Since the days of the anvil, hammer and forge, the basic components of manufacturing have not changed. The technology, competition and market pressures have changed, and margins have diminished, but the primary components of manufacturing remain the same: the classic buy-make-deliver.
The supply chain, by contrast, has changed drastically. The supply chain goes far beyond just manufacturing. It begins with demand planning and continues with supply planning to balance supply with demand. Only then does it move to the execution steps of purchasing (now often from half a world away), including production, order fulfillment and delivery to customers. Redesigning the supply chain, therefore, must be seen in this broader context.
Reducing manufacturing costs in isolation will almost certainly sub-optimize the results for a company as a whole. Implementing an integrated Sales and Operations Planning (S&OP) process is necessary to “optimizing the whole” and turning the supply chain into a competitive advantage. In the process, it will reduce manufacturing costs as well.
A recent Aberdeen Group study reinforces this conclusion. According to the study, best-in-class companies are twice as likely as their peers to have:
• Forecast accuracy at the product family level of 71 percent or higher
• Perfect order percentages of 91 percent or better
• Logistics-as-percent-of-sales of 6 percent or less, with no increase in these costs since 2005.
The study attributes these gains to successful integration of supply chain planning and execution, and to achieving data and process visibility across the supply chain. It goes on to state that these improvements have been achieved through aggressive adoption of supply chain planning technology.
Successful Supply Chain Transformation
How do these best-in-class companies achieve their success? Clearly, technology is a necessary element, but a company cannot simply rely on technology to transform the supply chain. Truly successful supply chain transformation requires three equally important components: processes, education and tools. This triad is like a three legged stool—rugged, sturdy and reliable. Many companies try to short circuit the restructuring process by implementing only one or two legs of the stool. That is a recipe for failure.
The supply chain involves so many departments of a company that it is a prime example of the need to tear down functional silos. Cross-functional communication and decision-making is often completely foreign to the institutionalized culture. Entire books have been written on the process changes needed to break down those barriers. The fact to take away here is that making such changes is absolutely critical to successful supply chain transformation.
It is also important to note that in order for improved processes to be implemented and institutionalized, there must be a corporate mandate for change. Employees respond best to changes that management fully endorses, which includes holding people accountable for implementation.
Perhaps the most important process change is the recognition that effective planning must precede execution. Improved demand planning means that manufacturing knows what to make when, therefore reducing the lost line time and high inventory cost of making the wrong products.
Improved supply planning not only enables these gains, but also reduces direct manufacturing costs. Production is allocated to the most efficient facilities, taking all costs, rates and lead times into account. The improved demand planning allows for fewer breaks in scheduling, lower transition costs and less overtime.
The education “leg” has two major components: educate the entire organization about the need to “optimize the whole,” and educate those at the executive level about the strategic importance of the supply chain.
On the first point, because so many functions are integrally involved in making the supply chain successful, it is key to “educate the troops” on how their role and their data affects the success of the whole company.
For example, one company found that it had IBM in its master customer database spelled 12 different ways. Applying technology to forecasting using this data will have undesirable results since software programs will see 12 customers instead of one. Educating the customer service representatives who maintain this data on how their actions impact the whole, is often all that is necessary to ensure better quality when maintaining the master database.
Similarly, many companies have a forecast that is so obviously over-optimistic that the operations department will make up its own forecast in an effort to protect itself from having too much inventory. All parts of the organization must work together, through the S&OP process, to achieve and act upon a single set of plans that is fully integrated between the Sales & Marketing and Operations departments.
The importance of educating the executive level about the strategic nature of the supply chain cannot be overemphasized. Too often, the supply chain is viewed as a necessary evil. No single executive is charged with end-to-end responsibility for it. Executives need to be taught how the supply chain can become a real competitive advantage, rather than merely a source of costs, in order to garner their support for both the necessary process changes and the required investment in enabling technology.
Putting a single executive in charge of the supply chain can help tremendously during the improvement project and beyond in maintaining a high level of visibility for the supply chain and its contribution.
To accomplish its goals, supply chain technology must support the improved planning processes which are being implemented at the same time as the tools. Each step of a supply chain transformation needs all three legs of the stool: process, education and tools.
A key concept here is “step”—this is not a “big-bang” approach, but rather a structured and stepped approach which allows the business to progress at its own pace from one step to the next. Typical steps proven to be successful are:
• Understand demand and its variability
• Analyze inventory and position it to support demand
• Develop a collaborative demand planning process
• Create a quantitative framework for supply/demand balancing (supply planning)
• Implement and institutionalize the S&OP Process
• Implement finite scheduling and ATP.
A Wide Range of Rewards from Supply Chain Optimization
As the Aberdeen study points out, there is a wide range of very tangible rewards for supply chain optimization. In addition to the key process improvements (KPI) cited in the report, there are also rewards that come in the form of higher levels of customer satisfaction, better supplier relations and better reviews by financial analysts.
Additionally, there are more subtle advantages. Acquisition is a major element of business growth today. We know first hand of manufacturers being acquired partly because of the health and vitality of their supply chain. And, we have seen corporations more smoothly and rapidly integrating acquired manufacturing facilities because they had the tools, processes and education in place that made the process more streamlined and user-friendly.
Perhaps the most valuable reward is one that can’t be quantified—the ability to see far enough ahead to prevent the train from wrecking, rather than always having to clean up after the wreck.
Manufacturing is a tough business with a wide variety of market pressures. The supply chain is one of the first places a manufacturing company should look to improve its competitive posture and profitability.