Supply Chain Leader: Reaping the Rewards of Innovation (issue 4)
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Supply Chain Leader: Reaping the Rewards of Innovation (issue 4) Supply Chain Leader: Reaping the Rewards of Innovation (issue 4) Document Transcript

  • October 2007 Ideas & Innovations from i2 Technologies • Cycle-Time Optimization • Demand Sensing • Risk Management • Lean Manufacturing Plus Interview with GM’s Adriana Karaboutis James Champy on Change-Initiative Pitfalls Burt’s Bees on Sustainable Supply Chains Managing in High-Growth Environments The Supply Chain Results Company TM
  • October 2007 Vol. 2, No. 2 i2 Senior Director, Contributing Writers Editorial Advisory Board Chuck Kramer – Marketing Lauren Bossers Sanjiv Sidhu – Senior Vice President, Retail Beth Elkin Founder and Chairman and Consumer Industries Sector Michael Cohen of the Board Editor Aditya Srivastava – Cynthia Fusco Senior Vice President and Victoria Cooper Pallab Chatterjee – Elizabeth Greer Interim Chief Executive Officer Chief Technology Officer Art Director Jon Kemp Hiten Varia – Kelly Thomas – Peter Klabunde Deborah Navas Executive Vice President, Senior Vice President, Circulation Manager Global Customer Operations Manufacturing Sector Sangeeta Bajaj Tom Smithyman and Chief Customer Officer Razat Gaurav – John Cummings – Vice President, Senior Vice President and Global Logistics Chief Marketing Officer © Copyright 2007, i2 Technologies, Inc. This magazine is available online at Reproduction of this magazine in whole or in part in any medium is prohibited without written consent of the editor. Contact:
  • In This Issue Cover story Short Product Life Cycles Demand Innovation Throughout the Business by Pallab Chatterjee Page 4 To compete today, consumer goods manufacturers must focus not only on innovations in product development but also on meaningful changes in four key areas of the business—technology, process, partnerships and market strategy. Features Page 17 There’s Power in POS Data—Not Just for Retailers, but for Suppliers Too by Mohan Balachandran and Jim Morganstern Retailers’ new emphasis on inventory at the shelf level adds a new level of customer service. Essentially, it’s vendor-managed inventory—though not at the distribution center. Page 24 Page 42 Managing Supply Chains in The “Lean” Challenge in High-Growth Environments Demand-Driven Value Chains by Gaurang Pandya and by Aamer Rehman and Venky Nayar Kelly Thomas Five key areas must be specifically In the extended enterprise, the addressed for high-growth markets: material-control techniques using organization, supply chain design, the traditional manual/visual planning, demand shaping and methods are no longer sufficient to managing transitions. synchronize material flow. Case studies Page 22 Cooper Tire Rolls Out New Systems for Better Demand Fulfillment, by Lauren Bossers Page 30 Customer-Centric Approach Drives Global Growth for Tata Steel, by Elizabeth Greer Columns Page 10 Cycle-Time Optimization: From Concept to Cash Register Faster—and More Profitably, by Gurdip Singh and Chuck Kramer Page 20 Order Fulfillment: Using Order Management to Get Closer to Your Customers, by Rajat Bhargav Page 39 Risk Management: New Technologies Help Identify and Mitigate Risks, by Darren Ward and Anand Iyer Departments Page 3 Perspective: Innovation Through People, Process and Technology, by Sanjiv Sidhu Page 12 Interview: Inside Supply Chain Globalization at GM. An interview with Adriana Karaboutis, by Victoria Cooper Page 32 Opinion: What are the top priorities in supply chain management for your business? Interviews with Burt’s Bees, AMR Research, ADTRAN and i2, by Michael Cohen Page 36 Focus: Protecting Revenue Through Supply Chain Risk Management, by Ravi Vancheeswaran of ON Semiconductor Page 45 Viewpoint: Changing the Way You Work and Think About Your Business. An interview with James Champy, by Victoria Cooper Page 48 Inside i2: Winners of the 2007 Global Ken Sharma Award for Excellence, by Tom Smithyman Supply Chain Leader / October 2007 1
  • Perspective by Sanjiv Sidhu Innovation Through People, Process and Technology Companies have been grappling for the past two What should you do about the disconnect? Should you decades with what will drive the evolution of supply chain produce more to meet the demand or, through a combi- management. At General Motors (see Interview, page 12), nation of promotion and production, achieve a demand/ Adriana Karaboutis suggests that it’s people (for domain supply balance of 90-90? Which approach will be more expertise), and business reengineering expert James Champy profitable for your business? maintains that it’s process (see Viewpoint, page 45). Problems like this arise every day in supply chain You would think that we at i2 would cite technology. management, and innovative processes and technologies But we don’t. When I cofounded i2 with Ken Sharma can support the iterative process needed to solve them. almost 20 years ago, we were focused on process innovation. We used a unique combination of process and technology In fact, we embedded many processes in our software. But innovation to create an agile demand/supply management software alone cannot drive change. The companies that process for Panasonic, for example. As Mike Aguilar, receive the full range of benefits from their software Panasonic’s senior vice president of supply chain strategic implementations also implement business process changes. initiatives, explained, “When Panasonic took on the project What is our approach to supply chain innovation of shifting our emphasis from supply to demand and today? I like to think of it as the analysis of extremes. We shifting our forecasting to a point-of-sale system, we had encourage i2 employees to envision our customers at a two choices. We could go through the traditional process theoretical level of best performance, or what we would of buying software and installing it inside our company… call extreme performance. or we could have i2, which has extensive software develop- Let’s take inventory as an example. We might ask, ment and consulting services, perform the data capture and “How can a customer reduce its inventory by half?” analysis for us. We decided to ‘rent’ both the software and i2’s Instead of contemplating moving from $100 million in expertise in forecasting analysis. We were able to get this inventory to $50 million, we suggest finding ways to project going in just a few months rather than a few years.” achieve near-zero inventory—which would be considered (Supply Chain Leader Interview, Spring 2006, pages 6–7.) extreme performance. Thinking about that near-zero Through this approach, Panasonic achieved increased state helps us to understand with greater clarity the first revenue and inventory performance in a short time. While principles and process changes required to support our we know that profound change is not a short-term propo- goal—in this case, inventory reduction. sition, we also appreciate that early successes are important When thinking about the processes required to effect in overcoming the resistance to change inside companies. such a step-level change in performance, we ask our people i2 Operations Services is helping more and more companies to think about what technologies might not only support like Panasonic move from a less desirable to a more desir- new processes but also be the catalyst for them. At i2, we able end-state of best practices and process excellence in believe that technology should focus on supporting the timeframe demanded by increasing globalization and advanced processes—those that make a company more customization. agile. When this is the case, process innovation is symbiotic Besides driving greater and faster process and technology with what technology is capable of doing. The result is innovation, the approach we take with i2 Operations Services greater agility, or “managing in the face of variability.” In creates a greater synergy among people, process and tech- other words, today’s advanced processes help companies nology. It’s my belief that it isn’t just the functional walls manage risks, exceptions, demand and other variables that need to come down inside companies. It’s also the resulting from market and competitive forces. walls separating these three interlinked engines of high performance. Enhancing iterative capability Innovations in supply chain management have come, Sanjiv Sidhu is the cofounder of i2 and in large measure, from the ability to iterate multiple the chairman of the board. scenarios at high speed, enabling businesses to make better- informed decisions faster, as problems arise. As an example, Contact: say your demand level is at 100, but your supply is at 80. Supply Chain Leader / October 2007 3
  • Short Product Life Cycles Innovation Throughout 4 Supply Chain Leader / October 2007
  • To compete today, consumer goods manufacturers must focus not only on innovations in product development but also on meaningful changes in four key areas of the business—technology, process, partnerships and market strategy. T he consumer goods marketplace has always been fast paced and unpredictable. After all, selling retail products is based on understanding the current needs of end users, then rapidly developing new offerings that address those needs before they inevitably change. Add the challenges of maintaining high product quality and generating strong Demand profits, while managing increasingly complex supply chains from end to end, and it’s easy to see why so many consumer goods manufacturers struggle to achieve lasting success. Recent trends have made the consumer goods market- place even more difficult to navigate. Product life cycles the Business have been slashed dramatically. The Internet’s increasing importance as a retail sales channel has increased com- petition, often from smaller companies whose Web sites might look very similar. In addition to leveling the playing field, the Internet has also contributed to an increase in price transparency, enabling consumers to make quick purchasing decisions based solely on price. The result? Today, prices are dropping faster than ever following an initial market launch, even on the most exciting, innovative products. Causing prices to fall even faster—and even lower— is the rapid commodization of products today. Even the most groundbreaking technologies or designs are quickly copied or advanced by competitors. The majority of trendy products become obsolete quickly, as they are replaced with “new and improved” concepts that capture By Pallab shoppers’ attention. This rapid pace has led to an even greater demand for Chatterjee new products by both retailers and consumers. Retailers are continually adding new shopping seasons, as well as demanding customized products that help differentiate their stores in a crowded marketplace. In addition, today’s consumers expect to see products that are customized to their exact preferences, or that reflect the latest fashion trend. CYCLES CONTINUED on Next Page . . . Supply Chain Leader / October 2007 5
  • Facing so many demands from the marketplace—and The new-generation supply chain the pressure to manage a global supply chain at a break- Most consumer goods supply chains were simply not neck pace—manufacturers often struggle merely to keep designed—and have not been adequately updated—to up. Many companies design and introduce products so support the success of products with short life cycles. rapidly that they don’t have a genuine understanding of “New-generation” products used to be launched every the real-world risks, payoffs and rewards associated with few years. But today new innovations seem to come every each new product, let alone of setting and achieving long- few months, especially in trend-conscious categories such as term strategic goals. They make enormous investments in electronics and apparel. Too many businesses are struggling design, tooling, manufacturing and inventory, often with- to adapt their old, “every few years” business models to the out a well-defined plan for maximizing profitability over realities of launching new products much more frequently. the entire product life cycle. Often, the life cycle ends In addition, supply chains have become increasingly before the manufacturer has a sound sense of the product’s complex, with raw materials suppliers and manufacturing ultimate contribution to the business. facilities around the world contributing to the ultimate profitability of every product. Overwhelmed by the sheer Most consumer goods supply chains were volume of supply chain information available, manufac- not designed to support the success of turers often choose to focus their attention on the upfront products with short life cycles. activities associated with product design, instead of gaining strategic insights across the end-to-end product life cycle. Why do many consumer goods businesses—even those To compete in the current marketplace, they’ll have to with qualified executives, state-of-the art facilities, global re-examine their overall approach and take a fresh look resources and successful retail partners—struggle to achieve at every business process. They’ll need to have in place a profit today? And why do so many new products—even the best possible information, as well as the best processes the truly revolutionary ones—fail? The answer is simple. and technologies, to make rapid decisions that are truly While companies are focusing on innovation in their informed—not just best guesses. product designs, too often they are trying to support these In other words, businesses will need to support their fast-moving, revolutionary products with an outdated product differentiation by innovating across the enterprise, supply chain that can’t keep up. with business and supply chain processes that match the Competing in a fast-paced, unpredictable retail market- speed and counteract the uncertainty of today’s market- place means operating with a global supply chain that is place. When innovation occurs across the business, designed to deliver the seemingly impossible combination completely re-invented business models will emerge. of speed and risk management. But powerful new tech- To create a new-generation supply chain that will nology solutions are available to help manage complex, support a company’s short- and long-term success, mean- end-to-end supply chains that stretch around the world. ingful change must take place in four key areas—technology, To fully leverage these technologies, consumer goods process, partnerships and market strategy. (See Viewpoint manufacturers will have to tailor their global supply net- on page 45 for James Champy’s insights into resistance to work, and their individual business processes, to the change inside organizations.) unique demands of today’s marketplace. Optimize Across Cost, Price Realization and Volume for Entire PLC Design Source Mfg Decision Distribution End of Life • Product Marketing • Launch Readiness • Time Zone vs. • Inbound • Disposition • Reuse Strategy • Supplier Quality Global: where • Outbound • Markdown to produce for • Engineering • Material Cost which market • Conversion Cost • Reuse Customizations • Demand Volume for what device • Service/Returns • Cannibalization • Portfolio Timing • Price Terms • Manufacturing • Product Delivery and Conditions Model Excellence • Flex Capability • Demand vs. Capacity 6 Supply Chain Leader / October 2007
  • Benchmark Life Cycle Cost Components Design Sell Liquidate Cost Cost to Market Cost Cost Cost of After- to Produce and Promote to Sell to Fulfill Sales Support • Engineering • Marketing/Demand • Sales and Operations • Inbound/Inter- • Warranty • Platform/Software Generation Cost Cost: Sales Comps, Facility Freight: • Returns (cost • Direct Materials • Promotions Planning Costs Plant to DC, of poor quality): DC to DC Cost • Operator/Channel • Process and Activity • Warehousing: Freight, • Manufacturing/ Subsidy Cost: Receive, Store, Special Processing Conversion Cost: (Price Protection) Order Management, Services, Pick, Ship Direct Labor, Inquiries, VMI • Promotional Indirect Overhead, • Freight: Packaging: Outsourcing, Inbound/Outbound, Operator-Specific Packaging and Labeling Tools and Dies, Expedite • Outbound Freight: Scrap Truck Load, LTL, Parcel, Air Technology innovation: look beyond the business and cost effectiveness. Broad supply chain innovations are To keep up with the incredibly fast pace of technology needed, as well as a new level of visibility into every corner development, consumer goods manufacturers may have of the global supply chain. Processes must change from to look beyond their own organization. Most businesses the beginning to the end of the total product life cycle, invest heavily in internal product development, but may from prototype development to end-of-life liquidation. overlook the opportunity to acquire existing technologies Pioneers in process innovation include Toyota, which developed by smaller companies. As consumers demand revolutionized automotive manufacturing with its tight increasingly inventive products, manufacturers may find control of the total supply chain—resulting in high quality, that their own internal development efforts cannot keep short lead times and outstanding cost efficiencies. Dell is pace—and that they need to consider more innovative known for its innovative strategy of selling computers ways of maintaining their technology leadership. directly to consumers, generating enormous profits by A number of companies have emerged as leaders in eliminating inventory. These kinds of groundbreaking this area, including Cisco, which has continually expanded process innovations could help consumer goods manu- its business model and global supply chain to include facturers differentiate themselves in the marketplace, as specialized technology companies that complement its own well as significantly improve their profitability. strengths and strategies. Both the open-source approach of Linux and Microsoft’s independent software vendor Partnership innovation: join forces network have demonstrated that the Internet can be To increase their chances for success, and share both leveraged to create a global community of experts who the risks and the rewards of today’s fast-paced market- continually contribute to product improvements. These place, a number of manufacturers are working with other examples should inspire consumer goods manufacturers businesses—including customers, suppliers and even to explore similar innovations in their own technology competitors—to create a new ecosystem that supports development efforts. their mutual success. An extraordinary example of this kind of partnership Process innovation: reinvent the supply chain approach is the Wi-Fi Alliance, a group of industry lead- Nearly every manufacturer has a process improvement ers—including Motorola, Sony, Nokia and Intel—that initiative in place, but the vast majority of these initiatives have joined to enforce product quality and compatibility are too narrow—focusing on a single metric that may not by creating a certification program for wireless devices. be related to larger strategic goals. And, while consumer This effort supports the success of each member’s products, goods manufacturers have invested in sophisticated tech- as well as promoting thought leadership and a commit- nology solutions, these tools cannot fulfill their potential ment to quality across the entire product category. unless the end-to-end supply chain is configured in the Another innovative partnership between General most efficient manner. To support shorter product life Motors’ OnStar and the communications industry has cycles, nearly every process within the supply chain must be reviewed to ensure that it is operating at maximum speed CYCLES CONTINUED on Next Page . . . Supply Chain Leader / October 2007 7
  • led to dramatic growth in the demand for integrated cycle can mean the ultimate failure of the product, no communications and data systems in automobiles. By matter what the business does to counter that mistake partnering to promote both the importance and the as the life cycle continues. availability of OnStar services, these companies have Making intelligent, correct decisions quickly might seem made OnStar’s telematics technology the industry standard. like an impossible challenge, and there is a long history It is now being licensed to many other automakers. of failed product launches to support this conclusion. The Achieving success in today’s challenging environment answer lies in making decisions that are based on real- may require consumer goods manufacturers to explore world data and information—from suppliers, customers, strategic partnerships like these. end users and every part of the business itself—as well as basing decisions on a logical, predetermined set of criteria. Market innovation: make the sale (See Opinion on supply chain priorities, page 32.) At each Consumer goods manufacturers must also innovate stage of the product life cycle, the business must gather through their ability to understand the end users of their the most recent insights needed to make truly informed products. By achieving far greater insight into consumers’ decisions about the product’s future. Even though the needs and desires, manufacturers can design products that marketplace will always be unpredictable, the business have a greater probability of success, minimizing the risks must respond in predictable and pre-defined ways that that are inherent in short-life-cycle products. maximize its profit margins, and minimize its financial Marketing success stories such as the Motorola RAZR risks, throughout the end-to-end product life cycle. and the Apple iPod were both based on generating and meeting unprecedented demand from the marketplace. As product life cycles are compressed, While neither of these products featured new or dramati- each individual decision assumes more cally different technologies, their appealing, slim designs— weight and carries farther-reaching as well as marketing campaigns that addressed end-user consequences. needs—resulted in breakthrough sales. Dramatic success stories like these may be the exception. For example, during the typical life cycle for a trendy But every consumer goods manufacturer can be inspired new product, there will be a time when point-of-sale data by them to achieve a better understanding of marketplace indicate a drop-off in cash-register sales—often in antici- needs, as well as to develop winning launch strategies that pation of a new, competitive product that is about to generate excitement and increase demand. launch. Instead of holding a series of panicky meetings, and rushing to make an ill-informed decision, businesses Plan-do-check-act—at warp speed must learn to react in a way that has been determined to The task of innovating in these four key areas—tech- manage margin squeeze and extend a specific product’s nology, process, partnerships and market strategy—may profitability as long as possible. Meanwhile, other business seem daunting enough, but consumer goods manufacturers actions might be triggered, such as expediting the launch face yet another imperative if they want to succeed in the of the new product that will replace the current one, so new era of short product life cycles. Most businesses also that the organization can boost the chances of its long- need to change their foundational culture and philosophy, term success. matching the speed of the marketplace with a corresponding Because every consumer goods business operates with sense of urgency and agility across the business. Simply its own set of selling channels, profit margins, transporta- put, they must take the traditional plan-do-check-act tion and distribution systems, inventory and materials cycle to warp speed. constraints and supply networks, these decision criteria With product life cycles squeezed to their limits, con- must be customized to each business. In fact, a separate sumer goods executives can no longer form committees set of decision criteria should be established for every and conduct months-long studies when a product fails to new product to address the unique challenges associated perform as expected. Instead, they must create a new way with that particular offering. Businesses face dramatically for the business to react immediately to changes in sales different challenges when they are introducing an entirely volume, new pricing pressures or other critical trends that new product genre, versus an improved technology platform can mean the success or failure of their products. or a new product model—and their decisions should be Consumer goods manufacturers need to ensure not based on an entirely different set of criteria. (See sidebar, only that they are making decisions quickly, but also that “Ensuring Continuous Product Innovation” on next page.) they are making the correct decisions to support each It may be tempting for consumer goods manufacturers, product’s success in the marketplace. As product life already overwhelmed with the demands of today’s market- cycles are compressed, each individual decision assumes place, to install a “one size fits all” decision solution. But this more weight and carries farther-reaching consequences. approach overlooks the nuances of each new product, and In fact, a wrong decision made early in the product life the distinct market environment in which it will be launched. 8 Supply Chain Leader / October 2007
  • The new supply chain model New-generation supply chain solutions can help man- While the new world of short product life cycles has ufacturers increase visibility and control across the total brought enormous success to many companies—including design-launch-sell-liquidate life cycle of their products, as innovators such as Motorola and Apple—the majority well as provide critical support for their ongoing decisions of consumer goods manufacturers today are simply not about price volumes and market attributes. But leveraging prepared for this new market reality. Most experience these solutions to their fullest potential usually requires a uneven results, at best, as they struggle to adapt their significant effort to innovate across the global supply chain. old ways of doing business to a new, demanding and By matching every part of their business model and competitive landscape. Overall, there are far more failed supply chain to the challenges and competitive impera- product launches today than enormously successful ones. tives of the marketplace, consumer goods manufacturers There will always be a certain level of inherent risk can significantly increase the success rates for individual when trying to devise and launch new-generation products products, as well as their long-term revenues and profits. that are aimed at the ever-changing needs of fickle con- sumers. But manufacturers can maximize their chances of success by rethinking their supply chain, and their overall business model, to support the new way they need to do Pallab Chatterjee is i2’s interim chief executive officer. business today. Ensuring Continuous Product Innovation As product life cycles are slashed, consumer goods competitors will be focusing substantial resources on manufacturers face two challenges: managing the profit- launching the next category-changing innovation. ability of each individual product and ensuring that there New product platforms represent an opportunity for is a continuous stream of new offerings to support long- manufacturers to introduce technology enhancements to term profitability and growth. Too often, manufacturers existing genres, refreshing consumer demand levels every become so focused on a winning new product that they 12–18 months. New platforms create an ongoing revenue are caught unaware when demand suddenly—and stream and help to support a position of technology lead- inevitably—shifts. ership. However, manufacturers must ensure that each Ongoing product launches cannot simply focus on platform launch signifies a meaningful technology upgrade new technology platforms or models that are merely that current users will perceive as valuable. Successful updates of a successful product. While these can represent a platform innovations include Microsoft Windows NT, significant revenue stream, consumer goods manufacturers the introduction of the 1080p HDTV video mode and cannot lose sight of the importance of launching new the launch of three-megapixel camera phones. product genres that will revolutionize the entire category New product models can help a successful genre continue and dramatically alter the competitive landscape. to generate revenue, as well as address previously untapped Each of these three kinds of product introductions— consumer preferences. Introducing an additional product genres, platforms and models—must be managed in color or an innovative feature every 3–6 months helps drive different ways to ensure their profitability, as well as to continued cash-register traffic and win new consumers. support the long-term success of the business. Product models are often based on fashion trends, so they New product genres, which are typically launched every must be brought to market quickly. The colorful array of two to three years, represent a breakthrough capability in laptops, cell phones and MP3 players that are continually either technology or design. Some examples of successful introduced demonstrate the marketing and sales power new product genres include Apple’s iPhone, Nintendo’s of new product models. Wii gaming console and the wireless BlackBerry devel- In many fast-moving categories, such as electronics, oped by Research in Motion. lasting retail success comes from maximizing the financial Since these kinds of product introductions have the contribution of individual product life cycles and fostering potential to redefine the category, they are typically the ongoing product development to ensure a continuous focus of significant investment. Consumer goods manu- flow of new genres, platforms and models. Manufacturers facturers are certainly justified in betting significant who focus too narrowly on one area—for example, con- resources on the success of a new product genre, but they stantly introducing new product colors and features, cannot afford to grow complacent. Even the most revolu- instead of anticipating the next category-changing genre— tionary new offering will be replaced eventually, and will miss a larger opportunity for long-term market leader- manufacturers need to start looking toward the next ship and profitability. genre almost immediately. After all, every one of their –Pallab Chatterjee Supply Chain Leader / October 2007 9
  • Cycle-Time Optimization by Gurdip Singh and Chuck Kramer Singh Kramer From Concept to Cash Register Faster—and More Profitably For retailers, achieving growth year after year used to profits, greater differentiation and increased loyalty. be fairly straightforward. The formula for success seemed However, retailers are discovering that there is enormous simple: aggressively open new stores. But, in today’s financial risk in assuming responsibility for the entire increasingly crowded and diverse marketplace, a one- design-to-shelf process. Retailers may wield significant dimensional strategy based on rapid store expansion is not power when purchasing finished goods, but that power enough to guarantee growth in either revenues or profits. disappears when they become the designer and the man- Retail space is at a premium today, and consumers enjoy ufacturer—and there is no longer anyone to accept their more shopping options than ever. They are often able to product returns. Every private-label strategy represents compare prices on the same product across multiple a tremendous financial investment, with no guarantee shopping channels, such as online and catalog, versus of success. physical store location. Channel blurring has added to Cycle-time optimization, always a strategic imperative, shoppers’ choices, while eroding their loyalty to any single plays an absolutely critical role in the private-label business retailer. For example, as mass merchants have begun to model. To accurately predict and capitalize on fashion sell groceries, and grocery stores have begun to sell gas, trends and regional preferences, retailers must drastically consumers can choose from a seemingly unlimited reduce cycle times so that they can delay decisions as number of options for these common purchases. close to the start of the selling season as possible. This means taking a close look at every aspect of their supply 37% of total sales were derived from chains, as well as rethinking their traditional relationships own-brand products in 2007, according with supply chain partners. to AMR Research. This enormous range of choices has resulted in Beyond business as usual demanding shoppers. Consumers today expect not only To design and deliver private-label products, retailers low prices, but also product assortments that are customized must extend their traditional supply chains to include to their specific preferences—creating new pressures for raw-materials suppliers and manufacturing organizations retailers to custom-tailor their store assortments to diverse around the world. In this new model—which requires local markets. retailers to assume the risks associated with raw materials, To differentiate themselves in an increasingly crowded manufacturing and inventory—retailers must view each marketplace, and offer truly unique products, many retailers supply chain process as an opportunity to cut time and costs. have turned to private-label product strategies. By design- Retailers need to realize that information sharing and ing and manufacturing products, retailers can leverage visibility—both within their own businesses and across their own customer knowledge to create one-of-a-kind the supply network—can lead to faster cycle times, lower offerings that are customized to the needs of their local costs, increased margins and higher revenues. By fostering stores, while also maximizing their profit margins. collaboration, retailers can collapse individual process Given the potential payoff, it’s not surprising that in- times, drive out unnecessary costs and turn the concept- house brands are growing in both popularity and influence. to-market cycle into a series of parallel, not sequential, In fact, a recent study by AMR Research states, “Survey steps that move products continuously and quickly toward responses show consistent growth in private-label pene- the cash register. tration from 2006 to 2008. 37% of total sales were derived Closer inter- and intra-enterprise collaboration also from own-brand products in 2007 and [this category] is enables retailers to maximize their forward visibility, expected to grow by 11%.” (AMR Research Report, since any constraints can be more easily identified and April 2007, “The State of Fast-Moving Consumer Goods addressed. Retailers can also track any changes in demand Retailers: the 2007 Technology and Process Review,” by forecasts or materials reservations, increasing their agility Mike Griswold and Fenella Sirkisoon.) and responsiveness. And, by sharing the same cycle-time Private-label products offer the potential for higher metrics across the global supply chain, retailers can ensure 10 Supply Chain Leader / October 2007
  • ongoing improvements in overall time and cost performance. of suppliers, team members can also use this preliminary information to position multiple products and raw materials Optimizing cycle times: five key areas across vendors, ensuring high capacity utilization and a Competing in the private-label marketplace requires constant flow of product through the supply chain. retailers to embrace collaboration and visibility in every part of the business. Through i2’s work with both retailers 4. Dynamic inventory utilization. Similarly, buyers and manufacturers, we have identified five key areas in can work with multiple raw-materials suppliers to allocate which enhanced visibility and collaboration can eliminate materials in the most timely and profitable manner. The months in private-label cycle time. private-label buying team can consider such factors as material costs and capacity levels to make more strategic 1. Integrated design and demand planning. decisions about acquiring raw materials, and to ensure Typically, a private-label sourcing team learns of new that materials are shipped just in time to keep the overall product designs and associated raw-materials needs about supply chain running efficiently and profitably. six months before the beginning of a selling season. But i2 has discovered that 8–10 weeks can be taken out of 5. Flexible distribution. A flexible approach to the the product development cycle by sharing information distribution process can save significant time and costs by about designs at a much earlier stage. Buyers can actively allowing retailers to analyze data on prices, profit margins collaborate with designers, as well as with a core group of and capacity constraints at various supplier facilities—and suppliers, to choose the most cost-effective materials and make more fluid decisions about how to move products manufacturing processes. Instead of being presented with through the supply chain. At most companies, such decisions final designs, and then scrambling to line up materials are made on a product-by-product basis by individual and manufacturing facilities, buyers become part of a fluid sourcing managers, but i2 helps retailers gain visibility design process that considers materials and manufacturing across all their private-label offerings. This ensures that costs up front. the right assortments will hit the right stores at the right In addition, the forecasting team has a much greater time, and in the most cost-effective manner. opportunity to study market trends and create accurate demand projections when specific product-design infor- Sharing information across the network mation is shared earlier. By sharing forecast information While many retailers may be initially reluctant to as early as possible, retailers can minimize risk and maxi- share so much of their strategic information with their mize responsiveness across the supply network. global supply network, it is the only way to achieve the dramatic time and cost improvements that today’s new 2. Strategic sourcing. Early notification also allows retail environments demand. buyers to consolidate orders for raw materials across It’s also the only way to manage the financial risk and numerous products, pre-position materials that may be demand uncertainty that come with private-label strategies. difficult to find and create flexible supplier contracts that By fostering greater collaboration with worldwide partners, include options to purchase additional materials—or retailers can delay critical decisions until closer to the withdraw from contracts—as demand projections shift. start of the selling season. When retailers can make more While actual purchase orders are not formalized until intelligent and timely decisions about their private-label closer to the selling season, buyers can gain an earlier offerings, they maximize their chances of selling products understanding of supplier costs and capacity constraints. at full price—and minimize the real financial risks associ- Products are manufactured and brought to market faster, ated with excess inventory and markdowns. The tangible and profitability is enhanced through strategic supplier results are lower inventory levels, higher rates of in-stocks negotiations that make the most of purchasing investments. and faster inventory turns—leading to significantly enhanced profitability. 3. Integrated manufacturing planning. Private-label product teams can cut significant cycle time by using Gurdip Singh is vice president of services for i2’s Retail early design specifications to choose the most cost-effective and Consumer Industries sector, and Chuck Kramer is manufacturer, as well as to plan exactly how products will the senior vice president for that sector. Adam Hatch also be made and shipped. For example, the sourcing team can contributed to this article. weigh the positive financial implications of manufacturing in large quantities against the costs associated with carrying For more information, contact inventory. If the sourcing team partners with a core group Supply Chain Leader / October 2007 11
  • Interview by Victoria Cooper Inside Supply Chain Scaling to different markets around the world calls for innovation and flexibility in the systems that support the business processes. Here’s what GM is doing to meet the challenge. Adriana Karaboutis is the process information officer How did you get into the field of supply chain for Global Purchasing and Supply Chain (GPSC) at management? General Motors. She has been with the company for three years and reports to both the group vice president and My career has been in and out of IT—I received my chief information officer, Ralph Szygenda, and the group degree in computer science and electrical control systems vice president of GPSC, Bo Andersson. from Wayne State University—but I’ve always been fasci- Karaboutis is responsible for GM’s IT innovation and nated by the complexity of supply chain issues. As supply modernization for purchasing, order fulfillment, supply chains become longer due to globalization, the problems operations and logistics worldwide. The systems she is get even more complex. responsible for support the more than $100 billion that I’ve worked in IT as well, in the supply chain business GM spends for direct and indirect materials as well as for organization. At various automakers, I ran production inbound and outbound logistics. scheduling as well as worked on the IT side. My business In this interview, conducted by Supply Chain Leader process knowledge has definitely helped me in this role at editor Victoria Cooper in Detroit in early August, Karaboutis GM, lending to more credibility on the operations side of describes the impact of globalization and digitization on the business. The supply chain organization here centers GM’s IT strategy for global purchasing and supply chain. around processes, and the IT people work in lockstep with Photos: Scott Stewart 12 Supply Chain Leader / October 2007
  • Globalization at GM the process leaders. I believe GM has a history of integrating cost, very quickly. Bo makes purchasing decisions 24/7 technology and business processes very effectively. through buying organizations that are strategically placed around the globe. These organizations buy for all vehicle Is on-time delivery still one of GM’s primary areas platforms around the world. of concern? If we don’t provide 24/7 systems availability for these buyers with near real-time information, we will fail the Today more than ever—with the globalization of the organization. Equally, we need to have supply chain systems company—delivering parts and vehicles on time is critical. in place to support the release and movement of parts We source, build and sell across the globe, and the accuracy from suppliers to plants and of vehicles from plants to and timely delivery within the supply chain of finished dealers—seamlessly. product is critical for our suppliers, plants and dealers. Order-to-delivery (OTD) time is something we watch GM has a history of integrating very closely to meet each market’s specific demands. For technology and processes very example, in California people typically want a car “right effectively. now.” The market pattern is to buy off the lot. People want to see the car, feel the car and drive the car quickly. GM has no boundaries—geographical, structural or Outside the United States and in other parts of the country, organizational. And we want to use our entire supplier the buying pattern may be different: ordering a vehicle and manufacturing base to address global demand. So, might be expected to take 25–30 days. In Germany, for our systems need to follow the same paradigm: global, example, you see a significant amount of build-to-order seamless, cost-effective and scalable. requests. So, while delivering on time is still very important to us throughout the supply chain, build-to-order, or OTD What are your major IT initiatives right now? times, are designed to meet specific market demands by region or country. Our IT initiatives align strategically with GM’s busi- If you think about globalization and what we’re trying ness goals. In GPSC, we’re currently working to standard- to support in the supply chain and our global systems, ize on global systems that are in our “bill of IT,” which we’re looking at a “produce anywhere, source anywhere, is similar to a “bill of material” for vehicles. By reducing build anywhere, sell anywhere, service anywhere” kind of regional-specific systems, we ensure that we will have paradigm. It’s not all about regional build and sell anymore. commonality around the world, that we can release Now the globe is the footprint for all of our processes. upgrades to our systems and that all regions will benefit From a systems perspective, this presents a new set of immediately from these upgrades. This allows us to be in challenges around flexibility, speed and global availability a much stronger position to react to business process of our systems. changes and requirements. Simultaneously, we’re focusing on bringing all of our What is the biggest challenge of globalization for logistics systems in-house––these systems were historically GM, in your view? part of a joint venture––as well as creating new functionality around best total-landed-cost analysis, steel purchasing, GM is handling globalization extremely well. We are resale systems and overall modernization of our legacy currently looking at our emerging-market strategies and systems. working from an IT perspective to ensure that we have cost-effective, scalable global solutions that will support What will be your next areas of focus? the business in these markets. Bo Andersson, our Group VP of Global Purchasing and Supply Chain, is looking to We are going to continue working on our legacy mod- source parts at “best-shore locations, ” so we need to make ernization with an eye toward creating the fastest, lowest certain that we provide systems capability so he can make the best-informed decisions, based on best total landed INTERVIEW CONTINUED on Next Page . . . Supply Chain Leader / October 2007 13
  • Interview (Continued) cost systems for our emerging markets that align with our As part of our strategy, we are commonizing on a stan- bill of IT. Also, visibility tools are becoming more and more dard suite of supply chain software from i2 as the basis for critical with our expanding supply chain, and we need to most of this new functionality. Our objective is to leverage streamline the number of order management systems. a common backbone and move away from custom code where it makes sense to do so. What did you inherit when you came into your role? We have very solid global systems in the core purchas- ing and supply chain functions. We’re looking to improve I inherited some very robust, solid systems that were these systems while delivering the new functionality that I designed extremely well to serve our current environment. mentioned earlier. Unfortunately, I inherited a lot more of them than we ultimately want! That’s why we’re looking to retire regional applications that have duplicate functionality around the globe as we modernize our legacy environments. We have an excellent materials management system and a world-class purchasing system. These are the cornerstones of our GPSC suite. We are continuing to improve these from an architectural perspective and working to make them “lighter” and less monolithic in some areas. I also inherited multiple order management systems, and this is an area where some strong convergence needs to happen globally. We have a very strong agenda in this space. It involves com- ponentizing the order management systems into services and taking advantage of service-oriented architecture. GM has no boundaries –– geographical, structural or organizational. What has happened with electronic data interchange (EDI)? Is it still useful? We’re very strong in EDI. Covisint is our strategic partner for EDI, and it supports GM globally. What about the 1990s purchasing portals GM got involved in? Our purchasing portal is our own in-house portal that serves us well. GM SupplyPower is a solid portal that serves as a gateway for suppliers to access GM’s Web- based systems. It’s a common system for GM to meet suppliers’ needs across all process areas. We will continue to use it into the foreseeable future. Andi Karaboutis is sitting in GM’s 2007 Pontiac Solstice. What are some examples of the new functionality and capability GM wanted? Could you elaborate on your use of one platform? In addition to bringing our logistics systems back into GM with our systems integrators, we are working on new While we’re using the i2 Agile Business Process functionality in the areas of supplier capacity planning Platform for functionality within i2 applications, we’re and control, best total-landed-cost analysis tools, vehicle also using other methods for our legacy system modern- visibility tools, and new metrics and reporting capabilities. izations. Essentially, we are determining, system by system, Also, we’re working on a new steel purchasing application. the best approach for moving into the future. 14 Supply Chain Leader / October 2007
  • The i2 system is a decision-based tool set. You can go If you look at GM as a business, we have one of the into particular solutions and pick the modules that work most complex supply chains of any company in the world. for you. So, my first point of call is i2 for several purchasing We have $86 billion worth of direct materials purchased and supply chain applications. I have found the i2 suite to globally, and 2,000 inbound trucks a day and 2,800 out- be the most robust at this point. But, if there’s another bound. We have more than 175 manufacturing facilities in product that is best for us in a particular area, we certainly 33 countries. The supply chain is daunting. I believe our will go with it. We have a good commercial agreement systems rank among the best in the industry for managing with i2 that allows us the flexibility to engage quickly on this complexity and providing seamless capability with new projects. It has taken all the noise of negotiations out zero disruption to the daily manufacturing process. Our challenge is that we still have too many systems in regional applications. I mentioned the bill of IT earlier. Each process area has a bill of IT, and the bill dictates what systems are designated for every element of the processes. The goal is for these systems to be standardized and deployed globally. In GPSC I have a little more than 300 systems; however, my bill of IT dictates that I should have much less than that number, after I’ve completed global rollout and alignment. Ralph Szygenda, our CIO, runs IT so that each process area has a bill of IT, like a bill of materials. What are the biggest challenges today compared to those of a few years ago? The extended supply chain and globalization of our business dictate that we must have flexible, scalable, low- cost, high-performing systems. Real-time information at people’s fingertips with increased collaboration capability is a must. In order to get there from here, we have to modernize our legacy systems, develop new functionality and work with the business to drive business process alignment globally. I don’t believe we’ve ever had this level of demand from our systems capability at any time in the past. We have a lot of opportunity ahead of us. From an IT perspective, we’re relying on standardized work and our basic focus on bill of IT as the cornerstones for what we do going forward. Each year we set objectives for improvement against this bill and then execute. The IT organization operates as a global matrix organization at GM. We operate an outsourced model and look to our systems integrators to deliver projects with us. What has been critical for us in GPSC is the purchasing and supply chain expertise that our people have. We’ve of the way. As Bo Andersson always advises, “Focus on found that unless you have domain expertise, you’re not getting systems delivered quickly, efficiently and at the going to be successful in commonizing processes or in best cost. Avoid getting caught in redundant planning, establishing supporting systems that hold up those processes. talking, reviewing and contracting cycles that do not add value to the business.” How do you rate GM in its systems sophistication? INTERVIEW CONTINUED on Next Page . . . Supply Chain Leader / October 2007 15
  • Interview (Continued) What are the core processes you are focusing on now within the supply chain organization? Our key focus is on supplier footprint optimization, or what we call SFO. This refers to sourcing to the best suppliers globally based on performance, quality, piece price and capability to meet GM’s needs. Bo Andersson is very focused on that. We’re trying to provide the best tools to enable quicker decisions with more supporting data. The best total-landed-cost tool, the supplier capacity control tool, the vehicle and part visibility tool, as well as the others I mentioned above are all new capabilities we’re developing to support globalization within the business. Real-time information at people’s fingertips with increased collaboration is a must. What do you think of as innovation in supply chain management? Clearly, the next level of real-time collaboration and seamless support of the global environment is what we need to focus on within the supply chain in support of our emerging-market strategies. Ralph Szygenda has always pushed the information systems and services organization to execute today’s needs while stretching us to innovate, transform and re-engineer our systems landscape for 5–7 years out. 16 Supply Chain Leader / October 2007
  • There’s Power in POS Data–– Not Just for Retailers, but for Suppliers Too By Mohan Balachandran and Jim Morganstern T he old techniques for meeting customer and market demand—forecasting from historical data and holding Improving customer experience at the shelf “Moving consumer product is becoming more like what inventory—are no longer effective for consumer goods happens in the fashion industry,” explains Lora Cecere, manufacturers dealing with increasingly high customer- research director for AMR Research. “The newest reality service expectations. Traditional forecasting processes not for retailer marketing centers on improving consumers’ only tie up capital but are riddled with errors when experience at the heart of the store, where the critical applied to short-term demand and supply issues like shelf encounter with product takes place—at the shelf.” The replenishment. declining consumer impact of traditional marketing media And the increasing retailer/supplier need for timely such as television, newspapers and magazines has refo- visibility into store-level demand drives the development cused retailer attention to the store shelf and rack level, of new technologies—systems that employ point-of-sale wooing customers by enhancing their in-store experience.” (POS) data and intelligent, exception-based scenarios for In the interest of keeping shelves perpetually stocked, tuning retail supply networks to market demand. “retailers want to both sense and shape demand in real Visibility is the issue du jour in this era of rapidly time,” Cecere says. “Although nearly all consumer products moving products, and the ability to understand shelf-level manufacturers have used POS data for monthly category events as they take place is critical to rapid response. management, the new shelf-centric reality requires seeing Historically, POS demand information has not been visible more granular data on a daily basis. to consumer products manufacturers in real time. The data “For instance, account teams need to be able to look at aspects of category management were typically contracted the entire Wal-Mart map daily, see the out-of-stocks as to third-party market-research firms like ACNielsen and well as anticipate them and immediately get down to work IRI. These firms submitted reports including data on brand with their merchandisers on resolving the issues. For retailers performance and issues such as out-of-stocks—usually determined to prevent out-of-stocks and to conduct pro- two to four weeks after the fact, or longer, depending on motions that intimately connect to demand fluctuations, the amount of replenishment inventory on hand. lag times are no longer acceptable,” Cecere explains. “The POS data have played a part in category management ability to use POS data in real time is absolutely key to since the 1980s, when Wal-Mart first put its Retail Link® effective response.” supplier network in place. “Generally, POS data were The execution of effective response, however, increas- somewhat dirty at first, but are a lot better now because ingly devolves to the consumer products manufacturer. retailers are using the data for their own replenishment,” Wal-Mart, for instance, has tasked its suppliers to work says Larry Lapide, director of the recently launched toward higher and higher shelf-rate levels while reducing Demand Management Solutions Group at the MIT excess inventory in the supply chain. Center for Transportation and Logistics. “But even cleaned up, the data are still not very usable as-is for con- sumer products manufacturers who need to harmonize POS DATA CONTINUED on Next Page . . . that data with their own language and systems.” Supply Chain Leader / October 2007 17
  • The downstream challenge why at the store shelf. It turned out there was an issue The benefits of demand-driven, POS-based business with SKU sizes that weren’t appropriate for Asian women, intelligence do not stop at the shelf. Analysis of down- and consequently the larger-size products only sold by stream demand data also yields long-term demand-sensing markdowns. This is exactly the sort of disconnect that and demand-shaping strategies. These strategies enable would be solved by POS data.” suppliers to use consumer demand signals to quickly take Even with a 98 percent fill rate, the fine print can reveal action as new opportunities arise, improving category costly fluctuations. Wal-Mart shelf fill rates are measured management and increasing brand equity as well as profits. each Friday, revealing a weekly average across all store Leading consumer brands continue to be plagued with locations. Consequently, demand variability by day or by issues like stock-outs in one location while suffering store is invisible. Most consumers shop on weekends, and excess inventory in another. While consumer products if stock levels fall below 98.5 percent on Saturdays or manufacturers have employed a variety of approaches to Sundays, proportionally more sales are lost. more proactively manage fast-moving retail channels, they An analysis i2 performed shows that even with a 98 are still falling far short. All errors—whether due to stock- percent in-stock average over the weekend, 277 stores outs, inventory build-ups or other process breakdowns— owned by one retailer would be out of stock of a particular are costly to retailers and suppliers alike. SKU on Sunday. To take effective action, companies need Compounding consumer products manufacturers’ daily analysis by SKU and by store, and also need to production and extended supply chain pressures, retailers’ evaluate how important each store is in terms of SKU new emphasis on inventory management at the shelf level sales. To obtain the data manually, they would have to adds a new level of customer service. Essentially, it is vendor- look at every SKU, at every store, every day. managed inventory (VMI)—though not at the distribution center, where the manufacturer’s retailer teams traditionally Taming the data deluge are required to manage inventory and replenishment. “The biggest stumbling block with POS data is that Instead, it’s at the store level. there’s lots of it,” notes Lapide. “As every shopper knows, Wal-Mart (among other retailers) monitors supplier product proliferation is epidemic on retail shelves. And, performance on an ongoing basis through a weekly score- as every CP manufacturer knows, this SKU proliferation card, grading suppliers on a wide range of metrics, from creates data-tracking headaches of the first order. A typical on-time delivery and in-stock levels to more recent initia- CP manufacturer might sell 500 SKUs through 4,000 Wal- tives, such as the environmental impact of the packaging Mart and Sam’s Club stores, tracking such functions as POS, used. Other big-box retailers, as well as grocery, consumer must-arrive-by dates, fill rate, etc. The aggregation of all drug, home improvement and electronics centers, all the data can amount to 90 million pieces of data per day. contribute to increased velocity and complexity. Sales-reporting tools traditionally used in operational According to Lapide, “Using POS data to support planning are built to analyze trends and changes in large VMI is another permutation of the retailer / consumer amounts of data by storing the data in a repository and products manufacturer, co-managed inventories relation- providing pre-defined reports, drill-down capabilities, and ship at Wal-Mart and elsewhere. Historically, retailers and ad hoc tools for searching and mining the data. The tools consumer products (CP) manufacturers have been peering are designed this way because the user does not know, at into a black hole regarding day-to-day shelf performance. the outset, the relevant data to analyze. During the months-long lag times, any demand fluctua- As a result, replenishment teams still find themselves tions—by day, location, context [weather anomalies, etc.]— drowning in data, spending far too much time trying to are obscured by the bleeding down and building up of in- identify replenishment issues from retroactive information ventories, making it impossible to track potential shelf trends. that isn’t operational. Analyzing demand-driven POS “Also, you tend to get a bullwhip affect in the distribu- data, on the other hand (specifically by identifying and tion channel,” Lapide continues. “Small changes at the determining the root causes of exceptions), provides a new shelf level are exaggerated as they move upstream, so you level of immediacy and accuracy formerly unavailable to have to look at your own shipments much longer to see short- and longer-term planning. through the noise.” “From a forecasting perspective, POS data give advance The pitfalls of shelf blindness are legion. “We just warning to enable response to change sooner,” says researched this problem with an apparel manufacturer of Lapide. “The data have been used on an ad hoc basis in seasonal products,” Lapide adds. “They knew what they operational planning, but that’s beginning to change. i2 shipped—by size, color, style—to a West Coast distribution has been one of the companies more involved in this area center, but they had not collected data on what sold and over the last four or five years.” 18 Supply Chain Leader / October 2007
  • The ultimate benefit The beauty of new tools for handling POS data is that manufacturers now have the means to preemptively sense i 2 S O LU T I O N S demand at the shelf level—shifting the whole fulfillment paradigm from what has happened to what is happening. The Demand-Sensing Advantage “In redefining processes to better serve shoppers at the shelf, The Platonic ideal for shelf replenishment would manufacturers must focus on demand sensing by key account,” according to Cecere, in her recent AMR Research involve a POS-linked supply network that auto- Report “Shouldn’t You Be Minding the Store?” (May 2007). matically analyzes all store SKU activity from a point- Cecere cites recent manufacturer pilots that illustrate of-purchase prompt in real time. If retailers and the sort of benefits achieved using downstream POS data consumer products manufacturers aren’t there yet, a and focused account teams. A major distributor changed new breed of technology, operating to preempt supply pre-determined routes and fixed delivery frequencies to chain and replenishment issues behind the scenes, has dynamic routing based on daily POS data. The three-month pilot resulted in an 8.2 percent increase in sales. In another brought them significantly closer. pilot, a consumer electronics company took over shelf i2 POS Demand Sensing is designed to enable replenishment for a major electronics retailer, reducing 18 consumer goods companies to reduce stock-outs, weeks of inventory by more than half and improving in- excess inventory, forecast variances and related stock positions by 4.3 percent, with a reduction in mark- problems at the store-shelf level to increase sales downs due to overstocks. and improve customer service. The solution applies Daily demand sensing is most critical to the success of new-product introductions and promotions. Cecere notes business rules to analyze retailer-provided, point-of- that 50 percent of new-product introductions fail because sale data to proactively identify and resolve revenue- of poor execution. “Out-of-stocks double or sometimes impacting business exceptions—exceptions that today even quadruple in heavily promoted categories at peak are causing an untold number of disruptions, including shopping,” she says. “The synchronization of getting order fill-rate errors, insufficient or erroneous supply product to shelves is absolutely critical.” For Lapide, a big issue is early indicators. “When you to stores, late receipts or misaligned Retail Link® first put the product out in the channel, it typically doesn’t (in the case of Wal-Mart) parameters. sell immediately at the shelf. You need real-time informa- Until recently, the large volume of daily POS data tion from the retailer to know the point at which it takes made it extremely difficult to identify and “sense” off in order to keep product in the pipeline. POS data individual SKU performance, or “see” the store-shelf become the leading real-time indicator for introductions level with any precision. Following retailer and supplier as well as promotions, allowing retailers and others in the supply chain to react to changes daily.” rules, the software first determines whether an issue Finally, well-planned and coordinated shelf-level has an internal supply chain cause, such as a missed execution based on real-time downstream demand data is must-arrive-by date or low fill rate. If no internal cause only the beginning in realizing the full potential of cus- is found, the software will then look for store-related tomer-centered merchandizing. POS data represent one demand causes, such as incorrect replenishment settings, stream of a number of possible cross-channel interactions forecast variances or on-hand adjustments. with assortment, allocation, space, pricing and promotional data that, when integrated together, can bring unprecedented Root-cause analysis is key to accurate demand granularity, timeliness and responsiveness to category- sensing and rapid exception resolution. i2 POS management decision making. Demand Sensing drills down into the relevant data surrounding exceptions by SKU, store and related Mohan Balachandran is a vice president in i2’s Retail warehouse, and provides response options and resolution and Consumer Industries sector, and Jim Morganstern guidance—whatever is necessary for the decision- is a senior director for solutions strategy in that sector. maker to understand and resolve the issue before it Freelance business writer Deborah Navas also contributed impacts the customer. to this article. Supply Chain Leader / October 2007 19
  • Order Fulfillment by Rajat Bhargav Bhargav Using Order Management to Get Closer to Your Customers To compete and win in today’s competitive market- Executives can see the symptoms every business day. place, aggressive companies have opened a number of The most serious of these symptoms is poor service quality, promising and profitable new distribution channels. In which can be measured by declining satisfaction ratings, addition to traditional brick-and-mortar stores, electronic increased customer churn and the failure to meet agreed- data interchange, catalogs and mail order sources, a growing upon service-level commitments. number of sellers now also take orders from Web-based That’s why many forward-looking organizations now customers and mobile buyers, as well as build-to-order recognize a pressing need to refocus their energies on and engineered-to-order customers. The proliferation of their customers. Executives increasingly realize the need distribution channels has allowed many companies to for better supply chain visibility, improved analytics and penetrate new market segments and to create and grow faster, more responsive customer service. lucrative new revenue streams. Yet those exciting new sales and distribution channels Fulfill expectations have also created significant challenges. The newer Web The bottom line for customers: they expect to receive and mobile channels are faster and more dynamic, and what they ordered, when it was promised. Despite that are therefore riskier and less predictable than traditional fact, most companies don’t have processes and systems in channels. While that dynamic nature can add considerable place that enable them to achieve differentiated fulfillment agility to an organization, the technologies needed to operations. According to Aberdeen Group, leading enter- establish and manage those channels are new and unfa- prises use order fulfillment to continually raise the service miliar to many firms. performance bar versus the competition. However, only 15 percent of the companies Aberdeen surveyed reported An integrated approach links every having an order fulfillment process that extends across element of order fulfillment, from the value chain. And only 21 percent of respondents capture to invoice and final settlement. described their customer service strategy as proactive and focused on continuous improvement. (Aberdeen Group: Just as many companies were exploring these innova- “Next-Generation Order Fulfillment: Paving the Road to tive new distribution opportunities, many were also expe- Success,” March 2005.) riencing successive waves of mergers and acquisitions. How does a company recognize a poorly functioning Those changes opened even more opportunities, but the order management system? Here are a few of the trouble most common approach of creating separate channel signs: processes and systems also tended to create a proliferation • Pricing or brand messages across products, services of enterprise resource planning systems and other infor- or distribution channels are inconsistent. mation technology (IT) systems that were complex, siloed • ERP and IT bandwidth constraints limit the ability and difficult to manage. Those calcified back-end structures to fulfill orders quickly and efficiently. add cost, risk and inefficiency to any distribution network. • Order fulfillment costs are growing as a percentage They prevent companies from planning and executing the of revenue. accelerated product life cycles demanded by today’s markets. • Excessive inventory-holding costs have a negative Companies in a number of industrial sectors have effect on cash flow and profitability. spent the past few years addressing the shortcomings of • Material delays affect fulfillment, service-level their legacy infrastructures, working diligently to drive agreements and customer satisfaction. greater speed and efficiency throughout their supply • Buyers, sales reps, logistics staff and call centers chains. Those efforts have yielded many positive results, cannot easily share information. from accelerated inventory turnover to reduced waste and • Making or meeting promise dates for unanticipated improved bottom-line profits. But for too many companies, customer orders is difficult. those inward-looking efforts have also led to a loss of • It is difficult or impossible to monitor and manage focus on the single most-important asset any company key suppliers. has—its customers. • Customer-service representatives must access multiple 20 Supply Chain Leader / October 2007
  • Evolving Capabilities in Order Fulfillment Record Keeping Order Fulfillment Collaborative Replenishment • Revenue accounts • Inventory visibility • Customer collaboration • Customer base • Sourcing and availability • Auto replenishment • Price lists • Shipment execution • Liability management • Service history • Exception management systems to provide information on the status of an Fortunately, the software industry has learned from order or shipment. those earlier setbacks. i2 has deep experience with three • Customers, sales and opportunities have been lost. full generations of order management and fulfillment technology across virtually every business sector. From Ask the tough questions that wealth of knowledge, we have identified the follow- When evaluating an order-management system, cus- ing key steps that determine the success or failure of an tomer service and supply chain managers should consider order management initiative: the solution’s ability to rationalize numerous complex 1. Begin with a clear, enterprise-wide understanding activities. Can it provide real-time order promising, of all strategic, technology and company-specific aspects allocation management and re-balancing? Does it perform of order fulfillment in a multi-channel environment. change management, credit modeling and order validation 2. Leverage a flexible architecture capable of preserving and brokering? Can the solution handle integrated pricing, the company’s investment in legacy infrastructure. shipping, invoicing, returns and the myriad of other 3. Adopt a phased, incremental approach that gains an variables that constitute a successful fulfillment system? early win (for example, in a selected channel or business An integrated approach links every element of order unit), and then expand the initiative to other channels, fulfillment, from capture to invoice and final settlement. units or locations in a carefully planned rollout. Modern order fulfillment is ideally suited to the needs of 4. Then, leverage the benefits. companies that sell through multiple, complex channels A streamlined order management and fulfillment system and systems. The best of this new generation of technolo- begins by introducing standardization and consolidation. gies can efficiently capture, process and fulfill orders from Those basic changes drive down costs while helping stores, telephony, electronic, Web and other sources—all companies accelerate inventory turn, optimize the use while presenting customers with a single, consistent and of assets and boost the productivity of service associates. positive buying experience. More efficient fulfillment shortens the product develop- When enacted as part of a larger collaborative effort ment and introduction cycle, reducing risk and making across the value chain (which may include collaborative companies more responsive and competitive. Product- replenishment, demand management and transportation oriented companies are also using improved order manage- bidding), a true end-to-end approach to order fulfillment ment to make their supply chains more visible, to improve can help present a single and more responsive face to partner performance and to make better business decisions. customers across various processes, locations, business Most importantly, better order management helps lines and IT infrastructures. organizations get closer to their customers. When orders are fulfilled quickly and reliably, customers notice. Recognize the hurdles Companies reap the benefits of greater customer satis- Of course, executives who are responsible for complex faction through higher rates of retention. Those crucial supply chains also understand that there are costs and customer-facing improvements translate naturally into risks associated with any significant IT initiative. In the increased sales and market share, new revenues and past, the rigid nature of legacy systems often prevented improved profits. the optimum use and re-use of legacy infrastructures. Companies have attempted to modernize and update Rajat Bhargav is a director of solutions strategy at i2. their order processing systems, only to have sometimes Jim Caudill also contributed to this article. overly ambitious efforts stall due to inadequate planning, the tremendous complexity of multi-channel fulfillment For more information, contact and simple organizational inertia. Supply Chain Leader / October 2007 21
  • CASE STUDY Cooper Tire Rolls Out New Systems For more than nine decades, the Cooper Tire and Rubber Company has provided the world’s motorists with a full line of tires and rubber products. The company has maintained a simple distribution goal: positioning the right product in the right place, at the right time, at the lowest possible cost. But achieving that goal wasn’t so simple, given that Cooper’s 25-year-old legacy replenishment mainframe system ran just once a week. Every Monday morning, inventory planners would receive a new report that reflected customer orders and available inventory. “You could see that there was a problem with gener- ating reports only on a weekly basis,” says Bob Sager, Cooper’s manager of supply chain research and design. “If we received a customer order on Monday, and the customer service representative did not come over to the replenishment area to inform our planners of the order, they were unaware of it until the next week.” In addition, Cooper faced increasing complexity in its product offering. The company was constantly adding more SKUs, and warehousing more SKUs in additional locations. As that complexity grew, many believed that to provide the same level of customer service, higher levels of inventory would be required. It was evident that new processes and tools were needed to remedy the situation. replanning functions every night. The solution is used to “In the past, if something happened plan the movement of inventory across the company’s yesterday, we weren’t able to respond entire North American distribution network. to it today. We can now. – Bob Sager ” After using this system for approximately six months, the Cooper/i2 team took a hard look at what was and Distribution and replenishment planning wasn’t working. The team began a continuous improve- With several i2 solutions already implemented, ment project aimed at fine-tuning the system, evaluating including those that addressed transportation manage- the utilization of existing tools and processes, identifying ment and advanced planning and scheduling, Cooper 15 areas of improvement and developing an action plan Tire was confident that i2 had both the solution and the for those improvements, all of which focused on improv- resources necessary to help the company achieve its goals ing fill rates and inventory turns. Cooper has realized a for distribution and replenishment planning. sizable reduction in finished-goods inventory and outside “The world that we were moving into was one that I storage costs with the system. dreamed of, but had never experienced,” says Tim Rupright, “The management at Cooper views DRP as a com- Cooper’s inventory planning administrator. “The i2 con- petitive weapon,” Sager says. “The whole idea around the sultants really had the ability to understand our business, daily rebalance of supply to demand makes us more com- to communicate what we needed to do, and to train us petitive because we can handle complexity and be more on what the system was capable of doing.” responsive to customer demand. In the past, if something Today, i2 Distribution and Replenishment Planner happened yesterday, we weren’t able to respond to it today. (DRP) serves as Cooper’s daily execution system, executing We can now.” 22 Supply Chain Leader / October 2007
  • for Better Demand Fulfillment Master data management management, finance and the other integrated supply chain Shortly after deciding to implement DRP, Cooper processes. IBM served as Cooper’s systems integrator on also realized it needed a better mechanism for maintaining this project. its legacy mainframe information, as well as the new “The IBM team came on board and really helped information that was required for the new i2 planning manage the inventory management project—not just systems. the implementation of the IMx software. All inventory “We had a choice to build our own infrastructure, or processes were looked at and either redesigned or redevel- to go with i2 Master Data Management, and we chose i2 oped,” Durliat says. “And that part of the IBM partner- MDM,” Sager says. “We use i2 MDM to store, maintain ship, plus the experience of i2’s resources on the supply and clean the data that we send out to our planning systems.” chain side, were critical to the success of the project.” In the past, making adjustments to the replenishment- Cooper Tire uses IMx to post inventory, sales and system data required users to go to many sources, and production activity every day. The system enables the changes were often manual and done by the information company not just to look at units, but also to validate the technology department. i2 MDM serves as a single source dollar value of those units. across multiple systems, where changes can be made at “That ability helps us determine whether we have good any scale by the user. It enables Cooper’s planners to control over our inventory, from a unit standpoint and a manipulate criteria to change behavior in DRP based trend standpoint, as well as from a financial perspective, on business needs. which is very important in this world of Sarbanes-Oxley,” “I have difficulty envisioning DRP functioning with- Durliat says. out MDM,” says Rupright. “We can use MDM to make adjustments to the replenishment system, and the results End-to-end visibility are visible the next day. It’s an iterative process that is Through its IMx implementation, Cooper not only has pretty amazing.” a single, real time, accurate view of actual inventory today, but also a projected inventory view—positioning the com- Distributed inventory management pany to support demand fulfillment. Increased visibility into In addition to having redundant versions of its master inventory enables Cooper to quickly determine the cause data, Cooper also maintained five versions of inventory of inventory problems and to implement processes that on its mainframe (which corresponded to the systems that can prevent the same problems from occurring again. used inventory). As a result, the company faced challenges By integrating all instances of inventory onto the IMx in achieving one accurate picture of inventory. This situa- system, Cooper has removed approximately 400 programs tion was exacerbated by the fact that inventory was also and 100 jobs from its mainframe, and it has reduced the valued in differing units of measure—by the pound or by number of inventory reports from 140 to 50. the unit. “As users, we are much more self-sufficient with inven- “The mainframe lost its transaction detail after two tory transactions through IMx,” Durliat says. “It’s easy to weeks, and this made it very difficult to go back and access the data, the detailed transactions are there and determine why an issue happened without having analysis is simplified.” detailed data,” says Craig Durliat, Cooper‘s manager of Having an integrated and flexible supply chain has operation accounting. “In addition, the system was very allowed Cooper to improve its response to demand— North American-focused, and, as we started growing, ultimately better serving the end consumer and improving we needed a more global footprint of the inventory.” the company’s bottom line. “The initial implementations To tackle these challenges, Cooper Tire implemented got us part way there, but it was the continuous-improve- i2 Distributed Inventory Management (IMx) to help get ment activities and increased planner experience that its inventory system off the 30-year-old legacy inventory produced the biggest returns and allowed us to achieve mainframe and assimilate into IMx all of its ties to order our stated goals,” Sager says. — Lauren Bossers Supply Chain Leader / October 2007 23
  • Managing Supply Chains in High-Growth Environments by Gaurang Pandya and Venky Nayar
  • Special attention must be paid in five key areas: organization, supply chain design, planning, demand shaping and managing transitions. Emerging markets in the Asia-Pacific region—including Western businesses, they are primarily focused on simple China, India and Southeast Asia—have become a key cost minimization. Even if the most sophisticated tech- driver of the global economy. Already representing some nologies were deployed within Asia-Pacific businesses of the world’s largest markets, China and India—each today, they would be unable to deliver meaningful results with populations over 1 billion—average annual economic until core supply chain philosophies are more widely growth of more than 10 percent. By 2030, China is adopted. projected to be the single largest market in the world, As a result, capitalizing on the huge potential of Asia- with India the third-largest. Pacific markets will require a significant effort on the part While companies in the United States and Europe of Western businesses. But that effort comes with an have certainly recognized the value of these Asia-Pacific opportunity for dramatic growth in both revenues and countries for cost-effective outsourcing—with China profits. The first step is gaining a clearer insight into known for manufacturing and India primarily for services— these emerging markets. only a few Western businesses have achieved any success in capturing the potential of these markets. Understanding the Asia-Pacific opportunity As the rapid growth of these countries’ economies One of the single-biggest deterrents for businesses continues, an increasing number of Western manufacturers entering the Asia-Pacific marketplace is the high cost of have begun to view the Asia-Pacific region not simply as operating a supply chain there. a supply source, but as a growing demand center. Many Some of the region’s challenges, including its over- Western businesses have engaged in mergers or acquisitions whelmed transportation and logistics infrastructure, are that have served the dual purpose of gaining a foothold in being addressed. Recognizing that an outdated and insuf- Asia-Pacific, while also managing the competitive threat ficient infrastructure represents a barrier to economic posed by Asia-Pacific manufacturers who are exploring growth, many Asia-Pacific countries are investing in the global marketplace themselves. improved air transportation, seaports, railways and high- Whatever strategy Western manufacturers employ, ways. However, manufacturers accustomed to the sleeker entering these expanding markets brings unique challenges. transportation systems—as well as lower logistics and In many ways, the Asia-Pacific region represents an distribution costs—in the United States and Europe will entirely different world—with its own business rules, experience a certain degree of culture shock, at least in government regulations, transportation and logistics the short term. challenges and a consumer population that is far more Western manufacturers will also see a significant dif- fragmented and diverse than in either the United States ference in service costs. Markets in the United States and or Europe. Europe are relatively homogeneous, keeping service costs In addition, the Asia-Pacific region has not historically down, but populous Asia-Pacific countries are extremely placed an emphasis on end-to-end supply chain manage- diverse in language, culture, income level and product ment. Concepts that have been widely embraced in more needs. To compete successfully in these countries, much mature markets—such as integration across functions, higher levels of service and personalization are required to demand-driven supply models and visibility across the deliver the customized products that address extremely end-to-end value chain—have not been broadly intro- heterogeneous market segments. duced in this region. And, while technology solutions may exist in some facilities that serve as suppliers to GROWTH CONTINUED on Next Page . . . Supply Chain Leader / October 2007 25
  • An additional challenge is identifying local supply officer, the chief operating officer or the head of the business. networks in the Asia-Pacific region and successfully This will help the supply chain—historically viewed as a integrating these companies into the end-to-end supply cost center—to be seen as a well-managed profit center, chain. Many Western manufacturers already partner with with clearly defined performance metrics and service- Asia-Pacific suppliers, but there are still language, tech- level agreements with other functions. nology and cultural obstacles to overcome, as well as a In addition to establishing the right organizational lack of the industry standards, protocols and business structure, businesses entering high-growth markets need metrics that are common in the United States and Europe. to focus on attracting, developing and retaining the There is certainly an opportunity to gain significant personnel required to manage a complex, diverse and sales revenues by competing in Asia-Pacific markets; the fast-moving supply chain. In many growing markets, key is to control costs and ensure profitable growth. It is employees drawn from the local community might have imperative that manufacturers understand and address the a better understanding of regional business practices or supply chain challenges involved, as well as balance their government regulations, as well as personal relationships domestic demand with the often enormous potential of that may be leveraged for the good of the organization. the Asia-Pacific region. But it is equally important to source talent globally to Fortunately, some pioneering businesses have already ensure that processes and knowledge can be transferred taken the bold step of entering high-growth international across all parts of the worldwide business—and that the markets, paving the way for other manufacturers. By best employees will remain with the business over the studying the successes and failures of these risk-taking long term, supporting worldwide growth. companies, manufacturers in the United States and Europe 2. Match the supply chain design to the global can maximize their own opportunities for growth and opportunity. Every manufacturer faces a difficult transition profitability as they prepare to compete in the promising when changing from a single-site business serving domestic Asia-Pacific marketplace. markets to a truly global business—with multiple manu- The Asia-Pacific region has not historically placed an emphasis on end-to-end supply chain management. Five keys for success facturing locations, a variety of transportation modes, The Asia-Pacific region offers its own unique challenges, diverse cost structures and highly differentiated markets. but it is not the first fast-growing market that has repre- Decisions about where to source materials, where to sented a target for international expansion. Based on its manufacture and where to sell products are suddenly much experience in helping manufacturers successfully adapt more complex. Careful consideration must be given to risk their supply chains to high-growth global opportunities, management strategies, and to weighing the service and i2 has defined five key steps for succeeding in a rapidly margin implications of various market results—so that expanding marketplace. supply chain strategies are “stress tested” before being put 1. Put the right organizational structure and into practice. (See risk articles on pages 36 and 39.) talent in place. The Asia-Pacific region, like many fast- It may seem logical to match the overall supply chain growing markets, has not historically placed an emphasis design to what is perceived as the largest opportunity in on broad, end-to-end supply chain management. Instead, the new market—for example, by building new factories companies have focused more narrowly on individual in India or China. However, businesses must consider transactions, and the daily operational demands of keep- the demands of the global marketplace to ensure that all ing pace with an explosively growing marketplace. For this market opportunities will be leveraged. This means first reason, manufacturers must create a local organizational gaining an understanding of the costs and drivers associated structure that emphasizes the importance of supply chain with every global supply chain activity, from sourcing management. In nearly every instance, a vice president of through distribution. Manufacturing facilities should be supply chain must be appointed, along with an associated located where they can maximize their contribution to staff. This new function should report to the chief financial profitability, whether that means being close to raw-material 26 Supply Chain Leader / October 2007
  • sources, taking advantage of low-cost labor or becoming as the Asia-Pacific region, requires manufacturers to part of the consumer communities they will serve. develop a systematic way to gather information about con- Manufacturers also need to understand the diversity sumer needs and then apply this information to their most of consumer needs in fast-growing markets, such as the important supply chain decisions. Manufacturers need to Asia-Pacific region, to make intelligent decisions about ensure that they are offering the right products, at the which promising segments to focus on, as well as which right price, at the right time, to the right consumer groups. challenging segments to avoid. There is a natural focus This is a basic tenet for any business, but it is especially on China and India in particular—each of which is quite true when a manufacturer enters a new international diverse—but manufacturers must also consider smaller, marketplace, in which little may be understood about the up-and-coming markets such as Vietnam. real-world needs and purchasing values of end users. 3. Balance global and distributed planning. Once products are launched into the market, demand One key difference between Western businesses and shaping—which is commonly associated with the retail Asia-Pacific companies lies in the degree of centralized environment—emerges as a critical concept in all consumer control that has traditionally been exerted across the end- markets. By linking key business processes to point-of-sale to-end supply chain. Manufacturers in the United States information, manufacturers can make intelligent decisions and Europe are accustomed to tightly controlling all business about markdowns that protect their profit margins while processes and supply chain partners; however, this philos- also ensuring a steady stream of revenue. In a diverse, ophy is not always embraced in international markets. heterogeneous market, demand shaping should be done Even though local supply chain organizations need flexi- at a very granular level, to maximize profitability across bility and autonomy to succeed, manufacturers need every market segment. to balance this with global control. A certain degree of 5. Manage transitions with flexible tools. centralized control ensures that the worldwide business is Manufacturers typically arrive in a new international operating under a single strategy, that key lessons and market ready to apply the tools, processes and strategies Manufacturing facilities should be located where they can maximize their contribution to profitability. knowledge are broadly shared, that common metrics are that have proven successful in their domestic businesses. applied and that there is no unnecessary duplication of But, in addition to language and cultural obstacles, they resources or business processes. often encounter local supply chain partners with tech- Ultimately, there is no universal answer. Each manu- nology platforms that are outdated and underutilized, as facturer must work to achieve the correct balance between well as business processes that will not easily mesh with global control and regional autonomy that is largely their existing operations. dependent upon the culture of the country in which man- A flexible technology architecture that overlays existing ufacturers are doing business. In weighing centralized systems is critical in enabling manufacturers to manage versus localized planning, executives must also consider transitions and business changes, facilitate rapid technol- such factors as the corporate culture, the impact on ogy deployment and adoption, integrate many individual strategic objectives, customer service implications, the processes and platforms, and reduce the total cost of impact on costs and profits and the efficiency and effec- ownership. Disparate operations data, legacy systems and tiveness of decision-making processes. technology platforms, can be unified by implementing a Even if they choose to empower their international service-oriented architecture that allows a high level of business units, manufacturers must still create and manage visibility and collaboration across international partners. a global business planning process—including sales and A flexible technology architecture can not only enable operations planning—that aligns and synchronizes current business processes, but also ensure that processes regional metrics with corporate goals. can change as rapidly as the business changes. 4. Understand and shape consumer demand. Entering a fast-growing market, especially one as diverse GROWTH CONTINUED on Next Page . . . Supply Chain Leader / October 2007 27
  • A success story nology architecture addresses inputs from such diverse These five keys for success can best be illustrated by functions as marketing, forecasting, research and develop- describing how one consumer goods manufacturer used ment and procurement. No matter where in the world these strategies to successfully enter not just one, but employees are located, they share a single view of end-to- multiple fast-growing global markets—where today the end supply chain activities, as well as a common perspective company holds a significant leadership position. on the key issues and opportunities facing the business. In the mid-1990s, this manufacturer was primarily As a result of its aggressive efforts to enter and dominate known as a regional supplier of product parts and com- high-growth markets around the world, this manufacturer ponents to larger companies, before it embarked on an today holds a global leadership position in eight key product ambitious strategy of entering fast-growing markets under categories. This once little-known supplier to domestic its own brand name. In doing so, the company implemented industry is now recognized by major retailers and business each of the five steps described above, including creating publications as a world leader in its product categories. a series of regional business units that placed an emphasis Now that it has reached a position of market leader- on supply chain excellence. It devoted a significant per- ship, the company is making a strategic move from being centage of supply chain employees to ongoing improve- a supply-driven business to implementing a demand- ment initiatives. The manufacturer also recruited heavily driven supply chain model. i2 is currently working with in each new market, combining local talent with experts the company to focus on closer customer collaboration, from its domestic operations to create a staff that is custom- greater end-user knowledge, more accurate forecasting tailored to regional needs. and more effective demand shaping to drive even greater While each regional business unit operates with a high revenues and profits. In a heterogeneous environment, demand shaping should be done at a very granular level to maximize profitability across every market segment. degree of flexibility, the business has established a global Maximizing your investment in growth markets center that ensures visibility and integration across the Not every business can expect to realize this kind of worldwide supply chain. The business has installed a set dramatic success when entering fast-growing markets, but of best-practice systems and processes that ensure the manufacturers can certainly improve their chances for speed, efficiency and consistent high quality needed to success by developing a sound understanding of supply serve fast-growing markets located in different corners of chain issues early in the process. the world. There is also a global process innovation team While it is easy to focus only on the potential new that ensures objective performance monitoring, measure- revenues offered by high-growth global markets, it is ment and continuous innovation throughout the company’s critical that companies plan for profitable growth—and facilities to ensure that performance remains at peak levels. that means putting in place the right organization, supply A service-oriented technology architecture supports chain design, global planning capability, market under- this global collaboration, enabling geographically diverse standing and technology architecture before significant business units to leverage one another’s strengths, as well capital investments are made. Of course, speed is of the as participate in global production and distribution plans essence in serving fast-growing markets, but much more that consider the capacity and cost constraints of every important is the ability to make intelligent decisions that plant. Customer needs can be met by a number of plants, will increase the chances for profitable growth over both depending on the current state of local market demand, the short and long terms. production capacity and work-in-process inventory at each of the company’s regional facilities. Gaurang Pandya is a director of solutions marketing and Sales, manufacturing and transportation plans are Venky Nayar is a senior solutions architect at i2. synchronized daily, and the flexible, multi-platform tech- For more information, contact 28 Supply Chain Leader / October 2007
  • Industry Overview Successfully Managing Growth in the Steel Industry Regardless of industry, manufacturers focused on steel’s selling price, steelmakers have become adept at high-growth markets can learn from the global steel designing highly effective supply chain networks, including industry. Steelmakers have overcome significant challenges physical plant locations, transportation modes, storage by changing traditional ways of doing business and capacities and material-handling capabilities. Today, embracing new concepts to help manage exponential steelmakers are slashing logistics costs by placing manu- market growth. (See Tata Steel case study, page 30.) facturing plants close to iron-ore suppliers, while locating Historically, steel production was considered a national finishing operations near key consumers. asset, with each country fiercely protecting its own inter- ests. For this reason, the steel industry was traditionally Centralized planning fragmented, dominated by a handful of large, publicly Because their supply of materials is rigid, and their owned companies. But increasing global competition has manufacturing base fragmented, steelmakers are enor- driven the industry toward consolidation and privatization. mously affected by even small changes in demand. Their Today, the typical steelmaker operates multiple manufac- historic lack of flexibility and responsiveness has resulted turing locations and services a global marketplace, often in periods of undercapacity and high prices—followed by through strategic partnerships. periods of global overcapacity and declining prices. Today, steelmakers are managing demand fluctuations more Today’s progressive steelmakers are effectively by installing centralized planning groups that turning their attention outward, toward fine-tune both the quantity and price of products in every the marketplace. international market to ensure that demand and supply Another significant shift has been a geographic one. variations are managed profitably. Due to mounting environmental and cost pressures, steel- making has shifted from the United States and Europe to Consumer outreach the Asia-Pacific region. China is now the world’s largest Traditionally, steelmakers sold products only to industrial producer and consumer of steel. customers, but modern manufacturers are exploring new Following are some areas in which steelmakers have sales channels that place them closer to the consumer. excelled as they have adapted to meet exploding world- Through increased online sales, retail outlets, processing wide demand. service centers and branded products, steelmakers are expanding their consumer knowledge, positioning them Market-driven organization to more effectively shape and respond to market demand. In traditional industries such as steelmaking, it seems only natural to focus on internal operations. But today’s Flexible technology architecture progressive steelmakers are turning their attention out- As industry consolidation continues, and customers ward, toward the marketplace. Steel manufacturers are demand better product quality and higher service levels, matching their new sales and marketing orientation with steel manufacturers are realizing the value of a flexible, dedicated supply chain functions that manage key processes service-oriented technology architecture. From linking such as product-mix planning, demand management and existing systems to increasing visibility across the supply order fulfillment. chain, new-generation technology tools are designed to manage the complexities of globalization. Leading steel- Strategic supply chain design makers are using service-oriented architectures to create Since transportation costs represent 5–15 percent of a significant competitive advantage. Supply Chain Leader / October 2007 29
  • CASE STUDY Customer-Centric Approach Drives The steel manufacturing industry has never been known for being particularly responsive to market needs. In fact, until recently, the industry has been plagued by extremely long lead-times, poor customer service and high levels of manufacturing inefficiencies. But there’s a quiet revolution going on, serving up more change in the last decade than in the 150 years preceding it. The use of leading-edge technology has driven business efficiencies, and continued globalization has created further economies of scale, with both fueling rapid industry consolidation. Tata Steel, the flagship of India’s $22 billion Tata Group, is Asia’s first and India’s largest private-sector steel company. One of the lowest cost producers of steel in the world, it was ranked fifth in the Asian BusinessWeek 50 performers in 2005, and has twice topped the “World-Class Steel- makers” list issued by World Steel Dynamics, a leading steel information service. Tata recently purchased Thailand’s Millennium Steel and Singapore’s NatSteel Asia, and in January 2007 announced the acquisition of Anglo-Dutch Corus Group in a $12 billion transaction. Tata’s strategic drivers were improved actual performance, it was impossible to design improve- customer satisfaction and higher ments in the overall delivery system. asset utilization. Realizing that its industry-leading position was hang- “Before we started looking at supply chain optimization, ing in the balance, Tata started the improvement process we suffered from all of the typical problems manufacturers by articulating its strategic drivers: improved customer face: non-optimized asset utilization, long cycle times, satisfaction and higher asset utilization. To address cus- disparate IT systems and lack of visibility into demand, tomer needs, the company conducted an exhaustive survey orders and shipments,” says Anand Sen, vice president of to establish detailed customer requirements. The survey Tata’s Flat Product Division. “We knew that we simply yielded three imperatives. First, provide an accurate promise couldn’t meet our strategic objectives by maintaining the as to when the order would be delivered. Second, in the status quo.” event that the order due date would be missed, notify the customer early in the process—not at the point of the Customer satisfaction missed delivery. And third, accurately project a revised Customer satisfaction was a real issue at Tata Steel. delivery date so that the customer could modify its schedules When orders were placed, customers were promised a due accordingly. date that was not based on hard data, plant capacity or raw- material availability. Orders were delivered when promised Business process reengineering only about 50 percent of the time. To make matters worse, After mapping the entire supply chain process in great customers would generally not receive advance notice if detail, Tata engaged in an extensive business process re- their order would not be ready as promised, and this lack engineering effort. The objectives were to evaluate the of communication burdened customer resources down the gaps in current supply chain processes with respect to line, in the finishing and distribution channels. industry demands, to redesign the processes to achieve a The plant would often scramble to address the needs dominant service position and to identify the IT enablers of high-priority customers, further alienating customers that could make this happen. “We saw the relationship with whose orders may have been just as important but less i2 as a critical partnership,” says Biswajit Roychowdhury, urgent. Without any method to analyze forecast versus chief of planning for Tata’s Flat Steel Division. “Our final 30 Supply Chain Leader / October 2007
  • Global Growth for Tata Steel action to fix the problem before we even have to notify the customer.” In addition, late orders running in the production line have been reduced to less than 10 percent, and order booking efficiency has risen to above 80 percent. Forecasting capability Tata’s forecasting ability has also improved dramatically. Prior to implementing supply chain software, the company had no systematic insight into how to evaluate the accuracy of its forecasts for demand as well as for raw materials. Now, it has the tools to analyze its forecast predictions against actual results, enabling root-cause analysis capa- bilities to identify what has caused the differences. “Improving our ability to forecast allows us to use due- date-based planning, which helps us to meet demand with higher utilization of assets,” says Roychowdhury. “Also, instead of manually balancing resources as before, we can now automatically identify bottlenecks deep in our processes, and take corrective action to increase our overall production efficiency, thus realizing the benefits of continuous improvement. In support of our strategic objectives, our decision to go with i2 Sales and Operations Planning, supply chain data are fully integrated with the rest of i2 Factory Planner and i2 Material Allocator was the Tata Steel’s business infrastructure, so we’re able to scale culmination of a long process of due diligence and included effectively as we grow.” all members of executive management.” The new-generation software from i2 has given Tata The business issues Tata wanted its process reengineer- planners several capabilities they lacked prior to imple- ing and IT implementation to address included: mentation. Planners can now project business over a year’s • Optimizing inventory investment, including raw materials, time and monitor performance against those projections. work-in-process and finished inventories They can also make product-mix decisions based on profit • Maximizing the value of supplier relationships optimization goals and take orders as late as possible with • Improving the accuracy of price and volume forecasts postponement strategies. Tata’s planners can also refresh the • Determining the best product mix expected time of arrival with up-to-the-minute information. • Making reliable customer delivery promises • Utilizing key assets optimally Prognosis • Prioritizing orders for key customers The rapid pace of change in the steel industry—and, • Improving quality and product yields through better for that matter, in heavy industrial manufacturing in scheduling decisions general—is not expected to slow down. Stoked by these • Improving transportation efficiency results, Tata executives are optimistic. “We’re shifting from Tata Steel completed its technology implementation being order-takers in a relatively controlled pricing envi- earlier this year and has seen significant improvements ronment 20 years ago to being sophisticated marketers already in critical areas. Most importantly, 85 percent of adroitly negotiating the profitable space between supply orders are promised within the desired delivery week and and demand across multiple markets on an almost daily do not require any manual intervention or adjustment— basis,” says Sen. “Someday, we’ll be able to predict not just up from 50 percent. “Sometimes it’s even as high as 92 the delivery date, but the actual hour that our truck will be percent,” asserts Roychowdhury. “Now, when we under- pulling up to a customer’s warehouse. It opens up a whole stand that an order is in jeopardy, we have the tools in world of possibilities.” place to troubleshoot the order and can often take corrective — Elizabeth Greer Supply Chain Leader / October 2007 31
  • Opinion by Michael Cohen What are the top priorities in supply Tony Quartararo education and problem solving with our supply base. Executive Vice President, Members of our vendor-management team are part Supply Chain, of the core teams that develop new products and initia- Burt’s Bees tives. In that process, we have regular multi-disciplinary meetings with our product development people so we can discuss the impact of proposed products on our ability to source materials from best-in-class supply partners who We are very comfortable with the progress we’ve made use the sustainable approaches we’re looking for. It’s not in the last few years implementing lean manufacturing just an analysis based on cost and quality; it’s a different and developing our employee-involvement culture. The lens looking into all these other factors and the sustain- next supply chain challenge is taking our philosophy of ability of the supply partners’ practices. doing business upstream to our supply partners. The benefits of this approach, beyond the most As a company, we value the Earth and we understand important—which is taking care of the planet—is that if that the sustainability of our planet is core to our future. you build a truly sustainable supply chain, it is more resilient. So we’re interested in doing things right, with our eye That will allow us to continue to grow as a business. on the greater good. Of course, this is not always the easy way to do things. We are now actively engaged in Focus on continuous improvement better understanding all of our process streams—not On the customer side, we have just undertaken a only where our materials are coming from, but how they core-process engineering review of our forecasting and are made, how are they packaged and how much energy demand processes. We had a multi-disciplinary team is used in their manufacture. Is it renewable energy? working to develop the methodology, and we have since What is the waste? We look at all the elements involved. rolled out new practices and protocols. Even in the first We have set a very aggressive goal as a company that few months of the new approach, we have seen some by the year 2020 we will be the greenest personal care dramatic improvements in communications and in company on the Earth, generating zero waste and using understanding prioritization so we can run the business 100-percent renewable energy. That is a mind-numbingly in a coordinated manner. aggressive goal, but it’s core to our DNA as a company. We’re asking better questions about our processes, and we are expanding the relationships with our customers If you build a truly sustainable supply so we have a better understanding of their needs and chain, it is more resilient. priorities. We don’t want to overproduce; not just because of cost issues, but because of the implications for wasted To get there, we are focusing time and effort on our energy and resources by having excess inventory. supply partners. We want to do business with like-minded Over the coming year we will bring on board a new companies who value the Earth. We have a lot of suppliers document management system we’re calling WAX, for knocking on our door every day looking to do business workflow automation express. This will become our with us, but we will only work with companies that we “central nervous system,” helping us better manage our know are doing things the way we would do them. operations and reduce paper. We have recently hired a supply chain sustainability On the manufacturing side, we make all of our products director and increased the number of professionals working in the United States, and our continuous-improvement in our vendor management program to help us build engineering team has led and implemented a number of those relationships with our supply partners. We are not lean initiatives in recent years. Our supervisors are now taking an ivory tower approach in this; we’re looking to becoming coaches too—we have self-directed work educate and be an agent of change so that our supply teams on some production lines, helping to raise the partners see the value of being green and sustainable. skills and abilities of our employees. We are piloting this Our quality audit team works hand-in-hand with our approach now and expect to see a great evolution in the suppliers and our vendor-management team to assist in years to come. 32 Supply Chain Leader / October 2007
  • chain management for your business? We looked at outsourcing manufacturing, and, retailers will need to invest in recruiting and, most impor- because of our explosive growth (20 percent a year), we tantly, retaining employees with skills in forecasting, opti- do use outsourced partners for some products to meet mization and supply chain planning. To keep talented demand. But in general we want to make all of our own people with those skill sets, retailers must stay current with products. We feel there is a multitude of benefits to the technology. People with those skills are in demand and keeping our manufacturing in house. will move on if they are not challenged or not working with None of this is easy to do, but it’s our corporate leading-edge technology. philosophy, and we’re seeing tremendous growth and Working together around product- progress. Like a flywheel, doing business in ways that assortment planning will be the next value the Earth and our people, it takes time to build up big win-win collaboration between momentum. But just like that flywheel, once it gets going, it generates a lot of power. retailers and suppliers. We are also starting to see an evolution in data sharing. Mike Griswold Beyond just sales information, some retailers are beginning Research Director, Retail, to share customer-loyalty data with their suppliers. In AMR Research, Inc. addition to what products have been sold, customer-loyalty data show the basket of products a particular customer buys together. Retailers can track the impact of out-of- stocks, or promoting various products, to see the effect on the overall assortment of items a customer buys. Customer One of the biggest issues for retailers over the next few data can be segmented by geography and other parameters years is the continued globalization of their supply chains to help retailers optimize product assortment store by store. as they source more and more products overseas. This I think working together around product-assortment challenge will prompt some companies to make significant planning will be the next big win-win collaboration investments in people, processes and systems to manage between retailers and suppliers. and improve visibility across a growing supply chain. It will be important for retailers to improve their end- Getting the internal house in order to-end visibility if they are going to maintain the right While the value of these deeper collaborations across mix of products in their stores and capture the real value the extended supply chain can be captured by some, the of collaborations with suppliers enabled by greater infor- reality is that most retailers are not ready to look exter- mation sharing. (See POS Data article, page 17.) nally yet. In the past few years, many retailers have gone Many retailers share point-of-sale (POS) data with through mergers and acquisitions, and now have a lot of their suppliers and have done so for quite some time. The work to do on their own internal visibility issues. Many next step is enhancing and integrating that data into fore- retailers are dealing with disconnected and incompatible casting and demand planning processes. Retailers want to systems within their own company. Before they can reach see what the POS data mean to their forecast and how out to enhance communication and collaboration with they can adjust that forecast and send the appropriate their suppliers, they need to get their internal systems and demand signals back through the supply base. As the sup- processes working together. That’s going to require signifi- ply chain extends, and lead times grow, the skills of fore- cant investments for some companies. casting and demand planning become more important if Another major supply chain challenge we see stems retailers want to keep the right products in the right stores from retailers pushing to become more focused on cross- at the right times. channels. They want to expand their Web, catalog and Traditionally, retailers have left much of this analysis to store sales operations, but those channels don’t necessarily the manufacturers and the suppliers, but now they want to operate with the same systems. This causes supply chain develop more of that capability internally. That translates into a human resources challenge for companies because OPINION CONTINUED on Next Page . . . Supply Chain Leader / October 2007 33
  • Opinion (Continued) complexity, even duplication, which increases inventory their sales to end users look like and so on. levels and costs. It will be important for retailers to ration- On top of that, the inventory information we do have alize their channels and optimize legacy systems. now can hide, or at least disguise, the real consumption Visibility, associate education and retention and cross- numbers. We don’t necessarily know if a demand fluctua- channel management are some of the significant supply tion is real, or if someone is stuffing the channel for some chain challenges for retailers over the next few years. reason. We can easily get burned by someone going on Improving internal and external collaboration and focus- vacation. For example, during the course of regular opera- ing on supply chain visibility will position companies to tions we’ll see that an ordering trend has a different curve become supply chain leaders in the future. and we won’t know what’s behind that change. So we’ll assume it’s real demand, and we will build new stock to Thomas L. Dadmun deal with that increase, but sometimes it will turn out to Vice President for Supply Chain be a false demand signal. What may have happened was and Program Management, someone had gone on vacation and ordered more stock to ADTRAN cover for a week or two. That sort of thing happens all the time, given the current state of our information and processes. For the past few years we’ve been doing a lot of work Greater visibility and VMI on our sales and operations planning processes to help us To try and get access to better customer sales data, better understand demand and react appropriately. That we’re working on pilot projects to develop weekly reports will continue to be a top priority. In particular, I want to from two of our key distributors, and at the same time to be able to get better information from our customers, and increase our visibility into their inventories and their quickly interpret that information in ways that are relevant pipelines. We expect this effort will provide us with a to our business—not only from an operations perspective, better understanding of real consumption, and we can but also from a revenue and margin perspective. [ADTRAN adjust our production accordingly. develops and manufactures networking and telecommuni- Another priority for ADTRAN is establishing more cations solutions to carry voice, data, video and Internet vendor-managed-inventory (VMI) programs with our key communications across copper, fiber and wireless network suppliers. Better use of VMI can help us ensure that a lot infrastructures.] of our standard items are readily available, while removing I believe the supply chain is really a demand chain. inventory from our books. Customer demand drives it all, so if we can do better with forecasting and understanding the demand up front, then The supply chain is really a demand that’s three-quarters of the battle. Of course, dealing with chain. Customer demand drives it all. demand is difficult, forecasting accuracy is always tough and getting the information that we need, when we need We do have a global supply chain. More than half of it, to make the right business decisions can be a challenge. our products are manufactured in Asia by our electronics What we need to do now is to get more point-of-sale manufacturing-services partners, and we have very good data, and more point-of-usage data about our products, relationships and strong collaborations with them. We from our customers. Sales data sharing happens in the have a quick-turn chain; we can change our production retail sector all the time, so if it works for them, then I say schedule in the current week, even though we’re manufac- why can’t it work for us? Of course, it can be more chal- turing most of our products halfway around the world. So lenging for us to get the data, particularly for our enter- our focus now is primarily on the customer and demand prise clients, which we serve through distributors. But side of things, because that’s where I think we can make we’re now establishing some pilot projects for that market the greatest improvements. to see if we can improve our performance. Finally, one area that I believe supply chain leaders Today, many of our distributors have different stock- must never lose sight of is what we call CIPs—continuous ing strategies, some with monthly reporting, others with improvement programs. At ADTRAN, we’re well along quarterly reporting. As a result, on any given day it can be the road toward building a culture of continuous improve- very hard for us to know what’s really going on with our ment into the DNA of how we operate. distributors’ inventories, what they have on hand, what 34 Supply Chain Leader / October 2007
  • ability to deliver on the promise of co-design is critical. The Last Word To meet consumer needs in profitable ways, companies must now do more than produce truly innovative products. John Cummings They must also design for manufacturability, for compo- Senior Vice President nent reuse, for distribution and for environmental sustain- and Chief Marketing Officer, ability. Co-design mandates more collaboration than ever i2 Technologies among different companies in the supply chain. Unfortunately, many companies are still very insular, focusing only on the next link up or down in their chain. Looking ahead, it’s clear that getting closer to customers They operate in a buy/sell relationship along the chain, and satisfying the needs of those customers by making versus a team approach to satisfy the end consumer. If the better use of information are major priorities for supply supply chain were truly transparent to all companies, then chain leaders in many companies. Because supply chain I believe we would see a very different approach to solving management has traditionally focused on supply, this will operational issues, and everyone involved would be better be a major shift for some companies, necessitated by the served. Companies would make better decisions that are shift in consumerism. No longer passive recipients, con- based on the potential impact on the end consumer. sumers are now in the driver’s seat. Better availability and use of information drive the Why? Consumers now have more information available change necessary for supply chains to move more rapidly to them than ever before, and that tips the balance of and to foster collaboration across companies. To accom- power in their favor. Consumers can—and in growing plish this, leading companies now strive for the purest numbers do—use the Internet to find out everything they demand signal they can get and to improve their processes need to know about a particular product and the various to better understand demand trends. Point-of-sale (POS) competing offerings before they decide what and where to data provide the moment of truth, and the further you can buy. They rapidly compare price and features across many propagate that information along the supply chain, the brands and channels. They are far less loyal to brand names better results you will see. (See article on the power of and much more interested in price and unique features. POS data on page 17.) This makes it all the more important, and challenging, Furthermore, companies need to do a better job of for companies to develop innovative, differentiated prod- surfacing other forms of information, beyond the demand ucts, and to have them available in the right place at the data that already exist within their operations, and make right price when the consumer is ready to buy. The effort that information visible in practical ways that improve is further complicated by today’s shortening product life supply chain efficiency. Tremendous amounts of useful cycles, and the proliferation of SKUs companies are now supply chain information exist at all points along the dealing with as they look to create more specialized offer- extended chain, but today it is very difficult to get to that ings aimed at smaller consumer segments. information and make it available for decision making. To succeed in today’s fast-paced, consumer-driven Supply chains face the same challenge that consumers did environment, companies need to break down the barriers prior to the Internet: Large amounts of information existed between producers and end consumers, enabling them to in the world, but it was very difficult to find. Today, that better understand consumers’ needs and to design products problem has been largely solved by the Internet, but we to meet those needs. Boeing did this recently with the have a long way to go before uncovering all the useful data design of the 787 Dreamliner. The aerospace company in the extended supply chain. involved more than 100,000 frequent fliers in the design Companies today have a lot of work to do to get their process, asking them what they wanted to see in an air- supply chains and processes moving fast enough to satisfy plane and incorporating their input into the final design. ever-changing consumer preferences. Finding ways to better capture and leverage information will benefit the companies The promise of co-design in the chain and contribute to the prosperity of all. In other industries, some companies now try to get more intimate with the consumer by moving to the con- cept of co-designing products—that is, bringing together Opinion interviews were conducted by freelance writer working groups from companies all along the supply chain Michael Cohen. to help drive innovation. In that process, the supply chain’s Supply Chain Leader / October 2007 35
  • Focus by Ravi Vancheeswaran, ON Semiconductor Protecting Revenue Through Supply Chain Risk Management Loss of revenue is the biggest risk to any business. come from a push to keep up with demand for a unique Today, supply chain managers are figuring in the calculus product produced by a limited number of suppliers. For of risk management at this strategic level, quantifying example, poly-silicon is currently in tight supply and in supply chain impacts on revenue as well as on the more high demand—mainly because of the rise in solar-cell traditional domain—costs. technology, which results from the high price of gas and Supply chain managers have become so involved oil and increased world-wide interest (and policy) regard- because responding to demand within the narrow window ing “green” technology. of opportunity is critical. If a company cannot serve cus- If a company cannot serve the demand tomer demand when it presents itself, then the company when it presents itself, then the has lost the demand. Companies have more control over cost; therefore it is easier to manage than demand or company has lost the demand. revenue. “To build or not to build?” is the only decision Consumers’ increasing demands for more options and to be made when demand and cost are the primary consid- the corresponding reaction from businesses have led to a erations. However, managing revenue is vital, since most proliferation of products on the market. This is the situa- companies are looking to grow their bottom line. tion today in the electronics market space. As consumers While most supply chain managers talk about risk in clamor to have more fashionable and more feature-rich terms of natural and man-made disasters, such as typhoons devices in their pockets and on their desktops and dash- or terrorism, in truth such catastrophes are rare. The boards, semiconductor customers are inevitably creating opportunity to win—or lose—a customer, however, comes more complex risks for supply chains. How? They’re up every day. So, the risk to revenue is constant. requiring firmer commitments of supply to demand upsides. They’re speaking in “ranges of outcomes” rather than Organizational and process complexity “point forecasts” to hedge their risks. Some electronics There are many ways to grow a business, but all of the manufacturers, however, do not understand that there are options are moot if the supply is not in place. Growth can costs associated with such risk management. If they want Using Scenarios to Plan for Risks Constrain/unconstrain resources Capacity edits: base, min, flex capacity Phase 1 Supply Swap capacity Scenarios Down time––holiday or planned Editing cycle times / yields Phase 2 Structural changes to bill of materials Demand Consensus forecast Scenarios Customer high-confidence forecast Phase 3 Customer scenario forecast Business Enterprise Phase 4 Scenarios Intraprise 36 Supply Chain Leader / October 2007
  • in forecasting. We look at it this way: capacity is the risk shock absorber between tactical and strategic planning, ON Semiconductor Snapshot and inventory is the shock absorber between execution and tactical planning. At ON Semiconductor, we’ve learned to let the cus- 2006 Revenue: tomer-order lead-time patterns drive the safety-stock $1.5 billion requirements across the different stages of the supply chain, allowing us to exercise the power of postponement Industry Segments: based on the demand visibility from the customer. Computing, Consumer, Wireless, Automotive, We also have found that instead of developing point Industrial, Networking forecasts, we develop range forecasts based on the relative risk of the opportunity. By doing so, we ensure that our Products: sales and marketing teams can let us know their relative Power analog and power discrete components confidence in the different opportunities. Using this method, (more than 2 billion products shipped monthly) we can make better decisions on capacity investments by Market Segments: sizing the opportunities more realistically. The lower the Asia-Pacific (33%); China (32%); level of confidence, the less likely the company will be to North America (19%); Europe (16%) invest in the risk. Meeting this promise has never been more important. As ON Semiconductor’s senior vice president and chief technology officer, Peter Zdebel, has said, “Delivering the product on time to the customer’s requirements is absolutely to share the risks with the suppliers, they need to share critical—even more important than fully meeting initial the costs—that is, develop collaborative models across the specifications. There is flexibility for refinements at later supply chain. stages, but failing to make volume by the first deadline In addition to more complicated supply/demand cycles jeopardizes the entire project.” and needs, the inventory dynamics in the high-tech indus- try have also changed. In 2000, semiconductor companies New-generation tools held 13 percent of the total high-tech supply chain’s inven- New-generation software tools built on the i2 Agile tory. By 2006, that figure grew to more than 30 percent. Business Process Platform have given us the visibility and Additional players have also joined in the fray. In the agility we need, enabling us to make faster decisions and past, the semiconductor company might have allocated create better workflows and protocols for speeding the supply to original equipment manufacturers (OEMs), dis- decision-making process and executing decisions based on tributors and EMSIs. The OEM would send information the risk of demand fluctuations. The platform allows for back to the semiconductor company to direct the material sharing of information across silos and even enterprises. It supply. Today we have many more players inside the supply also allows managers from all levels in the organization to chain—such as design companies, third-party logistics see the information they need, drawn from a “single source companies and original design manufacturers—in addition of the truth” at that moment. to the OEMs, distributors and EMSIs. As such, it is critical and necessary to triangulate the demand information to The opportunity to win a customer limit the natural bullwhip effect. comes up every day, so the risk to revenue is constant. Supply chain complexity The biggest impact of the software is the ability to How do supply chain managers handle all of this visualize and manage bottlenecks across the supply chain complexity? At ON Semiconductor we’ve found that holistically, rather than by manufacturing silo or stage, or technology is key, but has to follow process. Process leads even business unit. We realized early that our flexibility organization—or reorganization. We’ve defined the com- levers are inventory and capacity, and without automation plexity challenge as one that requires optimization of three and modeling algorithms in place we would not be able to critical variables—revenue (on-time delivery and lead times), stage either inventory or capacity in the right places at the inventory (internal and channel) and factory utilization right times. There’s nothing like driving the production (with attendant supplier relations). We’ve learned that inventory and capacity flexibility can reduce mistakes FOCUS CONTINUED on Next Page . . . Supply Chain Leader / October 2007 37
  • Focus (Continued) mix for 24,000 devices to motivate a company. As a result, our supply chain managers collaborate regularly with sales, marketing and finance managers, as well as with information technology managers, to get the Top 10 Supply Chain upfront intelligence on trends and market data in time to make the decisions that will advance our top line. We’ve Risk Factors been working hard to have intra- and extra-enterprise integration with our IT systems, and to make them agile enough to help the company respond quickly to all sorts of 1. Customer Fulfillment Preferences trends—from industry trends and customer demands to end- market functionality and product packaging and regulations. 2. Production Capacity-Demand Mismatches 3. Global Sourcing Reliance The business challenge Seeing the trends early is new for supply chain managers, 4. Competitor Disruption especially in our industry. But it’s essential, because it takes a long time for the total semiconductor supply chain to 5. Mode Capacity Shortages react to a trend. The cycle time to make the product is 7–13 weeks. And the EMS cycle time is another 3 weeks. 6. Organizational Restructuring So, it’s really a question of optimizing between cost and cycle time. The tricky thing with cycle time is understand- 7. Fuel Cost Volatility ing how the demand is moving through the network right now and how it is going to change over the next 2–3 years. 8. Market Growth Strategy Yes, manufacturing is moving to Asia. And yes, we’re serving demand in Asia, so we have to look at having 9. Inventory Ownership Liability more visibility in Asia. But, how do you have an Asia- focused network and still serve the customer needs in 10. 3PL Service Capacity the Americas and Europe? These questions are part of a Source: Supply Chain Executive Board, February 2005 forward-thinking strategy. The biggest impact of the software is the ability to visualize and manage promise model was inaccurate. And our supply chain bottlenecks across the supply chain components were disconnected. With advanced planning holistically. and scheduling, we manage by exception, conduct multi- Another thorny issue is staging the network so that if echelon inventory planning, operate with defined business an uptick in demand occurs, you can move it through rules and have more flexible allocations for demand quickly. And, if it doesn’t happen, you can postpone deci- fulfillment. sions so your inventory liability is not high. Can you get We’ve also realized a $20 million value within two out of a decision you made today tomorrow? And if your years—in productivity, increased inventory turns, and decisions cost more today—but you gain flexibility—was reduced obsolescence. Our number of planners is down it worth it? to 30, and 98 percent of our orders are scheduled auto- We are in our seventh year of focusing on improving matically in real time. the agility and speed of our supply chain processes and Instead of local wins and global confusion, we have organization. With the help of i2, we’ve moved from tac- achieved our global objectives—followed up with local tical planning optimization through scenario management actions—and a synchronized supply chain. For now! to our present focus, collaborative risk management. Throughout, we’ve focused on supporting processes that [See also “New Technologies Help Identify and Mitigate evaluate risks to revenue and cost containment. Risks,” on next page.] Before implementing the advanced planning systems from i2, we had to manage more than 3,000 orders a day Ravi Vancheeswaran is director for strategy and continuous manually. We had 150 planners in high-cost regions of the improvement for the global supply chain organization at ON world. We also had large inventories. Our available-to- Semiconductor. He is also the chairman of the i2 User Group. 38 Supply Chain Leader / October 2007
  • Risk Management by Darren Ward and Anand Iyer Ward Iyer New Technologies Help Identify and Mitigate Risks In 1995 an earthquake in Kobe, Japan led to the closures expectations. In response, the marketing and research of Japan’s two largest ports—resulting in more than $100 teams quickly rolled out a similar model based on gut- billion in damages to supply chains worldwide. More level projections. But on this second product, they missed recently, a blue laser diode shortage caused Sony to slash the mark and ended up with a warehouse-yard full of projections for the PlayStation®3 launch in late 2006 by unsold inventory that had to be liquidated at a loss. 2 million units. And just this summer, Mattel, the world’s largest toy maker, announced three major recalls of Chinese-made toys in little more than a month because Two-Year Impact of Disruptions of excessive amounts of lead paint. Average Percentage Change 20 Supply chain challenges and disruptions such as these 14 15 11 may negatively impact average operating income and return 10 on sales by more than 100 percent for two years or more Sales 0 after an incident occurs. (Georgia Tech Research News, Cost Inventory February 2, 2004, article by Vinod Singhal and Kevin -5 Growth Growth -7 Hendricks.) Perhaps that’s why AMR Research finds that -10 “Nearly 50 percent of companies intend to evaluate or Source: Georgia Tech Research News: “The Weakest Link: New Study Quantifies Financial Fallout from Supply Chain Malfunctions,” February 2, 2004, by Vinod Singhal. deploy new technology for supply chain risk management in the next year or two.” (AMR Research: “Managing Risk in the Supply Chain—A Quantitative Study,” by Demand risk also results from competitive pressures, Mark Hillman and Heather Keltz, January 3, 2007.) weather-related events and macro-economic factors. All risks are not equal. They must be With shortening product life cycles and rapid innovation in technology, companies sometimes find a product is not categorized on the basis of the severity competitive in price and features, even at the time of initial of the impact of the risk, and the launch. This can result in write-offs or negative profit likelihood of occurrence. margins and no appreciable increase in market share. To proactively evaluate and manage the risk in their Natural phenomena can also affect demand for certain supply chains, companies can employ something we call products by region either positively or negatively. In the RACE: risk analysis and continuous evolution. This fashion-apparel industry, early spring or late winter methodology can help companies evaluate and manage inclement weather—even if only in certain regions—can both customer demand and supply-risk factors, along wreak havoc on demand forecasts. This leads to excess with the potential impacts on company profitability and inventory and mark-downs in areas where demand is market share. unexpectedly low, while other product lines or regions with high demand may experience product shortages, Sources of risk resulting in lost sales. Demand risk can come in the form of changing or Geopolitical influences in the global marketplace also misunderstood customer preferences, technology or com- have unexpected consequences on product demand. For petitive changes, natural phenomena or geopolitical influ- example, recently, the political policies of Hugo Chavez ences. Risk related to customer preference involves unex- in Venezuela had an indirect impact on the demand for pected changes in types of product attributes customers domestic beer in the United States. While this might desire. It can also come from incorrectly anticipating the seem preposterous, a recent survey by Morgan Stanley demand for a certain product. For example, a consumer indicated that rising gas prices have contributed to a electronics company recently introduced a new product decline in the growth of beer consumption in the United targeting the surge in the MP3 player market. Its first product was very successful, with demand exceeding RISK CONTINUED on Next Page . . . Supply Chain Leader / October 2007 39
  • Risk Management (Continued) States as consumers use their beer money to keep gas in most likely to occur should be the first priority. their cars! (Morgan Stanley Research North America These are complicated scenarios requiring substantial report, May 13, 2007.) computing power and sophisticated analysis capabilities. In addition to managing and mitigating for demand All risk-analysis approaches have two phases, even though risk, companies must carefully consider factors that could the specific techniques used in each of the phases vary potentially disrupt or constrain production, logistics or the widely. The first phase of risk analysis is risk identification procurement of raw materials. Supply disruptions may be and consists of determining the sources of risk, the depend- the result of natural disasters, strikes, terrorism, mechanical encies among them and the likelihood of occurrence. For failures, research and development delays or unexpected example, the loss of a supply source in one location may logistics challenges, such as customs-clearance delays. cause a shortage of transportation capacity in a different As more supply chains stretch across the globe, the area, where an alternate supply source is available. complexities increase and require additional buffers of For many companies, the most signifi- inventory and time to offset the potential impact of unex- pected disruptions. Consider the difference in complexity cant constraint to agility and flexibility between a one-day domestic truckload delivery from a has been information technology. plant in the United States to a domestic customer and an The second phase is response analysis and involves deter- international delivery to the United States from China mining potential options to hedge against the risk while that may take three weeks—crossing two international assessing the impact in terms of both cost and benefit. borders and traveling on three or more modes of transport. Risk identification. The first phase of risk identifi- All of these factors can add considerable expense and cation often involves variants of the Delphi method of require a careful cost-versus-benefit analysis for each predictive analysis. Developed by the Rand Corporation risk-mitigation strategy. (See article on “Total Landed during the Cold War to predict the impact of technology Cost” in the Spring 2007 issue of this magazine.) on warfare, the Delphi method is a facilitated brainstorming or information-gathering process. It involves experts who Phases of risk management participate anonymously in iterative sessions by providing Even the best-managed companies can be over- predictions with supporting logic. The results from each whelmed by the prospect of rationally and proactively session are reconsidered by the experts until the process balancing the potential negative effects of risk factors converges on a relative consensus. against the cost and benefits of implementing risk-miti- Next, probabilities are associated with risk factors through gation strategies. In fact, it quickly becomes clear that a wide variety of techniques. For example, historical data managing risk could contradict other strategic initiatives, may provide estimates of variability in forecasts or lead such as reducing inventories and cutting costs. Therefore, times. Analysts may also use sophisticated regression models effective risk management requires a careful consideration to determine errors in long-range growth forecasts. of the appropriate balance among customer service levels, Similarly, such analysis enables planners to estimate the cost and working capital within an acceptable risk tolerance. probability of rare events. The process results in a good understanding of potential risk factors and their probability Disruptions Lead to Drop in Shareholder Return of occurrence. Parts Shortage (-7.53) Response analysis. Once risks are identified, the response-analysis phase focuses on estimating the impact Customer Changes (-11.52) of risk factors across the supply chain. This exercise is Ramp/Roll-Out Problems (-10.98) challenging because the relationships between risk factors Production Problems (-10.29) are not static. In other words, one decision or risk factor Development Problems (-10.58) may impact other risk factors. In practice, techniques for Quality Problems (-9.29) analyzing risk-decision clusters fall into two families— 0 -2 -4 -6 -8 -10 -12 prescriptive decision models and descriptive simulation Source: Georgia Tech Research News: “Putting a Price on Supply Chain Problems: models. Study Links Supply Chain Glitches with Falling Stock Prices,” December 12, 2000, by Vinod Singhal. Prescriptive decision models, which include many supply chain optimization tools, are designed to prescribe In addition, all risks are not equal. They must be an answer for a given set of inputs. The models used in identified and categorized along a scale on the basis of software solutions are further divided into two categories: the severity of the impact of the risk, and the likelihood deterministic and probabilistic. Both deterministic and of occurrence. Obviously, risks with high severity that are probabilistic models provide insight into the interaction 40 Supply Chain Leader / October 2007
  • between risk factors and supply chain control variables by systematically analyzing different scenarios. Risk Analysis Matrix However, while deterministic models use a single number for each variable under consideration, the more HIGH Make moderate High priority for sophisticated probabilistic models use statistical probability investments to proactive investment curves for variables such as demand patterns or the likeli- Likelihood minimize impact in risk management of hood of a supply disruption. Because of the increased Minimal if any Align investments Occurence investment with cost-benefit complexity in these probabilistic models, they tend to be required analysis limited in scope. LOW Descriptive models can simulate the operation of the LOW Severity of Occurence HIGH supply chain and generate statistics as a series of simulated inputs that are provided to the model. These statistics are then analyzed to facilitate decision-making. It takes a today must implement world-class processes and supply combination of sophisticated tools and techniques to chain solutions that provide the ability to continuously effectively determine the appropriate response to supply adapt and improve across the dimensions of organizational chain risk factors. structure, process, technology and strategy. Steps to mitigate risks. Once risk factors are prop- erly identified, analyzed and prioritized based on severity The technology challenge and likelihood, companies can take steps to proactively For many companies, the most significant constraint manage the risks in one or more of the following ways: to agility and flexibility has been information technology. • Redesign the network strategy to take into Traditionally, systems to support business operations— consideration geopolitical factors in addition to cost including supply chain management—have imposed opera- and service factors tional workflows and processes that required the business • Redesign supply chain or sales and operations to adapt to the technology. However, when companies planning (S&OP) processes evolve through acquisitions, divestitures and even organic • Improve strategic sourcing and contract management growth, they are forced to deal with multiple systems • Establish analytically supported demand forecasting supporting different processes and technology paradigms. and new product introduction processes Proactively managing supply chain risk factors further • Implement multi-echelon inventory optimization exacerbates this challenge. As a result, a company’s ability (while considering random risk factors) to evolve is often restricted by its technology infrastructure. • Utilize supply chain scenario planning and management While not a panacea, new-generation supply chain • Monitor and manage global logistics solutions based on a service-oriented architecture (SOA), • Transfer risk by using insurance such as the i2 Agile Business Process Platform, can address this problem. SOA-based solutions enable a A case in point company to rapidly develop and evolve business-oriented One example of real-world proactive risk management solutions and workflows that leverage and complement is at ON Semiconductor, a global supplier to multiple existing technology investments, rather than requiring electronics markets, including the fast-paced fashion them to be replaced. industry for cell phones (see article by Ravi Vancheeswaran, A related and complementary capability is Master ON Semiconductor’s supply chain director of strategy Data Management, which enables the business to and continuous improvement, page 36). ON Semicon- effectively and efficiently manage all of the data that ductor has continuously improved its supply chain to drive a supply chain. In short, SOA and MDM capabilities increase market competitiveness. The company proactively are critical for supply chain solutions that can adapt to manages risk through a combination of sales and operations evolving business requirements in preparation for and in planning (S&OP) disciplines and inventory optimization, response to critical supply chain risk factors. leveraging best-of-breed supply chain planning solutions from i2 to include supply chain scenario planning. Darren Ward is i2’s senior director of sales consulting As ON Semiconductor has discovered, a one-time for the Retail and Consumer Industries sector. risk management analysis is not enough; continuous Anand Iyer is an i2 fellow. evolution is required. An effective long-term strategy to manage supply chain risk requires an organization to be For more information, contact agile and responsive. Therefore, competitive companies Supply Chain Leader / October 2007 41
  • The “Lean” Material pull must be driven by Challenge capacity signals from down- stream in addition to inventory- in Demand- replenishment signals. Driven A May 2007 USA Today article entitled “Toyota’s Success Pleases Proponents of ‘Lean’” may have left some Value Chains readers confused. On one hand, it attributes Toyota’s success to lean manufacturing. On the other hand, it quotes survey results from management consulting firm Bain & Company stating that just 19 percent of companies that have tried lean are happy with the results. While the key concepts surrounding lean have existed for more than 40 years, the bottom-line savings and operational performance—in terms of inventory turns or order-fulfill- ment performance—have been below target, especially in environments beyond simple make-to-replenish. Still, the concepts of lean manufacturing are funda- mentally sound and pragmatic, and there is significant interest among industry professionals to use lean manu- facturing to realize demand-driven order fulfillment. What is standing in the way of better results? Recent trends have contributed to a sense of skepticism about the adaptability of lean techniques, eroding adoption of the principles across all industry sectors. One of these trends is mixed-mode manufacturing, where elements of build to order, engineer to order, and assemble to order can be applied to support an ever- increasing product portfolio and fluctuating demand profile. This operational model is more complex than the simple make-to-replenish model, and lean practitioners are having a hard time adapting the principles to it. Another complicating factor is the extended enterprise or value chain, where value-added activities are extending beyond a company’s four walls. In this case, the material- control techniques using the traditional manual/visual methods are no longer sufficient to synchronize material flow. More and more companies are calling for an electronic pull mechanism to adapt to the visibility, speed and flexi- bility required. The other key factor for slow adoption of lean is the lack of knowledge and process discipline to enable a closed-loop continuous improvement, or kaizen, culture. by Aamer Rehman and [Kaizen is a Japanese term for creating continuous improve- ment; it focuses on quality, communication, teamwork Kelly Thomas and a willingness to adapt to change.] This kind of culture is critical to realizing a quick plan-do-check-act cycle for factory personnel.
  • But several obstacles to routinely achieving this itera- systems. Pull-based production paces a factory to actual tive process present themselves in today’s fast-moving, customer demand and keeps the factory floor synchro- short-cycle manufacturing environment. There may be high nized through a set of real-time, pull (kanban) signals. employee turnover, eroding the knowledge base established The goal of pull-based production is to create a smooth over many years that fosters a systematic, “best-practice” material flow throughout the supply chain. This is achieved approach to operations. Also, as manufacturing becomes by flowing product in small batches (to reduce lot size), less centralized and more distributed, it gets more difficult pacing the processes to Takt Time (the “drumbeat” that to sustain consistency across plants and practices. The sets the production pace in the plant), to avoid overpro- solution is in standardization of both processes and systems. duction, and replenishing according to signals originating (Also see Interviews with GM’s Adriana Karaboutis on from downstream operations. page 12 and with reengineering guru James Champy on This control discipline limits the amount of inventory page 45.) A structured approach can eliminate maverick to a fixed maximum for each manufacturing cell, where the shop-floor behavior and channel shop-floor innovations maximum is equal to the number of kanbans circulating so they can become cross-plant best practices. within the cell. That’s where things get sticky. Unfortunately, While, in the past, lean practitioners preached tech- a simple kanban control system does not perform well nology solutions as an obstacle to lean adoption, today in environments dealing with high demand or process they are calling for a combined process and technology variability. For example, one would like to have a large deployment model that can address complex fulfillment number of kanbans at times of high demand to enable challenges. Partly, this is because planning, scheduling quick response. But one would like to have a small number and execution are converging, and the hierarchical levels of kanbans at times of low demand to reduce inventory among them are diminishing, due to the need for quick costs, since the number of kanbans is equal to the target decision support in a lean environment. But there is also inventory of finished parts. It is commonly accepted that kanban control does not work well when demand and flow of parts are highly variable. a dawning realization that it is hard to achieve return on In reality, manufacturers need the flexibility to choose investment and total cost of operations savings for lean dynamically between large and small numbers of kanbans. plants using the solutions of the past. But it is commonly accepted that kanban control does There are three levers companies can use to adapt lean not work well when demand and flow of parts are highly principles across the enterprise. One is the use of various variable, thereby making it impractical for production envi- material-control techniques adapted for multi-mode ronments in the high tech and industrial sectors, in particular. manufacturing. A second is the deployment of advanced In environments with custom products, product-mix technology solutions that provide standardized workflows variations, seasonality or highly variable demand, simple and “what-if ” exceptions management. A third is the kanban control is not sufficient. Fortunately, there are application of lean process-transformation approaches material-pull techniques other than kanban control that offered by service providers. Such offerings address the support the changing production landscape, but still training, design, deployment and roll out of new process- adhere to the core principles of lean manufacturing. While es and systems, depending on where a company is in its proven, these techniques are more complex than traditional journey to an evolved lean manufacturing model. kanban control and therefore require sophisticated tech- Before we explore these levers further, let’s revisit nology and process support. some of the basic principles of kanban. In high-mix, low-volume, demand-driven environments, pacemaker-level planning and scheduling must take a The kanban system number of factors into account. First, there is the need to The kanban control system is probably the most well- known pull-type mechanism for multi-stage production LEAN CONTINUED on Next Page . . . Supply Chain Leader / October 2007 43
  • schedule build-to-order, make-to-stock and assemble- • Use a single application platform capable of address- to-order items on the same production resources. Then, ing lean requirements during design, operate, sustain there are the start-of-life and end-of-life issues associated and improve phases of a lean program with parts planning and ordering. Finally, a set of • Standardize on a technology platform that can handle sequencing rules based on order configurations and plant to plant variations in terms of business rules, changeover matrices for products must be established user experience, reporting and integration with while still achieving mix and capacity leveling. In such legacy systems complex situations, planners must be able to create • Provide a closed-loop environment to drive structured “what-if ” scenarios quickly to assess the impact of kaizen improvements using real-time metrics on the changes on inventory targets, product mix and capacity shop floor utilization before publishing a feasible level plan. • Maintain the same level of simplicity, user control and visibility for which lean is known, while making The new paradigm the enterprise roll-out of a lean program possible In the old paradigm, the kanban signals keep all in- The i2 Lean Transformation Life-Cycle solution has house and external operations synchronized with the pace- been designed to meet these challenges. It offers a com- maker. These signals are consumption-based and initiate production of specific parts and quantities upstream to Manufacturers need the flexibility to consuming operations. Such kanbans are well-suited for choose dynamically between large and low mix and repetitive production. small numbers of kanbans. In the new paradigm, production authorization is not only driven by inventory-replenishment signals, but also prehensive set of capabilities that support design, deploy- by capacity signals from downstream operations. The ment, operation and improvement phases of a lean- processes and systems must have the capability to adopt manufacturing program. The solution combines principles new techniques as the production model transitions to a of the Toyota Production System, various material-control mixed-mode manufacturing model. It must be able to techniques, a flexible application platform, rich scheduling apply a manual kanban approach when appropriate but and execution capabilities, quick what-if scenario assess- ramp up to electronic material-control techniques when ment capabilities and real-time metrics for driving kaizen required. improvements. These techniques have been developed over the past The solution is compatible with lean manufacturing 10–15 years and include CONWIP (constant work-in- principles of level production, as well as with mix man- progress, to control the total inventory in the system), agement, synchronized pull and Six Sigma’s DMAIC POLCA (paired-cell overlapping loops of cards with (define, measure, analyze, improve and control) approach authorization, effective when there are capacity constraints) for continuous improvement and process control. In these and hybrid CONWIP and kanban. An appropriate ways, it can help companies operate in a hybrid mode to combination of these techniques can be used to synchro- achieve the successful adoption of lean manufacturing nize upstream and downstream operations with the across the extended enterprise. pacemaker schedule. In summary, i2 strongly believes that it is possible to employ lean principles across the extended enterprise if Technology requirements companies are willing and able to invest in a comprehen- The solutions required to deploy lean principles and sive methodology based on more sophisticated pull tech- at the same time react quickly to demand volatility in niques and more advanced software solutions. If so, they today’s complex, demand-driven manufacturing environ- can create a long-lasting lean transformation across their ment must be able to: extended enterprises. • Handle hybrid make-to-stock, make-to-order, assemble-to-order and engineer-to-order fulfillment models using a single technology framework • Support additional material-control techniques Aamer Rehman is a vice president of manufacturing beyond traditional kanban control to manage high- solutions and services at i2, and Kelly Thomas is senior variety and custom-engineered products for which vice president of i2’s Manufacturing sector. dedicated flow lines and simple visual control For more information, contact methods are not practical 44 Supply Chain Leader / October 2007
  • Viewpoint an Interview with James Champy Changing the Way You Work and Think About Your Business James Champy is chairman of Perot people think it will take. I’m a strong believer now that Systems Corporation’s consulting change happens in companies over a period of years—a practice. He is coauthor (with Michael minimum of five years for a complete change that includes Hammer) of Reengineering the behaviors—not a period of months. Corporation and (with Nitin Nohria) of That doesn’t mean that you can’t get incremental The Arc of Ambition, and the author of business-performance improvement during the first year Reengineering Management. His latest or two. In fact, it’s important to see benefits from process book is X-Engineering the Corporation: Reinventing Your or system change in that time to be sure that you are Business in the Digital Age. doing the right stuff. Your work throughout your career seems to be an How has your thinking evolved about the mix of expansion of Index Systems’ (now CSC Index’s) people, process and technology as organizational levers? early work in process reengineering. What is your latest thinking in your book on X-Engineering? I think those are still the three most significant organi- zational levers. But I think more strongly than ever that My latest thinking will be in a new book about changing process is where you have to begin. You begin by really not just your business processes, but your business models. understanding the processes in the company and their But X-Engineering is about cross-boundary process current state. What are they? What’s the quality of the redesign—not just doing process redesign within the walls operation? Where do the processes break down? Where’s of your company, but doing it in collaboration with your the money—where’s the concentration of cost? And then customers, your partners and other business alliances. you have to develop a future state—the way the world has Some people will call the book “Cross Engineering,” but to work with your company. What do the processes have I call it “X-Engineering.” to look like at this point? Unless you understand these two states, you’re just wallowing around; you won’t produce In X-Engineering you list quite a few tenets that anything very good, in my view. will change the way business is conducted. You write As you’re doing that, you do have to pay attention to about how to prepare for, manage, and adapt to the people, because it’s the people who will implement the change. How do you suggest that companies handle change and make it happen. There are always people issues. resistance to change? You always have to deal with resistance. In fact, one of the first questions that is asked when you begin a campaign or You know, most resistance to change comes from how a process change is whether your people have the skills and people feel about the change. How they feel is the reality, the appetite to implement the change, particularly the but some managers ignore that reality and focus on the senior management team. I’ll tell you, this isn’t just about abstract theory behind the change initiative. They make it the people in the warehouse or on the line. It’s about too academic and fail to understand why people feel the whether senior management has the appetite for change. way they do about the change. If they understood and The most serious source of resistance comes from the acknowledged those feelings, they could then determine senior management team when it’s not aligned with what how to respond to them. That’s behavioral work, but it’s has to happen, what has to change and how it’s going to important work; it’s not “soft” work. happen. Although senior management is always ready to Many managers don’t realize that change doesn’t happen step up and say, “Of course we have to improve our pro- with a single event, even though sometimes a catastrophic ductivity in this area by X amount and we need to put in event can encourage a company to change or help to estab- new processes and technologies,” what is often hidden is lish the need for change. Because change is not a single the debate about how—how to execute on it. event, it needs to be managed as a campaign, and that campaign may take longer than the one or two years most GUEST CONTINUED on Next Page . . . Supply Chain Leader / October 2007 45
  • Viewpoint (continued) Isn’t that commonly left to people in middle on the end-customer and the competition. Therefore, its management to execute? agenda is to buy for less. Does the manufacturer care if its suppliers are making less? Well, I believe inspired manu- Yes, but when senior management doesn’t like how facturers do care. Michael Dell knew that unless he had something is happening, everything stops. I call it a cam- strong, healthy suppliers, his business model wouldn’t paign of silence. The senior managers don’t get involved work. He developed a build-to-order model entirely and hope that “this too will pass.” For these reasons, I dependent on suppliers. think the most troublesome resistance to deal with is at the top. After all, most of the time, middle management What are your top three pieces of advice for senior will do what it is asked, but senior management operates management today, then? at a much more subtle level. Senior managers are often confronted with some of the most difficult choices they My latest work is about new business models, beyond will make in their careers during a change initiative, and reengineering. Effective change of the business model the leading question is whether they can accomplish the means changing both the promises delivered to the change with the current management team. customer and the delivery means—the what and the how. My first question to an executive, therefore, is often, If I were to give a senior executive three pieces of “Is your team with you—not just on the abstract idea of advice today, the first would be to make sure your senior what you have to change but on how the change is going management team is with you. The second concerns the to happen?” You often don’t know the answer to this nature of the team’s ambition. I am a very strong believer question until you get into the details about how the that the quality of the ambition very much affects what change will be implemented. you get. If the management team says let’s improve our throughput here by 10 percent, you can do that by tinker- Can you give an example of these sorts of details? ing with the operations. But if they say we want to improve by 100 percent and not build any more warehouses or I’ll give you an example of what happens in warehouses facilities, it causes the team and the middle management and other operations associated with manufacturing. to start to think much more dramatically. And if you don’t There’s a classic argument that occurs about how much have an ambition for more radical change, all you’re going customization needs to happen. Is your management team to get is incremental business improvement. going to support a policy that argues for standardization? The third thing may sound very tactical, but I think If you don’t standardize your systems and processes, every it’s critically important. You have to keep the CXO on the time there’s a new release of technology, or anytime you job. For a long time, management consultants argued that want to change something, it’s a huge and expensive what you needed was simply support from a senior execu- customization problem. tive. But that’s not the case. He or she has to stay in a decision-making role. Why? All of the operational and Most resistance to change comes from sales people in the field will argue that whatever they do is how people feel about the change. special or unique: They’ll say things like, “The market is Responding to those feelings is different in Omaha than in Philadelphia. We have to important work. customize for our market.” And then the implementation There are four important principles in the X-Engineering teams go into months of debate and discussion about how thinking. One is standardization. The second is trans- to do things. But what you get back, at best, is compromises parency—openness among you and your suppliers and in process and systems design. partners. The third is about harmonization—of jointly Those teams will never make the hard decisions that designing the processes. And the fourth is trust. None of need to be made. The chief executive has to be on the job this happens unless the parties trust each other and unless observing—if not participating—in the discussion, making they believe that there’s something in it for everybody. the decisions when there’s debate and disagreement. Let me give an example in the supply chain realm. When you see these large IT projects run over budget by As a supplier, my mandate might be to work with my tens of millions of dollars, most of the time it’s because customer—the manufacturer—to improve processes so my there was not a senior officer present to make the hard product costs less while my margins improve. But, often- decisions, so things got delayed; they got overly complex times, the view of the manufacturer is to beat down the and customized. price of the supplier, because the manufacturer’s focus is 46 Supply Chain Leader / October 2007
  • How does the CIO figure into this equation? there still are manufacturing jobs, maybe in different locations and different industries that require higher skills. The CIO is the most senior technology implementer. But this country is not suffering from offshoring. A lot But sometimes he or she does not have the authority or of companies are making all kinds of profit and building clout in the organization to tell a district manager he can’t up big cash reserves. So globalization is not the issue here. have it the way he wants it. It takes a very powerful voice in these arguments. Sometimes the CIO just isn’t senior What do you think the more significant issue is? enough in the enterprise to make decisions against what the line managers want. Even when there are close bonds The productivity improvement of the last 10 years has between CEO and CIO, the bond is often not sufficient. principally benefited shareholders and senior managers. It takes the authority of an operating officer. Workers have not benefited from it. They’re making less and they’re working harder. But that’s not the fault of X-Engineering implies a lot of collaboration. offshoring. It’s because companies have failed to reward What’s driving collaboration today? workers more aggressively than they do. And the reason they don’t is because they’re under tremendous pressure The Internet is a big enabler. I believe it will bring by very short-sighted shareholders to maximize earnings. about radical business change. After all, it provides almost Yet this strategy is not sustainable in a capitalist society. free infrastructure to allow companies to operate in funda- mentally different ways. And also to change not just how Why not? a company does its work but what it does—the nature of the service or product being delivered. What’s not sustainable is paying the executives and Let’s get back to your question of the people-process- shareholders and saying to the workers, “No, sorry, wait technology mix. While I believe companies need to start 10 years and maybe something good will happen to you.” with process, IT is more strategic than ever when com- The workers become demoralized and wonder, “What am bined with process. This combination can dramatically I doing this for? Is there a future for my children?” This change the strategy of a company. demoralization is very harmful to building a good enter- The benefit from technology isn’t just in the trans- prise. If you want to build a good enterprise, you want parency it provides between companies and their suppliers your workers excited, committed, believing in the mission and customers. IT allows them to achieve whole new levels of the place and believing that they’re being treated and of performance standards. It allows them to think much paid fairly. A company that is not doing this will not have more dramatically about where work gets performed and a committed or quality workforce, and that will eventually who can perform it—enabling the redistribution of work, hurt it. particularly of intellectual work. All of this offshoring could not occur without a tech- What is going to stop this trend? nology infrastructure. Good question. My hope, frankly—and I do see some Do you think this level of offshoring as a result of signs of this—is that there will be companies that take a globalization is a good thing, is inevitable? much more inspired view about how to treat their people. I think Pepsi is a company like that. I’ve always admired it Absolutely. In any free economy it’s inevitable. And as a company that treats its people very well. again, the technology and logistics enable it. The alterna- I know this sounds like a socialist point of view, but it tive is to build a protectionist environment, blocking the is actually a capitalist point of view: In order to do some- movement of work. The result of that has always produced thing effective, there has to be something in it for every- non-competitive companies. one, including your workers. The work should get better. I’m actually a believer that offshoring and globalization The ability to profit should get better. There should be are for the greater good. I’ll tell you why, from a U.S. collaboration within and beyond the walls of the enter- perspective. The unemployment numbers in the United prise to create value. States are very low. Of course, there is displacement of work and workers—some people lose their jobs—yet there This interview was conducted by Supply Chain Leader editor are plenty of jobs. Perhaps they’re not the high-paying Victoria Cooper in June 2007 Cooper is the principal of . manufacturing jobs some people have counted on. But Cooper Communications in Sausalito, CA. Supply Chain Leader / October 2007 47
  • Inside i2 by Tom Smithyman Winners of the 2007 Global Ken Sharma Award for Excellence A leading semiconductor manufacturer, an international levels, optimized markdowns and created a better managed footwear retailer and a Mexican beer brewer are the latest product flow. The company has also optimized its case winners of the Global Ken Sharma Award for Excellence. pack shipping, leading to more accurate quantities and ON Semiconductor, Payless ShoeSource and Grupo size assortments within all stores. As a result, Payless has Modelo were recognized for their leadership in supply experienced a string of positive same-store sales and chain management during ceremonies at i2 Planet 2007 improved inventory positioning. Orlando in May. The annual award, which honors i2’s late co-founder Ken Sharma, was open to hundreds of i2 users with implementations planned, in progress or completed. i2 and the i2 User Group co-sponsored the award, and an independent panel of analysts from AMR Research judged each nominee on the basis of innovation, supply chain depth and breadth, results and time to value. Return on investment Hiten Varia, i2 Darrel Pavelka, Payless ShoeSource Ravi Vancheeswaran, i2 User Group Longtime i2 customer ON Semiconductor received the Supply chain breadth and depth award for Supply Chain Return The Global Ken Sharma Award for Supply Chain on Investment. In the face of Breadth and Depth was awarded to Mexican brewer shorter than ever product life Grupo Modelo. cycles and increasingly complex Each of the company’s supply networks, ON Semi- breweries operated its conductor sought to transform production schedule dif- its supply chain into a ferently, and forecasting competitive differentiator. John Mallon, ON Semiconductor and planning operations Leveraging a variety of i2 were often manual. To solutions, ON Semiconductor has optimized its inventory solve these problems, position, improved scenario planning, implemented an Grupo Modelo imple- innovative sales and operations planning process, and mented i2 solutions to Gabriela Gonzalez, Ravi Vancheeswaran, Grupo Modelo i2 User Group increased its end-to-end supply chain visibility. improve visibility, planning, As a result, the company has improved its on-time collaboration and control across its extended supply chain. delivery to customers from about 70 percent to more than Through these implementations, the company has 90 percent. The company has also doubled its inventory reduced planning cycle times, increased forecast accuracy turns while increasing productivity by 300 percent. It and improved its response to market changes. Grupo reports that the use of i2 solutions has saved the company Modelo has lowered costs by reducing inventories, improv- nearly $20 million. ing plant execution, optimizing transportation planning and enhancing customer service at distribution centers. Supply chain innovation The company reports its network modeling activities The Global Ken Sharma Award for Supply Chain alone have enabled it to realize multimillion dollar savings, Innovation went to leading footwear retailer Payless Shoe- while improving the quality of its production plans. Source. With thousands of stores and SKUs, plus short product life cycles and long lead times, Payless needed to Finalists for the next round of Ken Sharma Awards will be named at Directions, the i2 User Group conference, on November 5–7 optimize its merchandise planning and allocation as well in Newport Beach, Calif. The global winners will be named at as its store-by-store price markdowns. i2 Planet 2008, April 30–May 2 in Phoenix. Using i2 solutions, Payless has decreased inventory 48 Supply Chain Leader / October 2007
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