAN A DEFINITION – A DIRECTION
The supply chain is a microcosm of the value chain in that the objective of its management is ultimately directed toward providing value to the customer. Consequently, supply chain management is not just materials management with a new name as some have implied. Rather it is the guiding philosophy that makes MRP and/or JIT provide value outside of their own limited spheres in optimizing manufacturing or distribution and will almost always be adopted in conjunction with one of these.
Attempts to define supply chain management typically focus on the kinks in the chain and how to iron these out and/or eliminate them. Perhaps if we view these kinks from the very far ends of the chain, we can see how re-direction becomes the definition. Here’s a typical effect that a supply chain that has not had the benefit of management has on the supplier’s supplier and the customer’s customer.
Our supplier’s supplier gets an order for raw materials to make a component that we, the manufacturer, need to make a finished product for our customer. Since the order is unanticipated they either have to maintain inventory which increases their cost or jump through the proverbial hoop to produce and ship the order which puts our supplier at risk of getting the materials needed to get us our components. Of course, we have put our supplier at such risk because our order for the components came at the last minute and had new specifications for the basic material that came as a surprise to them. We, the manufacturer, are naturally at risk because we may or may not get what we need to keep our customer and their customers from being at risk and we hadn’t planned for the order either. Most importantly, the end users and their intermediate providers are at risk of not being satisfied and so on it goes. The traditional method of ameliorating these risks was to carry “just in case” buffers, however, in this era of working capital conservation and JIT thinking, such inventory buffers are not a viable option.
When seen in this light, Supply Chain Management can be defined by it’s directional goal, that of constantly reducing risk (for avoidance of risk is a major factor in the buying decision) in the system by making the transactions in the supply chain predicable and repeatable. Taking cost out of the supply chain is a byproduct of predictability and repeatability.
CONNECTING WITH THE STRATEGY
Every company has a supply chain (or chains) and every company has a strategy. The main question for supply chain managers is, does your supply chain dovetail with your strategy? For many years the supply chain was stipulated as strategy was developed in a marketing vacuum. With recognition of the importance of the events taking place before and after the sale is made, hopefully strategists will examine their supply chains and connect them to strategy. Much of strategy is implicit in the nature of the product and it’s demand characteristics, which of course, reflect the markets in which the company does business. The first step to providing value through the supply chain is to make the connection between it and the products, demand patterns, and markets which constitute the broad strategy.
For general discussion, we can categorize products into three descriptive groups. High volume/ low margin products are those standard products which typically fall into Pareto’s twenty percent of the items representing eighty percent of the volume. Low volume/ high margin products are those catalog items at the other end of the Pareto’s Law spectrum and in fact have high margins to reflect their place in the customer’s value chain and to justify manufacturing complexity and a special supply chain. Designer products are non-standard items specially made for a customer’s unique need and which may or may not have continuing demand.
These product categories tell volumes about their place in the value chain of customers. The first of them, high volume/low margin products likely will be seen as a commodities with very elastic demand curves while the next two, low volume/high margin and designer items will exhibit greater in-elasticity. The enterprise will usually have a basic strategy to provide value for each and therefore will need an appropriate supply chain to support each of the respective value chains. Lets take a look at how a supply chain connected to the product characteristics and strategy can ensure predictability and repeatability.
High volume/low margin. The low margin associated with these types of goods calls for a supply chain, which efficiently moves them through the supply system in a continuous flow. The prototype of such a product is aspirin – steady demand, low technology, well established distribution system, commodity pricing. The need in this product’s supply chain is to minimize supply chain costs by keeping inventory in days of supply and by intense coordination of transportation logistics. The supply chain in staple products will normally be characterized by stability through long term relationships with suppliers who can dependably furnish raw materials that need no incoming inspection and can be delivered directly to production lines in precise lot sizes. The manufacturing link in the chain should manifest dedicated lines running a continuous process. Canned beer is the ideal example of a staple product with a strong supplier relationship; can plants are situated adjacent to the brewing/canning plant and cans are transported by conveyor systems from can production lines to canning lines across physically connected passageways. Forecasting the demand for products in this category will normally be a matter of adjusting shipment history to account for known anomalies in market conditions.
Low volume/high margin. These are the items, which fill out the product line. They are regular SKUs which exhibit the classically “lumpy” demand pattern. Such products can be forecast with reasonable accuracy over a long horizon but are maddenly impossible to predict in short time frames. None the less, they must be delivered in the same lead time as their high volume/low margin counterparts and customers want a reliable fill rate for them. The supply chain for low volume/high margin products ideally should emphasize flexibility and agility perhaps buffered by modest stocks of finished goods inventory. To minimize inventory further back in the chain, vendors will need to be sensitive to momentary changes in demand (VMI would work well for these suppliers) and manufacturing should be oriented to rapid changeover to produce in small lots. Finished goods inventory risk in such products is significant and can be ameliorated by “bright stocking” common items and doing final assembly and packaging to balance small finished goods buffers. A supply chain with these characteristics assures predictable and repeatable customer service within today’s tight lead times. Clearly however, the buffer inventories and the greater manufacturing capacity required for flexibility in this supply chain will portend higher costs which must be covered by the products’ implicitly higher price. It is important to differentiate these products from those in the previous category by pricing them to recognize their inherent demand in-elasticity.
Designer products. These are the well known “specials” that fall outside the standard product offerings and are attractive as profit generators or as marketing showpieces. They have a short life, demand forecasting is all but impossible and pricing has to be generous. These products will often be manufactured on the same equipment as the standard items and therefore will compete for relatively scarce resources. Flexibility is the watchword for designer items; rapid design and production capacity has to be available and suppliers have to be selected for their ability to react rapidly. This is a supply chain that is truly responsive and one in which waste appears to be inherent if rapid service is to be provided. Price in-elasticity usually accompanies these products so the market sees the “waste” as value. Quick response is predictability and repeatability for designer products.
MAKING YOUR SUPPLY CHAIN THE VALUE CHAIN – THE FIVE “ SHUNS”
Michael Dell, in a recent interview, said “…shouldn’t we be more selective and put our capital into activities where we can add value for our customers, not just into activities that need to get done? …. We focus on how we can coordinate our activities to create the most value for our customers.” Dell’s comments illustrate how similar are the concepts of supply chain and value chain. In fact, adding value through supply chain management is more than merely eliminating costs of supply. It is about enhancing velocity – speed and seamlessness from the very far ends of the chain. Velocity is accomplished by focusing on the five “shuns” of supply chain management: elimination, coordination, cooperation, integration, and communication. By examining each node in the supply chain and subjecting it to question as to these five principles, we can add value through velocity enhancement. Lets take a look at the “shuns” and how to apply them to optimize the supply chain. Of course we will first have reviewed our various supply chains to make sure that they reflect our strategies.
Elimination. There is no need to enhance activities that we ought not to be doing. Dell Computer made that decision about motherboard stuffing and outsourced the process, and the automobile industry decided that whole “systems” were more valuable when made by first tier suppliers who coordinate the supply chain of the system’s manufacture. But elimination is not simply outsourcing, IBM concluded that its distributors (and IBM) would benefit from receiving PC components instead of fully assembled computers. Elimination of activities need not be this dramatic. Simple elimination of dual forklift handling between a work center and a finished goods warehouse by combining material handling organizations contributes to velocity.
Coordination. With elimination as the obvious first step of the process, we can turn to the remaining activities of the supply chain and begin to bring them into coordination. Coordination means a JIT like synchronization of activities so that no time is lost among them. Another example from the Dell experience is the precise coordination of drop shipments from their monitor supplier, Sony. Sony ships monitors from it’s plant in tandem with processors from the Dell plant to end users so that no time, effort and cost is wasted by the additional handling if the monitors were first shipped to the Dell facility. This is supply chain coordination at its best. Again, it need not be so all encompassing; there are numerous incremental opportunities for coordination of internal and external activities.
Cooperation. The essence of cooperation is subordination of maximization for the benefit of optimization. The organization desiring to manage it’s supply chain for optimal velocity will have to examine it’s culture to determine if a cooperative spirit that seeks the greater good exists and if not, what needs to be done to inculcate such a spirit. Inter company partners will need to feel the cooperative spirit and be able to see the long term benefit of cooperation in relationships with their counterparts. Indeed, a cooperative business approach will be an important criterion in the selection of partners. The very nature of supply chain management involves the adoption of an enlightened sense of intra and inter company cooperation.
Integration. The resources of all the related parties are the objects of integration. The objective of such integration is to weave all of the activities among the entities in the chain together so that all have a vested self-interest in customer delight at the end of the chain. Such integration is accomplished by having each member of the chain create an adjunct relationship with their counterparts at the point where their operations interact. This means that formerly “separate” entities will have adjusted their rates of throughput to match the supply on the receiving touch point and to the demand on the delivery touch point and that transportation logistics facilitate integrated balance.
Communication. Communication is the mortar that holds the integrated supply chain together. Critical data moving up and down the supply chain facilitate the day to day decisions and activities that keep the chain coordinated. If customers and suppliers are seen as integral parts of us, the middle link in the chain, then we will be sharing information with them just as though they were another internal link in the supply chain. In this connection, vendors need to know inventory levels and production schedules in real time just as internal managers know them. They need to be apprised of product plans, engineering changes, effectivity dates and the like at the same time that internal people do. Customers, who want delivery at the right time and place will be furnishing the middle link manufacturer with sales forecasts and inventory levels so that we can be responsive to their needs. Willing and effective communication is what makes a world class customer on both sides of the middle link. And being a world class customer throughout is the spirit of supply chain management.
You have probably noticed by now that the five “shuns” possess a certain degree of interrelatedness. Without any one of them supply chain management doesn’t work. The key to creating value in the supply chain is to continually subject every node in the chain to the test of these five principles.
SCRUTINIZING BY SCORE KEEPING
A process as important to customer satisfaction as supply chain management has to be under constant scrutiny by the executives who champion it and the modern way to scrutinize is by viewing numeric data that represent it. The quantitative data chosen to measure supply chain effectiveness should direct attention to ever improving customer service and to increased velocity throughout the chain.
The basics of score keeping for scrutiny center on simplicity, improvement focus, and relationship to the product strategy. Relating to the product strategy may mean that two sets of the same measures could be needed for different product categories. Simplicity means that measures should be few in numbers and be easy to understand. Improvement focus means that the data should show progress toward goals and after goals have been met should direct us to continuous improvement by presentation of an on going trend line. Here are some obvious and not so obvious examples and what they tell us.
Topside supply chain metrics
Perfect fill rate. The perfect fill rate is ultimate metric on the supply chain. It tells management if we are achieving the goal of “delighted” customers.
Cash to cash cycle. The cash to cash cycle time is the ultimate indicator of velocity. It tells us how quickly we get materials from our suppliers, convert them into product, ship and collect, and pay the supplier.
Lead times. Average actual customer lead time as a percentage of quoted lead time and average supplier lead time are broad measures of velocity that tell how we are doing on each end of the chain
Inventory turns. The days supply of raw material in our plant and in our suppliers plant, work in process in our plant, and finished goods in our warehouse and the customers’ warehouses indicate the speed with which we are able to move materials through our chain.
Lot sizes. The average lot size for purchases and the average lot size in manufacturing give an indication of how well we repeatedly receive and manufacture in small lots and still meet customer needs.
Manufacturing schedule performance. Shop order due date performance is another repeatability harbinger. If manufacturing consistently hits due dates, the rest of the chain can be certain that its middle link can be depended upon without risk to the chain’s performance.
FINALLY, A SYSTEM
Not at all like the old paradigm, is it? Throughout, there is a sense of enlightened management, of interdependence and recognition of mutual self interest. Now that we have recognized that supply chains differ among product strategies, require focus on the “shuns”, and have to be measured to keep them tuned up, we can turn to the issue of what system best facilitates our chain(s). With all the good software products out in the market, one (or more) is bound to suit our needs. Having invested the time to take a hard look at the broad issues of our supply chain and understanding how it relates to the value chain, we are sure to be successful in using software to create a world class supply chain for our customers.
This article was provided by Gerald Najarian, The Remington Group, LLC
Copyright © The Remington Group, LLC
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Status: 18. Januar 2008