Author: Carl Ralph

Since what we in supply chain management and supply chain engineering do is develop solutions to meet the needs of our employers, clients, and their industries, it only makes sense to build our approach on established lean operations principles. Lean thinking should be foundational to the tools and approaches we use and develop.  In particular, we need to pay constant attention to the five Lean Principals.

The 5 Lean Principles:

• Define value from the customer’s perspective.
• Identify the Value Stream
• Make Value Flow
• Pull from the Customer Back
• Strive for Perfection

Let’s take a moment and look at each of these from the perspective of the Supply Chain Engineer

Define value

According to James P. Womack and Daniel T. Jones, authors of the book Lean Thinking: Banish Waste and Create Wealth in Your Corporation, understanding value is the critical starting point for lean thinking. But what that value is is not set by us, or by our bosses, or the Executive Committee.  Value is set by the end customer, and only the end customer. Put slightly differently, value is the specific goods and/or services that meets a specific customer need at a specific time and for which the customer is willing to pay. Anything that does not fit into that description, is not value. In lean parlance it is muda – waste!

According to the authors: “Lean thinking therefore must start with a conscious attempt to precisely define value in terms of specific products (or services or other solutions) with specific capabilities offered at specific prices through a dialogue with specific customers. The way to do this is to ignore existing assets and technologies and to rethink firms on a product-line basis with strong, dedicated product teams.”

But value is a constantly evolving concept. Often, the solution for today’s issue changes into tomorrow’s pain point.  Over the years, we have seen several examples of this.  Consider the need of the local business units within a large corporation.  The procurement of their goods and services were at one time the exclusive domain of Corporate Purchasing.  But this meant that the unique requirements of the individual business unit were often overlooked in the name of greater order consolidation and cost reduction.  And then came along the “center-led” procurement organization.  In this model, the local unit would purchase most items through a company-wide purchasing agreement negotiated by Corporate Procurement.  But when certain unique requirements arose or when significant cost savings could be demonstrated, the local purchasing department would arrange blanket orders or local contracts with their vendor of choice.

Now, all in all, this is really a pretty good model.  But like most exception-based practices, the exceptions gradually become the rule. So, over time, you end up with buying agreements from multiple locations resulting in multiple vendor records for the same item being stored in the corporation’s ERP systems. Consequently, employees might not know which vendor is the one that they should use for a given order. In the end, the Center-led approach has, in many instances, led to confusion and waste. And so, in these cases at least, a new value proposition has evolved. Each company will identify and prioritize the elements differently, but generally these companies now need to simplify the ordering process and related master data management while meeting the unique procurement needs of the local business unit and simultaneously minimizing the overall procurement cost to the enterprise.

Lean Thinking requires the supply chain manager and the supply chain engineer discover what their customers believe satisfies their specific needs at a specific time. But they must also recognize that this is a continuous improvement process, and not a “once-and-done” approach since problems and requirements change over time.

Identify the Value Stream

The value stream can be defined as the various activities that are required for the three critical business processes we must go through to deliver a solution to our customers, either internal or external.

These three processes are:

• The problem-solving task.  This includes the design, engineering and production of our solution.
• The information management task. The process of receiving demand, scheduling and planning delivery of the solution.
• The transformation task. Creating and delivering the solution to our customer.

But it is when we look at all three of these together as a system that we define the value stream.  Since this stream crosses departmental (and often company) boundaries, it necessarily requires cross-functional collaboration of stakeholders from all the affected areas. And this is where we almost inevitably find huge amounts of waste or muda.

Muda comes in two forms. Type 1 muda is the action that adds no value in itself, but is unavoidable, such as the physical inspection of items upon receipt at the loading dock. Type 2 muda adds no value and can be avoided without damage, such as a poorly laid out stockroom that requires considerable backtracking and wasted time in filling orders.

Back to our center-led procurement example, if we had identified all the stakeholders, Corporate Procurement, local purchasing, the end-users of the items ordered, the suppliers, both corporate and local, and together we had mapped the entire value stream, looking for problems and waste, would we have eliminated the issues we discussed.  Probably not. Exception-based solutions almost always devolve. But those companies that did take this more holistic approach tend to have more robust and durable center-led organizations

Make Value Flow

So now we have removed all the avoidable (Type 2) muda in the value stream. And now there is another, totally counter-intuitive task before us. We must make the value-added steps work together continuously (no waiting, stopping, or rework). That sound simple, but that’s not really the way our brains are wired.  It seems to us that doing things in batches will be most efficient.  Paint all the blue things, then all the white ones, followed by all the green ones.  But this results in a series of “batch and wait” steps. We are, in effect, creating our own bullwhip effect within our organizations.

Let’s go back in time to the early 20^th century and stop by the River Rouge Plant of the Ford Motor Company.  Here we see a very early example of flow processing versus the traditional batch process.  Ford didn’t make all the doors, then all the fenders then assemble them to make all the chassis. Instead, he set up conveyors that continuously moved the cars down the line – a flow – and each car “grew’ in an exact and repeatable process starting with a bare frame and ending with a complete automobile at the other end.  And it was this flow process that allowed Ford to assemble over 2 million Model T’s around the world.

 The same approach should be taken in Supply Chain Engineering. There are several aspects to consider:

• Eliminate specialized departments.

• Focus on the end-solution itself and what is required to complete a single solution.
• Ignore boundaries between companies, departments, and individual roles with the goal of “removing all impediments to the continuous flow of the specific solution.”
• Redesign processes so operation of the solution can flow continuously.

Pull from the Customer Back

Another feature of lean thinking is the concept of “pull”.  The goal is to deliver only what your clients or customers want and when they want it (Pull).  A common flaw in system design is guessing when and what the customers might want and pushing products out. But within supply chain management in particular, we see where this aspect of lean thinking can result in rigidity and a lack of resilience.

Kanban is an excellent example.  A Kanban system, whether single bin or dual, provides a just in time supply of inventory with the minimum of excess overhead. But the cost of that is a certain inflexibility.  If, for example, there is a sudden variation in either supply or demand, you may find yourself without sufficient inventory. And if there is any significant disruption to the supply chain, you have no buffer to mitigate the situation. For that reason, it is prudent to maintain a certain centralized safety stock of critical items.  But at the customer end, pull still remains the key.  For example: “No one upstream should produce a good or service until the customer downstream asks for it.” It is these real-time signals that indicate to upstream activities when more is needed.

Strive for Perfection

And finally, the improvement of processes never ends. You must always strive to design, develop, make, and deliver a better solution while improving efficiency. Think once more about our center-led scenario. In the cases where this has degenerated into confusion and disarray, was a continuous improvement mindset used? Most likely not, for if it had, the problems would have been identified and addressed long ago.

To continuously improve:

• “Form a vision, select the two or three most important steps to get you there, and defer the other steps until later.”
• Don’t settle for just being better than your competitors or even your current business practices; if you’re not moving forward, you’re moving backward.  You can’t stand still.
• Observe your outcomes. Analyze the results. And constantly look across the entire value stream to discover new opportunities for improvement.

Lean thinking can make your make your organization’s supply chain more effective, more efficient and more nimble.  And it can make you a better supply chain engineer.

In our last post we discussed what is a supply chain engineer. With this post, we start to explore what an SCE does beginning with developing a strategy and roadmap for supply chain digitization

Overview

Digital technologies provide a competitive edge by improving the speed and quality of the supply chain while reducing risk and enhancing innovation. Companies that wait too long to launch their supply chain digitization projects risk being outmaneuvered by more agile competitors. Yet, many companies have been slow to embrace the usage of digital technologies within their supply chains for two main reasons. Many have had a bad first experience implementing digital solutions. For others, the return on investment (ROI) isn’t clear, or the executive team doesn’t understand why the supply chain should be a strategic priority for information technology investments.

But the economic and strategic benefits of digitizing the supply chain are real.[1] For example, International Data Corporation (IDC), a leading market intelligence firm, reports digitally-mature companies will achieve $430 billion in productivity gains over their less connected peers.[2] Along with reinforcing the market need for digitization in the procurement space, research highlights the five most important digital solutions, according to the businesses surveyed:[3]

1. Inventory management systems. Hardware and software systems that record, track, and manage inventory levels through the procurement value chain
2. Cross-domain master data management. The collection, cleaning, and management of data from across a company’s businesses and functions within a “single source of truth” repository
3. Contract life cycle solutions. Solutions standardizing and automating contract initiation, creation, negotiation, and execution
4. Supplier quality management. Software allowing buyers to engage and collaborate with suppliers to manage product quality, delivery, and other aspects of supply
5. Spend analysis. Collecting, cleaning, and analyzing organizations’ expenditure data to drive internal strategy, decision-making, and compliance

Digital supply chain solutions not only create opportunities to improve efficiency but also pave the way for supply chain teams to play a strategic role in accelerating innovation.

These benefits can be divided into two broad categories–identifying and creating value and preventing value leakage–which, in turn, can be broken down into more detailed elements.

Identify and create value

• Collaborative and advanced sourcing
  • Supplier qualification and selection: Supplier x-ray – Tier-N supplier insight monitoring for qualification, selection, risk management, and negotiation
  • eCatalogs and eProcurement tools to facilitate sourcing and reduce transactional costs
  • Supplier collaboration platforms such as eSupplier Connection to foster supplier collaboration and innovation
• Spend Analysis
• Network or market data intelligence

Prevent value leakage

• P2P process workflows: Procure-to-Pay workflow and approval support
• Electronic Invoicing
• Demand Forecasting
• Inventory Optimization
• AP Recovery Audits
• Performance Management
  • Supplier performance scorecards: Automated scorecards and supplier performance management tools
  • Procurement organizational performance scorecards: Automated scorecards and performance management tools for the procurement organization

Getting Started

The abundance of competing technologies has made it difficult for companies to determine where to begin transforming their supply chain. Plus, the stakes are high to deploy a digital solution that adds value from the start, because a failed deployment can dissuade leadership teams from further investments. A disciplined, user-focused approach to transformation is critical to the overall success of the enterprise’s digitization journey. To achieve the best outcomes, procurement executives can begin building a sound strategy by choosing two to four digital tools that have a proven track record in the market. This process should be preceded by crafting the enterprise’s digitization vision, analyzing its current digitization status and maturity, and developing a transformation design and roadmap. From this process, a series of deployment sprints can bring about a successful transformation.

Supply chain executives facing the task of digitizing their procurement function can benefit from the helpful practice of creating a digital procurement roadmap, which will ultimately reduce costs and free capacity for more strategic activities. We recommend a five-step approach to supply chain digitization projects:

1. Gather data. Collect information on digital trends from the company’s leadership, the industry, the market, and procurement executives. What are the company’s digital goals and strategies? What vendors and solutions are other companies in the industry utilizing?
    
2. Create a vision. Focus on three to five years from now. What processes should be digital? What solutions does the company want to implement? Define how procurement will work with business unit leaders and vendors to accelerate innovation and results.
3. Digital maturity analysis. Assess which elements of supply chain digitization are already implemented or have been purchased but not installed (shelfware). What processes have already been developed and deployed to accommodate digitization.
4. Design a roadmap to get there. Supply chain executives should set detailed priorities, including near-term goals, to achieve the organization’s digital vision. They should also prioritize clean data, an agile operating model and a digitally skilled workforce when implementing new solutions.
5. Implement in a series of rapid “sprints.”  Instead of trying to coordinate all the anticipated changes into a single, integrated project—where errors or miscommunication can mean months of rework—make constant, small improvements in quick “sprints” of activity. 

While each organization’s journey will be unique, there is a general progression of tools and applications that, if deployed in broad phases, can result in a “rolling thunder” of momentum toward full digitization.  A recent survey of 243 procurement professionals rated 22 digital solutions.[4] The tools that scored high on customer satisfaction have shown a higher likelihood of successful deployment and can help build momentum for digitizing procurement.

Phase 1: Start with solutions that rank high in user satisfaction.  Successful deployments build momentum for digitized procurement.

• Accounts payable recovery audits
• Collaborative data platform (e.g., eSupplier Connection)
• Supplier quality management
• Electronic invoicing (eSettlements, Transcepta)

The next logical step is choosing tools that rank high in importance for the organization and relatively high in satisfaction. They

 include inventory optimization (IO), supply chain resilience, and cross-domain master data management. These solutions also are likely to be successful and deliver a meaningful ROI, demonstrating the value of digitizing procurement.

Phase 2: Deploy solutions that users rate as most important and high on satisfaction.  These tools are likely to deliver on ROI.

• Procure-to-pay suite
• Performance management system
• Inventory optimization
• Resilience & risk management
• Cross-domain master data management

The third cluster of tools includes those ranked high in importance but lower in satisfaction, largely because they are less mature or highly complex. That group includes contract life-cycle management, demand forecasting, and network or market data intelligence. These solutions are riskier to deploy and manage but still important for an organization–so proceed with caution and do proper due diligence to ensure you’re selecting the right solution.

Phase 3: Proceed with caution on solutions with lower satisfaction ratings and ensure that they are a good match for your needs.

• Demand forecasting
• Spend analysis
• Network or market data intelligence
• Contract life-cycle management

There are genuine benefits to digitizing the supply chain. For example, according to the online business and finance magazine PYMNTS.com[5],

• 94% of successful supply chain digitization projects directly led to an increase in revenue.
• Return on investment (ROI) of supply chain digitization initiatives is a top motivator with 77% citing cost savings as their top driver for a project.
• Other motivating factors include increased revenues (56%) and the emergence of new business models (53%).

However, those who are reluctant to digitize risk being displaced by those who are not. Armed with knowledge and a solid roadmap, an organization can sift through the plethora of options to avoid a poorly selected starting point or a failed deployment that can destroy momentum and discourage leadership from further investments.

For more information, contact Carl@TheSupplyChainEngineer or Sierra-Cedar.com.

[1] See for example, Paul Myerson, Management and Decision Sciences, Monmouth University, Supply Chains Need to Turn to the Digital Frontside, Industry Week, November 1, 2017

[2] “The Value of Real-Time Visibility and Predictive Intelligence for Supply Chains,” IDC, October 2016

[3] Paul Myerson, Management and Decision Sciences, Monmouth University, Supply Chains Need to Turn to the Digital Frontside, Industry Week, November 1, 2017

[4] Source: Bain Digital Procurement Survey, 2018

[5] PYMNTS.com, “Corporations Stuck In The Planning Phase Of Supply Chain Digitization”, Dec. 12, 2018

Visit us at our new home – VertexSupplyChain.com

Not long ago I introduced myself to a client as my company’s Director of Supply Chain Engineering Services.  He responded, “Supply chain engineering?  Wow, that sounds important.”

There may have been a hint of sarcasm in his voice, or it may have just been my imagination. But either way, he was right.  Supply chain engineering, or SCE, is a new, exciting … and important field.  It is where the applied sciences of engineering and information technology meet the business of supply chain management.

But it is such a new field that its boundaries are not well defined.  For example, if you go to Wikipedia, you will find this: ”(In SCE) strategy, engineering and IT are not regarded separately but equally and integrated in all planning steps. Solutions for supply chain design that follow the SCE approach are therefore considered to be holistically and always influenced by engineering. All measures that follow the SCE process focus the most ideal supply chain construction whilst regarding cost optimization, a correct use of engineering and IT as well as training and integration of employees in production centres and logistical facilities.”[i] I have read that several times now and I am still not quite sure what it says.

And if you pull up the Council of Supply Chain Management Professionals (CSCMP) glossary, you will find a very detailed definition of  supply chain management (SCM): “Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies.”[ii] 

Let’s make that a bit more succinct. SCM is the combination of business functions such as purchasing, logistics, production, and sales to move goods from raw material to the customer.

What you won’t find is a definition of supply chain engineering there.  Nope.  Not even a passing reference to SCE. And that’s not a slam to either the CSCMP or supply chain engineering. It is simply a testimony to how nascent this area of discipline is. And that’s probably why there is so much confusion around the subject. 

I have witnessed that confusion in the field. I have been places where a former IT guy manipulates item and supplier Master Data Files, so they called him a supply chain engineer.  But he’s not.

I’ve been where the lady who does the bid analysis is called a supply chain engineer. But she’s not.

So, what then is Supply Chain Engineer and how does it differ from a Supply Chain Management professional?  Well, at a very high (and somewhat vague) level, SCE is co-equal blending of business strategy, IT, and engineering. Alan Erera, director for the M.S. in Supply Chain Engineering program at Georgia Tech, offers a more concrete definition; “I view supply chain engineering as the application of the principles of management science, industrial engineering, operations research, and analytics for the design, control, and analysis of supply chain systems or their components.”[iii]

Put slightly differently, supply chain engineering (SCE) is the use of applied mathematics and applied science to analyze and optimize elements of the supply chain to meet specific business requirements.

And there you have it – the difference between SCM and SCE.

SCM says we need to have safety stock to prevent stockout.  SCE mathematically calculates the optimal amount of that safety stock for each item based on user-defined constraints.

SCM defines what the required service level is for meeting customer demand.  SCE analyzes demand and supply history to optimize the inventory policies to ensure those service levels are consistently met without unneeded investment in excess stock.

SCM determines the need to collaborate with upstream suppliers to ensure maximum profitability across the entire supply chain.  SCE identifies the tools and technology required to enable the requisite transparency as well as performs the analysis to optimize the profitability across the supply chain.

SCM recognizes the need to add a new distribution center (DC).  SCE determines the optimal location for that DC in order to minimize total investment and operating cost.

What makes a good SCE? First, like any true engineer, he or she must have a strong background in mathematics.  In the case of SCE, areas of statistical analysis and modeling are especially important. This includes subjects such as:

• Predictive (What could happen?), Descriptive (What has happened?), and Prescriptive (What should we do?) Analytics.

• Deterministic models and optimization techniques including linear programming, network flows, integer programming, and heuristics.

• Probabilistic models including the effects of variability in both supply and demand; forecasting and simulation.

They must also have a comprehensive understanding of the functional processes involved in a supply chain, including:

• Production scheduling; inventory management and warehousing, including stocking strategies, order-picking, sortation, automation; distribution.

• Problems of coordination and collaboration along the supply chain; make-or-buy decisions; pricing and auctions; wholesale and retail channels; supply chain dynamics, including the bullwhip effect. Distinctive supply chain issues in key economies.

• Familiarity with truckload, less than truckload (LTL), and last-mile transportation systems; container shipping, including port operations, steamship scheduling; railroad operations, including intermodal; air cargo. The international freight network and patterns of freight flow. Management and recirculation of trailers/containers, along with related labor issues.

• Planning and executing systems for inventory, warehousing, transportation, import/export, etc. Services-oriented architecture, cloud computing; systems integration; RFID and other technologies for scanning and monitoring.

So, I have to agree with my customer, whether he really meant it or not, Supply Chain Engineering is important.  It can be the difference between profitability and loss. It can determine a competitive edge. And in some cases (think Amazon and Walmart), it can mean market leadership.

And that is what Supply Chain Engineering is.

[i] https://en.wikipedia.org/wiki/Supply_chain_engineering

[ii] CSCMP Glossary; https://cscmp.org/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms.aspx?hkey=60879588-f65f-4ab5-8c4b-6878815ef921

[iii] https://www.quora.com/What-are-the-core-differences-between-supply-chain-management-supply-chain-engineering-and-industrial-engineering