Friday, April 23, 2010

Supply Chain Agenda: Meeting Customer Requirements

Capgemini says 58% percent of the supply chain managers surveyed said that their main business driver for 2010 is “Meeting (changing) customer requirements”. Overall spend on supply chain initiatives is projected to go up as well. Summary of results from their survey:

  • More than half want to start or continue with operational excellence
  • Trend for centralization of supply chains continues
  • It investments are back with 3-12% increase for supply chain projects over 2009
  • Sustainability gets more traction

Read the full report at: Capgemini Consulting research: Customer back on top of the supply chain agenda in 2010

Wednesday, April 21, 2010

Sustainable Thinking in Supply Chains: A Long way to Go

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Supply chains have the biggest potential to boost sustainable business practices, because supply chain processes control a very large number of enterprise activities including manufacturing and logistics that directly contribute to environmental degradation.
However, sustainable thinking in supply chains is still on the backburner for most of the corporations. A new McKinsey survey found that supply chain management ranked eighth in corporations’ view of where sustainability matters. Only “attracting and retaining talent” trailed supply chain management in this list. It shows that most companies view sustainability more as a marketing fad than a real shift in business environment. While there is a lot of rhetoric, the action is largely missing. According to the survey, “more than 50 percent of executives consider sustainability—the management of environmental, social, and governance issues—“very” or “extremely” important in a wide range of areas,
including new-product development, reputation building, and overall corporate strategy……”. However, when it comes to action, “only around 30 percent of executives say their companies actively seek opportunities to invest in sustainability or embed it in their business practices”. Some more interesting facts from the survey:
When asked about the “Top reasons for addressing sustainability issues”, companies ranked,
  • “Maintaining or improving corporate reputation” as their top most reason to adopt sustainability,
  • “Improving operational efficiency and lowering costs” came third and “Regulatory risk” was in eighth place.
In response to “Where sustainability matters”,
  • “Managing corporate reputation, brands” was on top, with,
  • “Planning investments” and “Purchasing, supply chain management” in seventh and eighth positions respectively.
To read the source article from McKinsey, click on the link: How Companies Manage Sustainability.
Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Tuesday, April 20, 2010

Integrated Supply Chains (Part 2)

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What is an integrated supply chain? We asked this question in Part 1 of this discussion and also presented a few real world scenarios showing that this is not as simple a question to answer as it may seem. A simplistic view of an integrated supply chain would be a supply chain enabled through automated and integrated processes which support the several supply chain processes that a firm needs. But the scenarios we reviewed in Part 1 of the discussion makes that simplistic view much harder to apply in real-world situations.

So how do you build an integrated supply chain? The answer lies in three parts:

  • Know your (Enterprise) Supply Chain: Do you know what constitutes your enterprise’s supply chain? Have you defined the scope of business functions for the supply chain of your firm? An AMR survey (Supply Chain Gets a Promotion by Kevin O’Marah) found that in 2009, 15% of the survey respondents had their supply chain reporting to their head of manufacturing. If your view of the supply chain is not integrated, then chances are that the supply chain is not integrated either. The scope must clearly identify the business processes, business units, and the organization that constitutes the enterprise’s supply chain. This is not quite as simple to define. This is not a theoretical discussion, but a true refection of your firm’s view of supply chain. Most companies consider logistics as part of supply chain, what about manufacturing, demand forecasting, purchasing, sourcing? Do you have an single organization view of this scope? Do you have an organization that reflects this view? Do you have different chiefs for manufacturing and logistics reporting directly to your CFO, or do you have a CSCO? What is the executive support for supply chain? Is the executive view of the scope of supply chain aligned with the organizational view and the process view? Establishing a clear scope of supply chain processes and organizational boundaries helps in defining what should be integrated. image
  • Know Your Extended Supply Chain: Do you know your extended supply chain? All firms have partners, vendors, carriers, customers, service providers, and so on. Do you know which ones of these partners are most critical to your supply chain? Which vendors, customers, carriers, logistics providers can cause major disruptions? What is the risk of such disruption? Do you have hosted supply chain systems – how does the business continuity depend on this partner’s ability to provide service? What is the level of collaboration with the critical partners? What is shared – demand and supply projections? What about stocking & shipping capacity requirements? Labor requirements? Identifying the extended supply chain through critical partners and their activities help identify supply chain functions where lack of collaboration can affect your firm in substantial ways even though the ownership of these functions lies outside the direct control of your business. To design an integrated supply chain, these processes must be integrated with firm’s own internal processes to effectively address demand and supply variability and supply chain risks.
  • Create Control Across the Extended Supply Chain: Do you have visibility and control across your extended supply chain? Once the above two questions of functional scope have been answered – the third and last question concludes the discussion towards designing an integrated supply chain. Having visibility is required, but not sufficient. Having control means that collaborative relationships have been clearly defined and evolved through a combination of fairness, trust, and contractual obligations. It is simpler said than done, because developing such relationships takes time. But that is what is required to develop a supply chain that would be truly integrated!

In a future discussion, we will review the traditional and emerging scope of the supply chain processes. It has evolved and expended in the last decade though most of the firms continue to view this in its most constrained logistics or manufacturing centered view. The AMR survey quoted above (Supply Chain Gets a Promotion by Kevin O’Marah) found that in 2009, 15% of the survey respondents had their supply chain reporting to their head of manufacturing. In 2009, 51% of respondents said supply chain reports to the president/CEO/GM, who owns overall P&L responsibility though this percentage rose to 62% in 2010. While the integrated view is evolving, 62% is still a long ways to go! I subscribe to the extended view of supply chain functions and have discussed this in my book on supply chain management.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Thursday, April 15, 2010

Integrated Supply Chains (Part 1)

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A few weeks back, I was invited to GSU for a lecture on integrated supply chains. I did not think much of it till I started preparing for my lecture. What exactly is an integrated supply chain? Is it a supply chain that is automated? Supply chain with integrated processes? Will a supply chain qualify to be called integrated if it shared its demand with its suppliers? Can a supply chain that has deployed a single version of master data be called integrated? What about a supply chain that does not have a single source of master data, but does provide a consistent analytical environment to consolidate and report its performance metrics? Do companies that have a Chief Supply Chain Officer have integrated supply chains?

To truly understand the complexity, let us review a few more scenarios:

  • In May 2009, Wall Street Journal reported Best Buy in an article saying that, “it could have sold more electronics equipment in three months ended Feb. 28, but its suppliers deep cuts made it difficult to keep shelves stocked”. Does that show a broken supply chain for the electronics industry? The quoted article also shows how the electronics supply chains typically spread over the globe and consist of several echelons of independent vendors who must work together to make sure the shelves at Best Buy are stocked with what the consumer wants. It goes on to say, “…when economic crisis struck, tech companies up and down the line contracted as sharply as possible in hopes of being the ones to survive, and “forced to guess at demand for their products in a plummeting market, everyone hit the brakes, hard. An examination of the electronics supply chain -- from retailers all the way back to makers of factory machinery -- shows that, at almost every stage, companies were flying blind as they cut”.

Clearly that shows a broken supply chain across an industry that boasts of some of the best companies quoted regularly in Top 25 supply chains by AMR. Best Buy, Apple, Dell, IBM, HP, Nokia, Samsung, Sony – all appear in AMR’s Top 25 supply chains for 2009. So what gives? If they are the leading supply chain companies, then why the trouble with Best Buy as reported by WSJ?

  • Sears Holdings annual report for 2009 reports that, on January 31, 2009: Sears Holdings operated 39 domestic supply chain distribution centers, of which, 11 support Kmart locations, 24 support Sears stores and four support both Sears and Kmart stores. This is after five years of the companies’ merger in 2004. The story is no different for most retailers with multi-channel operations where most of the retailers have failed to consolidate supply chain assets for their online and store channels. Can they claim they have an integrated supply chain? Home Depot, Wal-mart, Macy’s all have fulfillment operations for their online retailing that do not fully leverage their store supply chains.
  • What about companies that have automated processes, but use different systems across geographies, across business functions, across lines of assortments? The world’s largest home improvement retailer recently deployed SAP for demand forecasting & replenishment for their Canadian operations, but continues to use their legacy systems for the US operations, they have separate demand forecasting systems for replenishment, price optimization, and promotions planning; and separate systems for online & store assortments –- can such an assortment of systems for a single supply chain process lead to an integrated supply chain?

These scenarios bring forth an important concept, that the question of integrated supply chain must have a well defined context. It must be asked within a well-defined scope of partners and processes, even business units. As the supply chains can theoretically extend through almost infinite tiers of suppliers and buyers, where should one put the boundary? What about the processes within the four walls? Should supply chain processes integrate with merchandising? What about finance? Should they integrate across business units? Without such a boundary constraining the supply chain, how can one determine the extent of integration? But, isn’t any such boundary arbitrary and therefore questionable?

Is your supply chain integrated? What would you say?

In part 2, let us explore the subject further and review a possible way to think about what an integrated supply chain may mean and how to build one.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Tuesday, April 13, 2010

The Answer is a Resounding Yes

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Of course, the question is: does supply chain excellence pay off?

As reported in this article in the latest issue of Supply Chain Management Review, researchers at Michigan State compared the supply chain leaders with their nearest competitors and found that the supply chain leaders reported better financials across the board. For the data from 2004 through 2007, companies with leading supply chain capabilities reported:

  • 50 percent higher net margins

  • 20 percent lower operating and SG&A (Sales, General & Administration) expenses

  • 12 percent lower average inventories (days of sales)

  • 30 percent less working capital expenses/sales

  • Twice the ROA (return on assets)

  • Twice the ROE (return on equity)

  • 44 percent higher economic value added

  • Twice the returns on stock prices

  • 2.4 times the risk-weighted stock returns, and

  • 46 percent greater market value-to-assets ratio

Not surprising, but this potentially addresses the question of proving with data what most of the supply chain practitioners knew through personal experience. In fact, all supply chain capabilities have the potential to reduce the costs either directly or by increasing the efficiencies. In each case, they affect the corporate financials positively. The relationship between the corporate financials and supply chain functions is very direct. There are two things that appear on the financial statements that effective supply chain practices directly control.

  1. The first is the inventory. It appears under the current assets in the corporate balance sheets. Supply chains control inventory and can reduce it significantly without affecting the revenues of a firm. Inventories add to the current assets, which is part of total assets of a corporation. Between two companies with the same revenue, the one with lower total assets will have higher asset turnover – the equation is that simple! My book on supply chain processes shows a graphic view of how the corporate financials are affected directly by supply chain functions. Lower inventory directly affects the inventory turnover (reported above as days of sales), and higher asset turnover positively impacts the ROA, ROE, and the working capital to sales ratio.
  2. The second is cost of sales. Cost of sales consist of direct costs such as the cost of merchandise, cost of raw materials, cost of direct labor, and so on; it also has some indirect cost components such as the cost of distribution including the freight and warehousing costs. Most of these costs are controlled through supply chain processes and good processes can directly reduce most of these costs. A detailed analysis of the Cost of Goods Sold is presented in my previous article here. Cost of sales appears in the corporate P&L statement right under the Revenues. This number drives the gross margin that a firm can report. Higher gross margins typically lead to higher net margins, lower operating and SG&A, and lower working capital to sales ratio.

However, supply chain is simply an effective tool, and most firms need to also develop teams of people who can deploy this tool successfully to produce the financial results typical of companies with excellent supply chains.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.