Transforming the Supply Chainby Becky Boyd on 2010-08-27 19:49:27
With the advent of Internet and related technologies, the world has become a smaller place. Customers can now purchase products offered by suppliers around the globe. Competition is now global. For the enterprise to remain globally competitive, companies have to rethink their supply chain strategies and manage things differently. Supply chains must be transformed to meet this global competition. And since supply chains are not static - market share changes, companies enter new geographic markets, new competitors come on board, your company mergers with another or is acquired, new government regulations appear, etc. - companies must keep transforming the supply chain on a continual basis.
Transforming the supply chain is about building a strong foundation, from which to make better decisions. Managing change and operational decision-making becomes easier when you have a strong foundation and an understanding of how your supply chain will react under stress. In principal it is very similar to the food pyramid that the USDA recommends for us to use to plan our meals. Simple in theory: it seems easy, but hard to put into action and harder to sustain.
The cost of the supply chain and the value it provides are no longer a secret of a few. But, the discipline to build the supply chain foundation upon the ruins of the internal silos are still a long way from reality in most organizations. Fundamentally an organization needs to build a supply chain plan to support the business plan. This plan must allow for variability and provide flexibility to support the inevitable change that is occurring in the marketplace. Organizations with a strong well-built foundation can be responsive to the changing needs of their customers. As in the food example above, it comes down to choices; trendy miracles cures, quick fixes, or disciplined fundamental planning. This planning requires utilizing supply chain design tools that provide an overall view of the foundation.
The process of building a strong logistics foundation is a multi-step process that includes:
Step 1: Establish Project Scope
Step 2: Describe the Network
Step 3: Obtain Customer Demand Data
Step 4: Obtain Freight Costs
Step 5: Obtain Facility Data
Step 6: Prepare Scenario Generation Data
Step 7: Validate the Model
Step 8: Run Optimization Exercises
Step 9: Analyze Solver Results
Step 10: Implement the Results
The first steps for transforming your supply chain include getting a baseline of your supply chain network. A baseline of your operation is an overall view of how you operated last year, the service you provided and an overall view of the economics of manufacturing, transportation, suppliers, and warehousing. A baseline of your current operation leads to the discovery step, the first step in understanding what drives your supply chain.
Scenario review involves utilizing the understanding you gained from the discovery step and participation of a cross functional team that provides ideas for new ways of operating and serving your customers. As you evaluate scenarios and how they will impact your business an understanding of what you ultimately want your supply chain to look like emerges. At this point you are faced with the task of prioritizing your action. Implementation requires involvement from the cross functional team that helped drive the scenarios. It also involves attention to details surrounding serving your customers as your supply chain evolves.
Before organizations begin the process of understanding the fundamentals of supply chains and the value it provides or could provide to customers, companies must understand their infrastructure. Every organization has a different infrastructure, made up of different pieces:
• Distribution Centers
Understanding the infrastructure begins with knowing the interrelationship of the parts. A supply chain that is cost effective and flexible is created by studying the whole system and how the pieces interact, not be attacking a silo or single component at a time. It is this basic truth that explains why organizations do not focus on the true fundamentals of their supply chain operation – because companies are run by departments or silos. The best way to operate on a daily basis may be by dividing the work into departments, but that is not the best way to create or modify a supply chain. Most organizations are trying to operate the best they can with today’s supply chain, which explains the latest appeal of event management and alerts highlighting changes. The goal is to build a foundation that will allow the organization to be able to handle all the orders and changes that occur over the long haul in the most cost effective way.
Departments want to focus on the fundamentals of their piece of the supply chain; change the things they can control. Attacking the total system of moving parts requires changing an organizations way of thinking and reacting. It requires planning and anticipating, but most of all it demands understanding that the organization evaluate the supply chain as a whole system. Understanding the total system and how it interacts can provide answers to the trade-offs that drive the change required.
What is Baseline?
Creating a baseline of the business requires capturing how the business really ran over the past year. The information gathered and analyzed includes all costs, the service levels provided, the flow of materials, and a better understanding of the mission of your total supply chain. This is very different than a very familiar consulting concept of benchmarking. Benchmarking is an attempt to compare the business against other organizations that consultants believe have demonstrated best practices in an area of operation.
Driving costs out and improving service begins with the discovery phase. Build on the understanding of current operations and identify the real drivers of the business. For example:
• Costs, Transportation, warehousing or manufacturing,
• Service, speed or reliability
• Customers, expectations and requirements
• Inventory deployment, strategies around fast movers, and slow movers, emergency parts etc.
Once the baseline is complete, the components of the supply chain will be known, and organizations will begin to discover its characteristics and what makes it operate. This phase is generally eye-opening, leading to the ability to make better decisions during the scenario reviews. Organizations that have attempted to solve problems without completing their baseline and discovery phase are susceptible to cures worse than the original problem.
Many times basic review of current operations surprises many in the organization who did not realize the over use of expedited transportation or the poor service given to a particular type of customer. This phase becomes a key part of the credibility companies need when they start to make changes. Discovery creates credibility for the team. Reviewing the numbers and the operational practices with the cross-functional team and internal customers builds credence. During this stage, seek out data anomalies and slowly build participation for the study.
In addition, this phase helps organizations think about what characteristics the supply chain needs as a whole. For example, for a high tech manufacturer, flexibility may be the number one concern. A consumer goods company might be better served by a highly structured, process-oriented supply chain. A company may even need a combination of these two qualities. Whatever the case, the discovery phase will examine closely all supply chain issues, determine how the supply chain is and should be operating, and make decisions based on what is learned.
Evaluating scenarios is about quantifying the short and long terms plans to turn the supply chain from a cost of doing business to a competitive weapon that will drive value and provide a true differentiator in the marketplace. This quantification phase builds on the discovery phase by providing a means of comparison.
A recommended first scenario involves evaluating the blue-sky view of the business and envisioning the optimal supply chain and how it would operate. This scenario allows organizations to compare an optimal solution to the current baseline, providing a magnitude of available opportunity. A mathematical modeling tool supports the evaluation of different supply chain strategies and is more cost effective and reliable than guessing or relying on gut instincts to drive the changes. A supply chain design tool using optimization allows companies to evaluate different strategies, including:
• Postponement strategies
• Hub and Spoke distribution networks
• The impact of time on the supply chain, increasing service or cycle times
• Customizing service for different classes of customers
• Value of outsourcing – 3PL’s or co-packers
• Managing capacity
• Product introductions
After evaluating the outcomes of the scenarios, organizations put together a strategic plan and action timeline. This plan includes both short and long-term goals and prioritizes strategies according to time or cost, the amount of change necessary, and how much savings or profit will be generated. Organizations may want to implement those strategies that require the least cost and effort – or “low-hanging fruit” – first. This includes decisions such as changing sourcing policies or adding a third shift. When making decisions regarding the priority of a strategy, the ability to implement must also be considered. A strategy such as building two new distribution centers – which will require much more time, money and other resources – may be a high priority, but cannot realistically be implemented in the short-term. Achievable goals must be set and reflect the changes within the supply chain that the company is both willing and able to make. In the scenario review phase, companies will have modeled the impact of each decision and have a good understanding of what each decision impacts, which is essential for finalizing implementation plans.
We have talked about prioritizing change and the opportunities to drive savings and improve service offerings. Redesigning a network is a catalyst for fundamental changes and may impact the foundation of all the participants in the supply chain. Changes to the supply chain can range from simple customer realignment processes to developing new service standards, to changing the mission of a facility to a major outsourcing effort.
But change to the foundation impacts much more than the suppliers - it impacts customers. Include them in plans and efforts. Encourage their participation for understanding costs associated with a required service level - is that level really required and at what cost? Understanding the cost of service and the profitability of customers helps support the business plans of the organization.
The alignment of the changes with the business goals is the first step in building the implementation action plan. Many times the transportation group is required to rethink transportation procurement decisions and process in response to new facilities and flows, while the real estate group is trying to find the right space, and while the CFO is evaluating the impact on the balance sheet of taking assets off the books. This process is hard, but the benefits are huge - from surviving to creating profitable growth. Leading organizations today are competing supply chain to supply chain. Their efficiency and speed are freeing up money for investment in the constant efforts to be more efficient, flexible and faster than the competition.
By Dr. Jeffery Karrenbauer, PhD
INSIGHT, Inc. (www.insightoutsmart.com)