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Global Supply Chain Mega Trend Interview


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Global Supply Chain Mega Trend Interview

  1. 1. Quest Gateway to Logistics Excellence uarterly Feb-Apr 2010 Supply Chain Megatrends 2010-11 Knowledge Partner
  2. 2. global Supply chain M Shift from Customer Service to Relationship Management 10 While traditional customer service focuses on achieving internal operating standards, a truly rela- tionship-driven supply chain focuses on establishing customer success... Forecast to Endcast 12 Management often lets forecasting bumble along unsupported in the hope everything will come out all right in the end.... Experience to Transition Strategy 14 Firms increasingly confront the need to reinvent processes that are performing adequately when as- sessed historically, but in fact.... Experience to Transition Strategy 16 While departments may remain the preferred method of managing work, the reality is that process-oriented, self-directed.... Collaborative Approach 18 The notion of focused collaborative arrangements, coupled with true cradle to grave accountability, is revolutionizing the way that.... Vertical to Virtual Integration 20 Virtually integrating operations with material and service suppliers to form a seamless flow of in- ternal and external work overcomes the financial barriers.... Trust the expertise 41 Melvis Furtado 3PL is a two-way traffic where the firms have to be a good listener and always evaluate what best their partner can do and what constraints he has. 3PL provides Service not just .... Supply Chain Opti-Simulation Unwired 44 Tolga Yanasik Simulation is often regarded as the proper means for supporting deci- sion making on supply chain design. Owing to its inherent modeling flex- ibility, simulation is often regarded as the proper means for.... CONT
  3. 3. Mega Trends 2010-2011 22 Absolute to Relative Value The notion of relative value is to grow a larger share of the profitable revenue available in a business arrangement by a willingness to perform a broader range.... 24 Information Hoarding to Sharing Given the right information-enabling technology and leadership, decision-makers can become per- formance managers.... 26 Training to Knowledge-Based Learning Implementing knowledge-based learning to effectively train employees is becoming critical..... 28 Reinventing Managerial Accounting to Value-Based Management Value management is appropriately viewed as the implementation of financial sophistication. The key is to identify and support activities that create value as contrasted to.... 30 Supply Chain design and analytics Changing scenario of Supply Chain is forcing companies to redesign their supply chain model to keep pace with the market.... “Approach RTC while cutting cost” 50 Thibault Quiviger Redesign To Cost (RTC), a very efficient Cost Cutting Approach consisting of reveiwing the very detailed design and specifications of the product, can save 15- 35 % of your total cost..... Back to Old Nightmares : Mastering Time Yan Lehunchec 54 This new paradigm is shifting the center of the industrial organization from the plant to the management of supplies and dispatch.... Corollary of Supply Chain Analytics 58 Unnikrishnan A long forgotten virus is challenging the LLC Industrial base, i.e. Long lead times TENTS
  4. 4. Questuarterly Feb-Apr 2010 Editorial Head Apresh C Mishra Editorial Let’s hope for the best +91 99105 16905 Intellect Head F or the last couple of years Supply Chain has matured so have its complexities. Considered often as a soft skill, Supply Chain manage- ment, on the contrary, is an engineering activity, as much as manu- facturing or IT development. This activity requires not only extensive training and skilled people to be carried out efficiently but also trust among Rajeev R Mishra the different partners in the chain. That’s the most difficult aspect of Supply Chain management: partners need to trust each others, to share data or +91 99711 74574 even invest in common systems. This trust issue is often the foot trap which blocks, for instance, the development of 3rd PL. 3rd PL need to invest in Marketing and Operations heavy IT system interconnected with their customer’s systems to provide Head up to date services but contracts are challenged every 2 years. This is far Shatrunkay Singh shorter than the breakeven point, impeding the development of long and fruitful relationship between 3rd PL and orders givers. There are several aspects of supply chain interaction that have been iden- tified in supply chain trends over the last few decades. The mega-trends re- Communications Partner flect fundamental paradigm shifts exhibited by leading firms as they Renaissance PR transform their supply chain capabilities to accommodate the long-term transition from an industrial to an Scientific Technology driven society. Knowledge Partner These mega-trends imply substantial change in logistics practices between Enetek S.A.R.L. supply chain partners as they struggle to establish efficient, effective, and relevant product/service solutions for end-customers. The mega-trends Disclaimer discussed in this paper identify some critical dimensions of change relevant All the information in this magazine has been provided to supply chain value creation. with due care. However nei- Well, we have tried to create an enabling environment for the supply chain ther Uvaach Media nor its any partner guarantee for the sector so as to equip supply chain strategists with the changing market appropriateness of the infor- trends which could affect them in future. Moreover supply chain is con- mation. Kindly check prop- sidered secondary focus. We hope Log4scm Quest will create value addition erly before acting according in bringing supply chain in centre stage in companies’ strategic business to the information we have planning. provided here. All the matters contained here are under the We would be glad to hear from you intellectual property right of Uvaach Media that prohibits Happy reading!! the user from copying or re-, producing the matter in any form without the prior writ- +91 99105 168905 ten permission of Uvaach Media. Feb-April 2010 Log4scm Quest 05
  5. 5. Cover Story Global Supply Chain Mega Trends 2010-2011 06 Log4scm Quest Feb-April 2010
  6. 6. T raditionally, supply chains customers will increasingly define that triggers a re- created value through value in the context of a technol- plenishment low price and broad ogy driven competitive environ- event to product assortment. Today, how- ment is critical to supply chain t a k e ever, supply chain managers are success. There are several aspect learning how to accommodate of supply chain interaction that customers who demand greater has been identified in sup- control of the buying process, ply chain have the financial ability to make trends choices, and are willing to utilize over place. a variety of ways to pur- D e l ay s chase goods and services occur for a to satisfy their number of reasons, and the longer the delay, the greater the uncertainty up- stream supply chain partners t h e experience. That uncertainty last few translates into those partners tak- decade. ing measures to guard against The mega- stock outages, in the form of trends reflect larger safety stocks. As that de- fundamental par- mand signal, and its delay, moves adigm shifts exhibited further away from its source, the by leading firms as they trans- larger the amplitude, or uncer- form their supply chain capabili- tainty becomes. That uncertainty ties to accommodate the impacts planning cycles, and their long-term transition from an in- lead times, within and between dustrial to an Scientific Technol- the supply chain partners. In this ogy driven society. These way, distance and time become lifestyle re- mega-trends imply substantial more and more critical to build- quirements. Unfor- change in logistics practices be- ing an effective and efficient sup- tunately, as firms struggle to tween supply chain partners as ply chain. implement best practices to solve they struggle to establish effi- today's problems, the environ- In addition, there are com- cient, effective, and relevant ment in and around the firm is pounding factors that occur due product/service solutions for changing. If a firm does not have to the nature of that initial de- end-customers. The mega-trends the capability and inclination to mand signal the supply chain re- discussed in this paper identify change, it may find itself in the ceives. The circumstances that some critical dimensions of position of doing things ex- cause a consumer to walk into a change relevant to supply chain tremely well that no one values. specific store and purchase a par- value creation. The goal of integrated supply ticular SKU are of interest in un- chain is to enhance end-customer Once a product is scanned at a derstanding supply chains. It value, Understanding that end- retail store, a natural delay occurs could just be the normal weekly in the transmittal of the signal shopping run, which results in a Feb-April 2010 Log4scm Quest 07
  7. 7. Cover Story demand signal that is relatively easy were managed, and how effective to predict and manage. Problems the resulting processes were in arise when product promotions take achieving the objectives, was par- place. The consumer might have tially dependent on where and how made a purchase because of a inventory was physically deployed in coupon event, a store ad placed in a the network. This led us to support The location local paper, or via an in-store event. the development of a dynamic sim- These events can cause disruptions ulation model to adequately repre- and amount of in the supply chain, and far too fre- sent the processing of a supply inventories and quently are mis-communicated to chain’s work processes and operat- production the supply chain partners. ing policies against the supply capability plays a chain’s primary driver: demand. This New product initiatives are an- direct impact on leads to an important point: If a other form of disruption in the sup- supply chain’s designing incorpo- the ability to ply chain. A new initiative,perhaps a rates not only questions as to Where respond to these new product, or variation on an ex- and how many stacks of inventory?, isting product, requires decisions on types of supply pre-launch production timing, and but also of work process like inven- chain demand tory deployment, replenishment pre-building and staging inventory creating events, policies, operating policies, the two to meet anticipated demand for the issues are inherently linked and must further leading to products. The location and amount be solved together. improving our of inventories and production capa- bility plays a direct impact on the As we investigated different oper- understanding of ability to respond to these types of ating policies within the warehouse how physical supply chain demand-creating structure proposed by the optimiza- location and work events, further leading to improving tion models, we found that in cer- processes are our understanding of how physical tain instances that we would not be inherently linked location and work processes are in- able to achieve the service levels we herently linked in efficient supply had intended. This learning from in efficient supply chain design. And while these prob- the simulation modeling fed back chain design. lems exist in scale in the different into the optimization model, in parts of the World, they are further terms of new constraints required exacerbated when dealing with in- to determine a feasible warehousing ternational trade. structure. That, in turn, created a new scenario to test within the sim- The ENETEK Analytics group ulation environment. In the course was asked to develop a traditional of the work, we realized that an eas- distribution network design model, ier process to move back and forth utilizing mathematical optimization between the two technologies would methods, to suggest a potential lay- be useful. out of warehousing required to meet this need. To accomplish this, Let’s consider the different situa- work processes and policies would tions here below : need to be substantially changed. A steel maker is designing its 5 How successfully those changes years investment plan. It must de- 08 Log4scm Quest Feb-April 2010
  8. 8. cide where to invest, which pro- 2. Where to locate the dif- EOM will decide if it must be duction line to revamp, which ferent Distribution Centers built on stock or on demand, im- production capacity to squeeze (DCs) plying very different industrial or- down across 27 plants in Europe. 3. How much stock will be ganization scheme : demand Its product portfolio is made of 16,000 different products and necessary to guarantee 95% serv- forecast, supplier contracting, many of them are processed on ice level to every customer with a production allocation, capacity different production lines in dif- delivery lead time of X days (X to management… Then, once de- optimize) cided which car to build on stock ferent countries. The team in versus on demand, the OEM charge of this process is also con- 4. Out of the total stock, must decide through which DC cerned by the effect of different how much will be safety stock sending this car in order to guar- price policies contemplated for that is to say dead stock. antee that it will reach the cus- the different product and how this could modify their invest- These questions must be con- tomer in less than X days after ment plan. sidered as a single problem which this customer passed his order. It A car maker is willing to re en- must be handled by the OEM. Or is easy to understand that both gineer its distribution chain in its 3rd PL suppliers. Indeed, since the distribution and the produc- Europe to build a competitive ad- more and more 3PLs tend to tion are intrinsically linked when vantage against its competitors in manage the distribution network, deciding which marketing offer a context of over production they should propose added value about delivery lead time to de- over capacities, long delivery lead solutions to the OEM by study- sign. Let alone considering the times and over stock scattered in ing in depth these questions with product mix which is per se a the different European countries. their customers. Nonetheless, as challenge. The difficulty for this EOM can it is easy to understand, these A port authority is willing to be summarized by the following questions, which at first sight different questions: build a new container terminal. It seem to be pure distribution is- must decide about the new lay- 1. Which product must be sues, go very deep in the OEM out of the terminal, the number built on demand, which must be organization and its production of cranes, the size of the parking built on stock strategy. For each car model, the lot for the waiting trucks, the number and location of weigh since more and more 3PLs tend to man- bridges and, most important, the age the distribution network, they number and lay-out of the cus- should propose added value solutions to toms gate it must start negotiate the OEM by studying in depth these with the government. questions with their customers. In this article, we will consider Nonetheless, as it is easy to understand, the scientific approach which can these questions, which at first sight seem be implemented to answer these to be pure distribution issues, go very technical questions and beyond, deep in the OEM organization and its explain the tools and methodolo- production gies and Mega Trends Feb-April 2010 Log4scm Quest 09
  9. 9. Cover Story Megatrend-1 Shift from Customer Service to Relationship Management Relationship does matter While traditional customer service focuses on achieving internal operating standards, a truly relationship-driven supply chain focuses on establishing customer success. For many customers, such operating features as cycle time compression, exact point in time delivery performance and perfect order-to-delivery may be the prime drivers of supplier acceptability. C ustomer Focus and Supe- and perfect order-to-delivery may rior Service should be a be the prime drivers of supplier major objective for every acceptability. In contrast, other manufacturing company in order customers may not be willing to to either achieve or maintain mar- shoulder the cost of day-to-day ketplace leadership. Customer rel- six-sigma logistics support. Their evancy will increasingly become preference may be for a high level the key strategic commitment of of average logistical support forti- leading corporations. While tradi- fied by immaculate logistical recov- tional customer service focuses on ery when and where needed. achieving internal operating stan- Supply chains designed to dards, a truly relationship-driven achieve unique customer value supply chain focuses on establish- propositions have the potential to ing customer success. For many turn commodities into value-added customers, such operating features solutions. Given an understanding as cycle time compression, exact of what drives end-customer pur- point in time delivery performance 10 Log4scm Quest Feb-April 2010
  10. 10. chase behavior, a supply chain firm's resources relative to the matching service capabilities with based on relationships has the needs and desires of select indi- changing customer expectations, greatest potential to result in vidual customers. Then the firm providers can stay ahead of com- unique logistical solutions that are can deploy its resources and ca- petition. simultaneously effective, efficient pabilities to perform customer- Second, firms seeking to en- and relevant. This implies that valued activities and services that hance customer relationships firms will likely participate in competitors cannot match at all must develop operating systems multiple supply chains to support or at a reasonable cost. capable of quickly reacting to different customers. There are two shifts that must change rather than depending Although most firms have not take place for firms to evolve upon anticipatory deployment of achieved the desired level of along this continuum. First, firms inventory to handle planned re- closeness with customers, it is the seeking to develop strong cus- quirements. This is facilitated by most advanced of the mega tomer relationships should recog- gathering and exchanging infor- trends. We assess the current av- nize that all customers do not mation throughout the supply erage achievement to be 5-6 on have the same service expecta- chain as contrasted to guessing the ten-point scale. Leading firms tions and do not necessarily want what may happen. The focus increasingly recognize that suc- or deserve the same overall level must be on efficient and effective cess hinges on establishing inti- of service. They must, therefore, accommodation of unique cus- mate relationships with key identify core customers best tomer requests as well as on the customers. Intimate relationships suited to be their business clients ability to react to unexpected op- enable firms to generate unique and then meet or exceed expecta- erational circumstances. and profitable product/service tions by providing unique value- These capabilities enable firms offerings for their preferred cus- added services. These services to capitalize on uncertainty to en- tomers. This, of course, is in di- may include assignment of spe- hance customer satisfaction. rect contrast to principles of cific focus teams to identify, de- Some approaches that facilitate mass marketing, and it is certainly sign, implement, and refine flexibility include providing front- cost prohibitive to all but the specialized and synchronized of- line employees with the authority most narrowly defined market ferings. Additionally, firms must to approve special customer re- niche firms. Managers seeking to develop the ability to satisfy not quests, automatically accommo- achieve this level of intimacy with only existing needs but also those dating stock outs through customers must assess their that may emerge. By continuously multiple service locations, and implementing preplanned solu- Although most firms have not achieved the tions. Another critical enabler of desired level of closeness with customers, it flexibility is routinization and simplification of fundamental is the most advanced of the mega trends. We work to minimize effort ex- assess the current average achievement to be pended on handling day-to-day details and free resources to deal 5-6 on the ten-point scale. Leading firms in- with unexpected events. Judicious creasingly recognize that success hinges on employment of form and time postponement also contributes to establishing intimate relationships with key a firm's ability to respond to un- customers. known or unplanned circum- stances. Feb-April 2010 Log4scm Quest 11
  11. 11. Cover Story Megatrend-2 Forecast to Endcast Predicting the unpredictable Management often lets forecasting bumble along unsupported in the hope everything will come out all right in the end. This approach can only contribute to repeating cycles of poor performance. I ts difficult to forecast our business, it’s too unpre- dictable. The fact is, when in- ventory exists at any level in anticipation of customer orders, it scheduling, inventory levels, and customer service (among other things). Managers know this, in their hearts, but for some un- known reason they insist that “we is the result of a forecast. Some- can’t forecast this business”. The one, somewhere in the organiza- result is that management often tion has made predictions that lets forecasting bumble along un- have activated capacity, consumed supported in the hope everything cash and driven the customer serv- will come out all right in the end. ice level. Also, it’s a good bet that This approach can only contribute the someone who’s forecasting is to repeating cycles of poor per- doing it without the right tools, formance. without proper training, and with Experience demonstrates that little or no information to support the consequence of bad forecast- the process. Yet, the forecast drives ing is a significant and unfavorable material planning, production impact on overall business per- 12 Log4scm Quest Feb-April 2010
  12. 12. formance. To make matters swers various managers will give results being realized. worse, a form of denial sets in the same questions. This, of • Short-term forecast devi- and the real costs of poor fore- course, opens up an entire area ations are monitored and ad- casting are consistently underes- for discussion (spirited discussion timated and often overlooked. in many cases) which should be justed and long-term forecast When “bad numbers” drive ma- the beginning of swift problem accuracy is continuously improv- terial planning and production resolution. ing. schedules, the inevitable results • Inventory record accuracy Answer “Yes” or “No” to each are longer cycle times, higher is maintained at 98+%. of the following: overhead activity costs, erratic production schedule perform- • Order fill rates meet man- • Excess safety stock ance, excessive inventory, lower agement’s specific and measured buffers are not pyramidally main- throughput, and lots of dissatis- customer service strategy. tained at various inventory levels fied customers – eventually hav- to compensate for “bad num- • Delivery lead-times are at bers”. ing a negative impact on sales. least competitive and predictable. The cost of bad forecasting is • Excess and obsolete in- enormous. Forecasting deserves • All functions agree on ventories are measured and are increased recognition of that im- which products are stocked and less than 1% of total inventory. portance and must become one which are made to order. What to do further? of the most critical management • The mix and investment For those who do not score well functions. As such, improving the forecasting process deserves the in inventory are a shared respon- on the Self-Diagnostics test small investment required to sibility between Sales and Manu- above, appropriate action is defi- facturing. nitely required. achieve incredible returns on that investment. First, management must for- • Appropriate mathemati- mally recognize sales forecasting The Self-Diagnostics Checklist cal and statistical calculations are as a vital business control point. used instead of “rules of thumb” The following ten point check- Second, this recognition should to establish desired mix and lev- be followed by a thorough evalu- list is a simple self-diagnostic els. ation of the current forecasting which can help companies envi- process. Third, where needed, an sion what performance could be. • Management’s inventory action plan for improvement Another enlightening aspect from investment plan and customer should be launched without delay. the test could be the differing an- service objectives are the actual The good news is getting a fore- casting process in place is not as Forecasting deserves increased recogni- difficult as many people think; statistical forecasting tools are tion of that importance and must be- readily available and the proce- come one of the most critical dural requirements are modest. If you have to forecast, then the management functions. As such, improv- only proper course is do it with the right tools, techniques, infor- ing the forecasting process deserves the mation and properly trained staff. Then, and only then, will you be small investment required to achieve in- able to say “we can forecast our business.” credible returns on that investment. Feb-April 2010 Log4scm Quest 13
  13. 13. Cover Story Megatrend-3 Experience to Transition Strategy Leading the edge Firms increasingly confront the need to reinvent processes that are performing adequately when assessed historically, but in fact are being dramatically out-performed by solutions tailored to new competitive conditions. E xecutive Leadership is re- creasingly, however, firms confront quired to bring heavy em- unique situations about which they phasis on the vision, have zero or limited experience. objectives, and the importance of For example, it is becoming com- the process redesign. Even after mon for firms to employ solely the redesign and implementation contracted resources (possibly in- are completed, executive manage- cluding consigned inventories) for ment must be steadfastly diligent many supply chain activities. Most to make sure the old ways do not firms have limited experience in slowly resurface. For years, the so- establishing and managing these called experience curve has domi- relationships. nated strategic responses to market A second example is the increas- and competitive situations. Firms ing focus on achieving reduced or based their strategies on concepts negative cash-to-cash cycles. that had achieved past success. In- Today, new competitors have 14 Log4scm Quest Feb-April 2010
  14. 14. achieved success in traditional fied, documented, and refined. supply chains using a combina- Through experience, most man- tion of e-commerce and direct agers have created business mod- logistics to, in fact, operate on less els regarding the processes they than zero capital investment. This manage. While these models are shift in measurement and practice sometimes comprehensive, in managers must has forced many firms to design many cases they are limited in develop expertise in and manage in uncharted waters. scope and perspective. As a re- The point is that all the experi- sult, the decisions weigh heavily the application and ence in the world concerning on past limited experience. In the interpretation of how the traditional logistics future, new business models must decision support model works is of very little value include the organizations, activi- in developing a strategy to con- ties, resources, and relative pa- tools that are front this new competitive pat- rameters of the expanded becoming more tern. During periods of intensive enterprise. change, previous experience and crucial in the Second, managers need to de- existing infrastructure are typi- velop skills in solving case situa- conceptualization cally among the most difficult and evaluation of tions outside their traditional barriers to overcome. Firms in- experience base. This should in- supply chain creasingly confront the need to clude analysis of situations in- reinvent processes that are per- volving "fictional" products and alternatives. forming adequately when as- markets where managers must Effective decision sessed historically, but in fact are rely on the application of concept support system being dramatically out-performed rather than historical practice. by solutions tailored to new com- applications provide petitive conditions. Finally, managers must develop expertise in the application and a broader range of When assessing the status of the shift from an experience to a interpretation of decision sup- nontraditional port tools that are becoming transition process, our experience experiences for more crucial in the conceptualiza- suggests a typical score of 3 to 4 the manager of the tion and evaluation of supply on the ten-point scale. Manage- chain alternatives. Effective deci- future. ment is beginning to realize the sion support system applications potential benefits of more provide a broader range of non- broadly conceived and executed traditional experiences for the strategies. Three changes must manager of the future. The capa- occur to facilitate the shift from bility to identify new strategic pat- an experience to transition based terns, accurately assess their likely strategy. performance, and manage con- First, fundamental total cost-to- tinuous transition is becoming serve frameworks must he identi- the leading edge model Feb-April 2010 Log4scm Quest 15
  15. 15. Cover Story Megatrend-4 Functional to Process Integration For significant breakthroughs in efficiency While departments may remain the preferred method of man- aging work, the reality is that process-oriented, self-directed work teams are increasingly the solution for significant break- throughs in efficiency. O ne of the oldest and of power and control devel- potentially most oped within organizations, the productive trends is traditional notion of a depart- the continued migration from ment became synonymous with functional to process integra- being departed from the rest of tion. While the work of logis- the organization. tics itself has remained While departments may re- relatively the same over the past main the preferred method of decade and will continue to re- managing work, the reality is main the same during the next that process-oriented, self-di- ten years, what has and will rected work teams are increas- continue to change rapidly is ingly the solution for significant how we view work. As pockets 16 Log4scm Quest Feb-April 2010
  16. 16. breakthroughs in efficiency. most managers. Further integra- Managers realize that functional tion across the firm's major excellence is only important in functional boundaries is the first terms of the contribution func- step toward additional process tions make to the processes they integration. serve. In terms of organiza- tional structure, the concept of Second, there must be sub- functional departments is as ob- stantial advancement of process solete as punch cards are to in- integration with external supply formation technology. chain partners, particularly with The validity of wading costs service providers. This requires Most employees more consistency in the defini- will do what they among functional areas to ben- efit total cost is beyond ques- tion, execution, and measure- are measured on tion. Information technology ment of supply chain processes and what they are extensions such as ERP are to establish common language and expectations. paid to do. The starting to support more so- phisticated costing approaches, challenge is to con- Third, most employees will do lessening the difficulty of meas- vert metric and re- what they are measured on and uring across functions. ward structures what they are paid to do. The On the basis of these develop- challenge is to convert metric from department ments and applications, we be- and reward structures from de- related budgets to lieve that firms have achieved 4 partment related budgets to co- coordinated to 5 on the ten-point scale rep- ordinated process-related process-related in- resenting the shift from func- incentives. centives tional to process integration. The reality and potential of While there has been substantial meaningful metrics based on progress, major opportunities to one plan, which in turn is based shift to the process focus re- on one forecast, will increas- main. ingly become reality. There has First, while purchasing, pro- been substantial progress in this duction, logistics and marketing area but more opportunities re- functions have each been inte- main as additional cost informa- grated within their individual tion and accuracy will lead to processes, there has been less more refined processes with re- progress integrating between duced duplication. these areas. This is still recog- nized as the "Great Divide" by Feb-April 2010 Log4scm Quest 17
  17. 17. Cover Story Megatrend-5 Collaborative Approach To streamline the distributive process The notion of focused collaborative arrangements, coupled with true cradle to grave accountability, is revolutionizing the way that firms work together to streamline the distributive process. I n most business relation- partners. The concept of inte- ships today, suppliers sell to grated supply chain management, customers. Often there is however, highlights the leveraged considerable conflict in these benefits of firms collaborating to buyer/seller arrangements as each achieve common goals. party seeks the best financial deal. The notion of focused collabo- Neither side fully trusts the other. rative arrangements, coupled with Vendors must guess customers' true cradle to grave accountability, needs since specific demand or is revolutionizing the way that planning information is not firms work together to streamline shared. In such situations, the po- the distributive process. The po- tential for achieving overall oper- tential for increased overall effi- ating efficiency is limited as firms ciency as a result of reduced work maneuver for short-term benefits duplication and redundancy are as- at the expense of their trading tounding. 18 Log4scm Quest Feb-April 2010
  18. 18. Developing collaborative be- shared responsibilities, delineate havior has been the subject of guidelines for sharing proprietary substantial discussion. These be- planning and operational infor- haviors, however, are not well de- mation, and create financial link- fined in most firms. Managers at ages that make firms dependent many firms feel that behavioral on mutual performance. change is extremely difficult to They also should encourage risk To be truly effec- achieve. Often they find them- tive, collaborative and benefit sharing by detailing selves talking about collaboration much more than they actually how rewards and penalties are to arrangements also be apportioned across partner must be highly practice it. Our assessment for firms. Such sharing reflects com- the average firm is 2 to 3 on the mitment to the belief that indi- sensitive to the ten-point scale. potential negative vidual firm performance is linked There are three shifts that must to overall supply chain perform- aspects of inter- occur to enhance firm collabora- ance. In addition, formal guide- locking agree- tion. First, true collaboration is lines that define joint operating not dominated by or self-serving policies and procedures for han- ments. to one party in the arrangement. dling both routine and unex- Specifically, par- Collaborative relationships must pected events should be derived. ticipating firms encourage the mutual trust and must be willing to Finally to be truly effective, col- value needed to develop and sus- tain coordinated operations and laborative arrangements also address difficult strategies. must be highly sensitive to the issues related to potential negative aspects of in- There must be a shared vision terlocking agreements. Specifi- relationship de- and objectives among customers cally, participating firms must be integration far in and suppliers about interdepend- advance of the ac- willing to address difficult issues ency and principles of collabora- related to relationship de-integra- tual need to dis- tion. Efforts to achieve objectives must focus on providing the best tion far in advance of the actual solve a supply need to dissolve a supply chain chain arrange- end-customer value regardless of where along the supply chain the arrangement. Although most col- ment. necessary competencies exist. laborative relationships are volun- This perspective is key to long- tary and, in effect, can be term supply chain viability. dissolved at any point, setting for- mal exit procedures is advisable Second, successful collabora- to prevent disputes over assets. A tion requires structures, frame- clause relating to duration and works, and metrics that encourage cross-organizational termination of the relationship behavior. Rules and agreements ensures that it does not outlive its should clarify leadership roles and usefulness to the participants. Feb-April 2010 Log4scm Quest 19
  19. 19. Cover Story Megatrend-6 Vertical to Virtual Integration On the way to process reforms Virtually integrating operations with material and service suppliers to form a seamless flow of internal and external work overcomes the financial barriers of vertical ownership while retaining many of the benefits. H istorically, firms have The problem with vertical inte- tried to reduce supply gration is that it requires tremen- chain conflict by owning dous capital investment and an consecutive levels in the business incredibly complex organizational process. Henry Ford's original structure. Recreating Henry Ford's business strategy is a legendary at- vertical supply chain is infeasible tempt at using ownership to today. Firms, therefore, must har- achieve vertical supply chain inte- ness the expertise and synergy of gration. Ford's dream was full external supply chain partners to ownership and management of achieve success. Virtually integrat- the entire value creation process in ing operations with material and order to reduce waste and increase service suppliers to form a seam- relevancy. Ford's rubber planta- less flow of internal and external tions, ships, and foundries con- work overcomes the financial bar- verted raw iron ore to a finished riers of vertical ownership while car in seven days. retaining many of the benefits. 20 Log4scm Quest Feb-April 2010
  20. 20. While many manufacturing and activities that they do not directly retail firms have traditionally control and cannot directly see, worked with third party logistics but whose performance they can providers (3PL's) to handle phys- and must monitor to ensure suc- ical movements of products, cess. These suppliers represent a there is a growing trend to out- firm's extended family and will source knowledge processes as contribute as much to the future well. Staff and process design ac- success or failure of the supply tivities are being outsourced to chain as any internal department. Most firms have consultants. Information design, A firm's management strategy taken initial steps collection, maintenance, and must reflect the recognition that analysis are outsourced to infor- a supply chain is only as strong as toward virtually mation integrators. Knowledge its weakest supplier link. specialization will increasingly be- integrating their Second, evolving the structures come an activity considered for supply chains. to facilitate virtual integration is outsourcing by the virtual enter- neither easy nor quick. Supply Relatively few firms, prise. The benefits of outsourc- chain partners must have a com- ing such competency in order to mon vision of the total value cre- however, have focus on core business require- ation process as well as shared ments will continue to drive firms responsibility for achieving it. achieved from vertical to virtual integra- tion. Firms must carefully identify and full-scale select partners with complemen- Our research provides evidence tary visions, strategies, and oper- implementation. that most firms have taken initial ational capabilities. Partners must Expansion of this steps toward virtually integrating interface their operations in ways their supply chains. Relatively few that reduce duplication, redun- mega-trend is firms, however, have achieved dancy, and dwell time while main- full-scale implementation. Expan- taining synchronization. currently slowed by sion of this mega-trend is cur- Additionally, firms must spread some highly rently slowed by some highly the risks and rewards of collabo- publicized failures of contract lo- ration to solidify goal attainment. publicized failures of gistics relationships. As a result, contract logistics Finally, firms must extend man- prospective service providers are being carefully qualified prior to agement practices beyond suppli- relationships. engaging in virtual relationships. ers to include suppliers' suppliers. We assess the average perform- Suppliers' views on resource ance score on this trend to be 4 needs and constraints, threats, to 5 on a ten-point scale. opportunities, and weaknesses must be considered when setting To move to virtual integration, goals, objectives, and action plans three shifts must occur. First, as they play increasingly vital and managers who interface with ma- terial and service suppliers must irreplaceable roles in creating learn how to manage assets and end-customer value. Feb-April 2010 Log4scm Quest 21
  21. 21. Cover Story Megatrend-7 Absolute to Relative Value Enhancing marginal profitability The notion of relative value is to grow a larger share of the profitable revenue available in a business arrangement by a willingness to perform a broader range of value-added services while enhancing marginal profitability. T he key to long-term tween revenues and cost. Many success is doing the firms act to increase sales in re- things that attract and sponse to market pressures maintain the most profitable only to find that escalating customers and doing them costs associated with the in- well. A traditional success creased sales fully erode the measure has been absolute marginal profits. The notion of market share typically meas- relative value is to grow a larger ured in gross sales dollars. share of the profitable revenue available in a business arrange- A more sophisticated ap- ment by a willingness to per- proach to measuring success form a broader range of may be the relative share a sup- value-added services while en- plier enjoys in terms of key hancing marginal profitability. customer success and resulting profitability the difference be- Some enlightened firms are 22 Log4scm Quest Feb-April 2010
  22. 22. beginning to accept and ex- to the correct segments, and ploit this shift. They realize producing credible reports for that efforts focused on serv- senior management must be ing profitable accounts can employed. Sales and market- yield enhanced returns com- ing involvement must be se- pared to those obtained by of- cured, as they have to accept fering mediocre service to a the principle that more sales wide range of customers. and revenue do not necessar- ily mean higher firm prof- Such "average" service may over-satisfy some customer itability. Logistical practices current status of such as multi-customer trans- firms regarding this segments while under-satisfy- portation consolidation, ing other segments willing to trend is a meager I cross-docking, mixing in-tran- pay more for better service. sit, and other operational in- to 2 on the Often the result is losses in novations that improve ten-point scale. both revenue and profit in efficiency and enhance rela- these marginal accounts. tive value must be adopted. There is a long way Thus, the true measure of to go to implement successful growth may not be Second, the financial mar- the absolute size of dollar kets must begin to place more this trend within sales as it is the relative share emphasis on profit than mar- the next decade. of sales received for value ket share. While earnings per While there are rendered. share (EPS) and profitability many changes that Our estimate of the current are very important measures of performance, the financial must occur for status of firms regarding this trend is a meager I to 2 on the markets do place some em- this trend to ten-point scale. There is a phasis on share. This forces materialize, there long way to go to implement senior management to main- are two that are this trend within the next tain share even when the mar- decade. While there are many particularly critical. ginal share is not profitable. changes that must occur for this trend to materialize, there While visionary firms are be- are two that are particularly ginning to recognize this critical. change, the focus on relative value will evolve quite slowly First, a wider implementa- tion and acceptance of activ- as it requires major paradigm ity based and segmental shifts. The concept is easy to costing is required. Logistics understand, its implementa- information systems capable tion, however, requires major of accurately tracking cost changes in management phi- components, assigning them losophy. Feb-April 2010 Log4scm Quest 23
  23. 23. Cover Story Megatrend-8 Information Hoarding to Sharing Share...Learn...Grow... Given the right information-enabling technology and leadership, decision-makers can become performance managers. E very decision-making cycle de- pends on finding the answers to three core questions: How are we doing? Why? What should we be doing? Scorecards and dashboards monitor the liver sustainable competitive advantage by growing revenue faster, reducing op- erational expenses further, and leverag- ing long-term assets better. Implicit in several of the mega-trends is the need business with metrics to find answers to for supply chain participants to share in- How are we doing? Reporting and analy- formation. sis provides the ability to look at historic data and understand trends, to look at The shift from a need to know mental- anomalies and understand Why? Plan- ity to relevant information sharing is a ning and forecasting help you establish a difficult transition for old school man- reliable view of the future and answer agers. Most, with years of experience in What should we be doing? Integrating the trenches, have learned the hard way these capabilities allows you to respond that information is power. It is becoming to changes happening in your business. increasingly clear, however, that those who hoard information can only exploit The quality information offers insights it - they cannot leverage it. The immedi- and lessons learned on leveraging your ate gains that are generated from such in- information assets better in support of formation hoarding pale in comparison your most valuable human capital assets: to the cost savings and enhanced service the growing number of high-value deci- that progressive firms find attainable sion-makers. Given the right informa- through sharing relevant information tion-enabling technology and leadership, with supply chain partners. The open de- these decision-makers can become per- ployment of information across the sup- formance managers. Such managers de- ply chain is the catalyst that enables 24 Log4scm Quest Feb-April 2010
  24. 24. effective integration. It serves as usually expands as trust is estab- substantially exceed the profits re- the key that unlocks the power of lished. Initially, such tactical data as sulting from the sale of such infor- supply chain integration. short-term forecasts and inventory mation. availability may be provided to fa- Currently, the shift from informa- cilitate resource planning and prod- Third, organizations that view in- tion hoarding to information shar- uct flow. Once the benefits of formation as a key resource man- ing is dependent upon technology. tactical sharing are realized, firms age its exchange in a confidential Primarily, the ease of use and low tend to become more open to shar- manner to reduce conflict when cost of the Internet is driving rapid ing sensitive information on costs, conducting business with compet- change. This is presenting a diffi- product development plans, and ing suppliers or in serving compet- cult transition for managers who promotional schedules. The auto- ing customers. For example, a are measured and rewarded on tra- motive industry is a prime example number of manufacturers have es- ditional metrics. As a result, the of firms designating tier one lead tablished separate cross-functional score of the average firm is only 3 suppliers who in turn coordinate teams to serve competing mass to 4 on a ten-point scale. To ad- and sequence the work of second- merchants. The teams include per- vance further on this continuum, ary suppliers. This supply chain sonnel from both organizations in four major shifts must occur. strategy has significantly reduced such areas as sales, marketing, fi- nance and logistics. Increasingly, First, effective information shar- cost and time of automobile as- shared confidential information is ing is heavily dependent on trust sembly. Such benefits are totally de- required to plan joint operations. beginning within the firm and ulti- pendent on information sharing. To ensure that confidentiality is mately extending to supply chain Eventually, long-term plans and maintained, there must be credibil- partners. Managers are slowly strategies are revealed in order to ity and trust between supply chain learning to share information al- develop and integrate logistics partners.Information Quality, Rel- though some still believe that shar- processes and resources across the evance, and Timeliness have a ing forecasts, sales, inventories, supply chains. major impact on overall company costs, and promotional or develop- Second, many organizations will business performance. This means ment plans will compromise their not share forecast or planning data the integrity of computer files and organization's competitive posi- under any circumstances while oth- outputs must be very high. tion. This is particularly frustrating ers have adopted the practice of when a manager's view of the or- selling it to a third party provider Finally, information sharing may take many forms. The most com- ganization encompasses only his or of competitive data such as Infor- prehensive is the exchange of data her own specific functional depart- mation Resources. Some retailers, ment. For this reason, information for example, view point-of sale files and provision of direct access is often not shared among depart- data as a valuable commodity they to databases. Shared employees, al- ments of the same operating unit. own and from which they can ex- though not yet common, extends the process by providing a manage- If managers do not share internally tract a profit. This is a short-term rial conduit through which infor- its doubtful they will share infor- mentality. Managers must begin to mation with supply chain partners. realize that the efficiencies ob-mation flow between organizations can be coordinated and translated. The scope of shared information tained through information sharing Information also can be shared Currently, the shift from information ers who third party logistics suppli- through assign dedicated employ- hoarding to information sharing depends ees to shipper locations to ensure coordination. A substantial in- upon technology. Primarily, the ease of crease in information sharing is use and low cost of the Internet is driving critical to enhanced supply chain integration and performance. De- rapid change. This is presenting a difficult spite the historical inhibition, firms transition for managers who are measured must begin to extend their willing- ness to share. and rewarded on traditional metrics Feb-April 2010 Log4scm Quest 25
  25. 25. Cover Story Megatrend-9 Training to Knowledge-Based Learning Coping with Human Factor Implementing knowledge-based learning to effectively train employees is becoming critical. I n the foreseeable future the lo- ing a product from a shipping loca- gistics process will remain tion to a customer destination. human centric. Effective man- Truck drivers, in fact, may spend agement of the logistics process, more time face-to-face with key cus- however, is complicated by the fact tomer representatives than any other that over ninety percent of all logis- company employee. tical work takes place outside of the The truck driver may not even be vision of any supervisor. No other employees within the typical busi- an employee of the firm that is mak- ness enterprise are expected to do so ing the shipment to the customer. much critical work without direct su- Other examples include customer pervision as those that make logis- representatives and inventory plan- tics happen. For example, an ners. There is a critical need in these unsupervised truck driver performs areas for employees that understand almost all the value created by mov- supply chain dynamics and can use 26 Log4scm Quest Feb-April 2010
  26. 26. information-based tools to develop tives, dynamics, and measurements. and implement effective strategies. For example, a truck driver cer- tainly must be skilled in all facets of While many enlightened execu- driving. However, they also need to tives acknowledge that this mega- possess knowledge concerning trend is one of the most critical how they fit into the logistical they face, practice indicates that not process and how to access expert much progress is being made. data warehouses, tracking capabili- it is becoming in- Those that are trying to implement ties, and adaptive decision support creasingly clear that knowledge-based learning are hav- systems to resolve and prevent op- firms must build ing problems finding the time and erating problems. Some forms of the appropriate methods to effec- the knowledge knowledge generation are as simple tively train employees. Training capabilities of key as learning how to cooperate. Oth- time is difficult to find due to the manpower reductions that have ers may require astute skills to iden- managers and tify emerging trends or observe been forced on most firms. planners. These competitive superiority. It is difficult to find the appropri- individuals must be Second, it is becoming increas- ate training approaches as they ingly clear that firms must build the provided the must integrate across a number of knowledge capabilities of key man- education and functional areas and incorporate agers and planners. These individ- experience that multiple technologies. The chal- uals must be provided the lenges of effective human resource education and experience that en- enables them to management are being complicated ables them to build an understand- build an by increased globalization. As a re- sult, our assessment is that the av- ing of the risks and benefits understanding of inherent in supply chain integration erage industry rating for this shift the risks and and the relationships between sup- is I to 2 on the ten-point scale. The benefits inherent in ply chain partners. low rating on this assessment sug- gests that there are significant In a world where all logistics and supply chain changes needed to achieve an envi- supply chain employees are rela- integration and the ronment of knowledge-based tively high paid specialists, the Firms that develop and maintain relationships learning. broad-based supply chain man- between supply First, senior management must agers will exploit the winning for- chain partners. improve capabilities to manage a mula. Among all the mega-trends, diverse workforce. Training must the development of effective shift from emphasizing individual knowledge based learning systems employee skill training to develop- may be the least developed. This ing knowledge-based learning. This represents a substantial challenge means that skill development must and opportunity for the people re- be placed in the context of the sponsible for developing and train- overall process in terms of objec- ing personnel. Feb-April 2010 Log4scm Quest 27
  27. 27. Cover Story Megatrend-10 Reinventing Managerial Accounting to Value-Based Management Paradigm Shift towards financial sophistication Value management is appropriately viewed as the implementation of financial sophistication. The key is to identify and support activities that create value as contrasted to those that only increase revenue or decrease cost. F or decades firms have been managed by the numbers. Over the last ten years, how- ever, managers have become suffi- ciently aware of the limitations of work drives stakeholder value. Re- cent developments, driven in part by widespread adoption of Economic Value Added (EVA) and Market Value Added (MVA), are resulting in Generally Accepted Accounting integrative frameworks to imple- Procedures (GAAP) to be willing to ment value-based management. spend significant resources on man- Value-based management is closely agerial accounting methods such as related to the basic paradigm shift activity-based costing. These meth- toward financial sophistication. In ods improve managers' understand- fact, value management is appropri- ing of the dynamics of integrating ately viewed as the implementation internal and external functional ac- of financial sophistication. The key tivities. They also provide the met- is to identify and support activities rics managers need to support that create value as contrasted to strategic and tactical decisions. those that only increase revenue or decrease cost. Today managers seek to extend measurement to assess how their This mega-trend has long been 28 Log4scm Quest Feb-April 2010
  28. 28. recognized as particularly relevant ent programs and strategies. These for operational managers. Unfortu- approaches enable managers to set nately, it has taken a considerable goals for specific actions and pro- amount of time and effort to gain grams and to measure achieved senior management's attention. performance. They have the poten- Current initiatives to link opera- tial to relate customer sales and tions to value-based performance profitability based on exact costing are facilitated by commitment to of ordering practices and delivery ERP implementation. The trend is expectations. This precise cost in- likely to take off now that supply formation can be used to modify chain management concepts are re- supply chain practices. For exam- Customer service ceiving increased acceptance by the ple, managers can work with spe- measurement is financial community. Still, the aver- cific customers to develop new age firm today scores only a 1 to 2 routines that simplify and stream- associated with on a ten-point scale. line order placement, resulting in better service as well as lower cost. revenue and is Although the drive toward value- based management remains in its Second, there must be a change in assessed by infancy, managers are increasingly the way benefits are measured. A developing a set of forced to demonstrate how supply few firms have adopted a compre- chain practice and process changes hensive value model that incorpo- shared cross-func- can affect the overall financial rates operational excellence and health of their enterprise. Tradi- asset utilization perspectives to as- tional and cross- tional performance measures do sess value-based management deci- organizational not describe achievement in the fi- sions. Key operational excellence nancial language spoken in the ex- metrics focus on increased cus- measures to guide ecutive suite. Measurement systems tomer service and lowest total cost must enable managers to link sup- of ownership. The combination al- and monitor work ply chain performance directly to lows the supply chain to respond performed by financial performance. more precisely to specific customer There are three transformations needs. multiple supply required to apply value-based man- Customer service measurement is chain partners as agement. First, firms must identify associated with revenue and is as- and assign the benefits of specific sessed by developing a set of they add value for initiatives to the appropriate supply shared cross-functional and cross- chain partner. Activity-based cost- organizational measures to guide the end-customer. ing approaches provide one way and monitor work performed by for firms to measure performance multiple supply chain partners as across functional areas and focus they add value for the end-cus- on benefits associated with a spe- tomer. Lowest total cost of owner- cific activity or process. Total cost ship incorporates all basic product and activity-based methods enable costs as well as all supply chain firms to pinpoint the profitability costs related to inventory financ- of specific products, customers, ing, acquisition, processing, move- and supply chains, as well as project ment, storage, handling, and cost-revenue outcomes for differ- delivery. Feb-April 2010 Log4scm Quest 29
  29. 29. Cover Story Megatrend-11 Supply Chain design and analytics How do you monitor your supply chain activity? Changing scenario of Supply Chain is forcing companies to redesign their supply chain model to keep pace with the market. W ith this level of visibility, itor the satisfaction of key cus- planners and key decision tomers, take snapshots of the global makers can test scenarios to determine how the network can best address changes in the market, capacity and inventory status for a specific product group, or compare the performance of the top 10 sup- the business, or customer demand. pliers. There are powerful Web- They can define, select, and monitorbased customer and supplier tools key performance indicators (KPIs) that allow you to expose internal to get an integrated, comprehensive processes without deploying a costly view of performance, using prede- infrastructure. That gives you and fined KPIs based on the supply your suppliers and partners the visi- chain operations reference model, bility needed to effectively monitor which includes sourcing, planning, supply chain activities, identify criti- production, distribution, and returns cal events, and take the actions nec- processes. essary to keep your entire supply chain process flowing smoothly. You A 360° view of the business lets can give customers faster and better you analyze forecast accuracy, mon- 30 Log4scm Quest Feb-April 2010