At The Supply Chain Engineer™, we are keeping a close eye on the Coronavirus, or COVID-19, and the implications it has for your business, particularly your supply chain management. We would like to share with you our insights into how we see this unfolding in the near future as well as things you can do now to harden your supply chain and make it more resilient to this and future disruptions
Anticipated Distribution and Business Effect
There remains much uncertainty around this outbreak and there are several potential outcomes depending on the virus’s seasonality and other variables. What follows is the scenario we expect will play out, although it represents only one among many possible results. Based on several reputable and well-informed analyses, we believe that the US will likely experience between 50,000 and 500,000 cases nationwide, with the majority of these occurring in three to five major cities and several other cities reporting a few dozen cases each. Personal, business, and governmental mitigation behaviors will likely extend for around six-weeks in the harder hit metropolitan areas and three or four-weeks in outlying areas. We anticipate that the virus will follow the typical coronavirus pattern of seasonality in humans and largely dissipate on its own as the seasons warm.
The financial impacts of COVID-19 will result in a global
slowdown, although not a recession. In
the US, we expect that the economy will still grow, but at around 1% to 1 ½% –
about half of last year’s rate. This
will have the greatest impact on small- to mid-sized companies. Aviation, hospitality, tourism, and related
services industries will be hardest hit with consolidations likely to increase
dramatically. As shown below, the impact
will vary across industries.
Supply Chain impacts have so far been due to Chinese
shutdowns. Presently, outside of Hubei, most of China has returned to more
than 90% production. Hubei will likely not return to that level until sometime
in April. Trucking capacity remains at
only around 80%, causing an eight to 10-day delay getting products to port for
overseas shipping.
This all may result in inventory allocations by key distributors within the United States as their Chinese suppliers ramp up production and attempt to manage their own inventory whiplash. At the same time, consumer demand shocks will continue. Items seen as consumer necessities – non-perishable food products, paper products, bottled water, sanitizers, and antibacterial cleaners – will continue to spike as consumers in areas with outbreaks attempt to prepare for self-quarantine. This transient demand shock will give way to a drop in demand as consumers find themselves temporarily overstocked.
Overall, we expect COVID-19 to result in an
additional 10- to 20 weeks of supply chain disruption
before the recovery is complete. This means we will continue to feel the
effects through mid-May to July.
How to Harden Your Supply Chain Now
Even though it may be too late to anticipate the outbreak,
there is still time to mitigate the impact of COVID-19 and to prepare your
supply chain to withstand future disruptions.
Protect your personnel – This disruption will pass. In order to rebound quickly from any breach of business continuity, you must keep your assets and personnel safe so you can return to full capacity as quickly as possible. The Association for Supply Chain Management recommends, “Follow the Centers for Disease Control and Prevention guidelines. Give your workforce a constant, calm, flow of reliable information. Restricted travel policies are a beginning. Also implement screening protocols, increase workforce hygiene standards, and promote telecommuting and other flexible arrangements. Encourage people with preexisting conditions, who are more susceptible to the virus, to self-declare. Then, proactively shift them to remote work.”
Know your stock coverage – It is critical to know how many days of coverage you have of key materials so you can prioritize the items for which you need to find mitigation solutions.
Keep your suppliers in the loop – In times of crisis you cannot over-communicate with your principal suppliers. This will happen automatically if you have digitized your supply chain, giving you the added advantage of speed. If not, your buyers and commodity managers need to fight for their attention. It is particularly important to keep in nearly daily communication with those suppliers in affected areas in order to stay on top of potential supply shortages.
Identify alternate suppliers, materials, and resources – Once you have identified your material mitigation priorities and coordinated with current suppliers, you will have a concise “shortlist” of essential items that you need to re-source. Look for alternate suppliers and materials. If needed, consider re-engineering the parts to make them easier to source.
Map your Supply Chain – You know where your tier-one suppliers are and if they are in affected areas, but what about your tier-two or tier-three suppliers? Are they directly impacted by the disruption? Are they financially able to withstand the impact (65% of smaller suppliers in China have 2 months cash)? By mapping your supply chain, you will know where your risks are and can receive near-real-time warnings.
Digitize your Supply Chain – Digitizing your supply chain not only reduces transactional costs, it allows you to buffer risk with less expense. Further, digitization automates many functions, reducing errors and increasing speed. And in a crisis, speed is life.
Contact Carl@TheSupplyChainEngineer.com today to discuss how we can help you mitigate your COVID-19 risks and harden your supply chain to increase resilience against future disruptions.
Whether you are reading the
headlines, looking at data trends, or living it in the trenches, it is easy to
see that our world is full of potential and actual disruptions that can affect
business operations. Examples from the
last year include Hurricane Dorian, the UAW strike at General Motors, and the
ongoing threat of tariffs and Brexit, and from today’s headlines we have a new
threat – the coronavirus. Some disruptions like natural disasters come with
little warning, others lurk in the environment and managers struggle to decide
if, when and how they should prepare for them.
Being the proverbial ostrich with your head in the sand does not keep
the disruptions at bay – it just guarantees you will be blindsided by them. In
today’s business environment, it seems managers across all functions need to be
always ready to respond. We call such an
organization ‘resilient’ and we define it as the “capacity of an enterprise to
survive, adapt and grow in the face of turbulent change”. While many focus the resilience discussion on
surviving the disruption and getting “back to normal”, we believe the concepts
of adapting and growth are important elements, as 1) all disruptions are
learning opportunities that can make us better next time; and 2) some
disruptions necessitate changes that put is in a better position for
sustainable future growth.
Our research efforts working with national and multinational companies led us to conceive of resilience as a balance between understanding your vulnerabilities and building appropriate capabilities. Vulnerabilities are the environmental factors that make an enterprise susceptible to disruptions
(more details to follow). We typically think of vulnerabilities as inherent in the environment – not something we can control. Some organizations face a lot of vulnerabilities – others relatively fewer. Capabilities are the management controls that enable an enterprise to anticipate and overcome disruptions. You can think of these as the risk mitigation strategies that managers can choose between. The goal of an organization is to be in a state of ‘balanced resilience’ – that is one where they have developed the right level of capabilities for the level of vulnerabilities they face (see Figure 1). If your capabilities aren’t sufficient for your level of vulnerabilities, you are exposed to risk. If you have built capabilities that go beyond your level of vulnerabilities, you could be eroding profits by over-investing in those capabilities.
Of course, this
is a simplified view because it is also necessary to have the right capabilities. If your organization is highly vulnerable to
cyberattacks, it doesn’t matter how much redundancy you have in your supply
network. So, we have to think about this
a bit deeper to truly help managers with their decision-making.
To dig deeper,
we identified 36 vulnerabilities, which we categorized into 6 categories (see
Table 1). When people discuss risk, they
often focus on vulnerabilities like natural disasters, supplier issues or technology
failures. However, a firm’s risk profile
is determined by far more than these risks.
Let’s take brand awareness as an example. Both Coca-Cola and National Beverage face external
pressure because they make soft-drinks that research has shown increases
obesity and rates of diabetes. However,
the strength of Coca-Cola’s brand makes them more susceptible to public
attacks, and therefore at a higher risk of demand fluctuations if another
research report hits the headlines connecting their products to consumer
health. Similarly, well-known companies
might be more popular targets of cyber-attacks or terrorism than smaller
firms. We must therefore think broadly
about vulnerabilities and even understand how multiple risk areas might
interact.
We also identified 71 capabilities, which we categorized into 14 categories (see Table 1). As with the vulnerabilities, some of these are often the focus of discussions on risk management – flexibility, redundancy and visibility are all terms that get a lot of attention. Others, like brand loyalty, might not be as obvious, but if Apple delays the launch of a new product because of a supply chain glitch, can they take advantage of their customers’ loyalty? Yes, many of their customers are willing to wait and are less likely to turn to a competitor’s product, so they can weather the disruption better than, say, Nokia might. We have also had many interesting conversations with managers and executives around organizational capabilities. Some organizations (particularly smaller ones) are able to make quicker decisions in a time of disruption because they have empowered decision-makers throughout the organization, or they have better lines of communication between functional areas. One company we worked with credited their strong employee loyalty for how they managed through a data disruption – the employees were dedicated enough to their jobs and the company that they jumped in and took pride in working overtime to see the organization through the crisis. Indeed, resilience capabilities come in many forms.
Now that we have them identified, we are at a point where we can discuss matching vulnerabilities with capabilities. For each vulnerability in Table 1, we have identified the specific capabilities that an organization could build to help them prepare for or recover from a disruption caused by that vulnerability. Think of this as a large matrix with the 36 vulnerabilities down the side and the 71 capabilities across the top. If you are facing a particular vulnerability, you can look across the row and see the menu of capabilities that you could consider building to help mitigate that risk. Or if you are thinking of building a particular capability, you can look down the column and see which risks that might help you mitigate. To further help with decision-making, we have created a tool (SCRAM™) that will help you measure the gap between a particular vulnerability-capability pairing. If you rate a vulnerability as high, and a capability as low, you have a large gap in that corresponding cell. Figure 2 shows the results for a SCRAM™ assessment at the factor level, but it can also measure gaps at the subfactor level. Again, a manager can look at these results across a row or down a column to help determine the menu of capabilities that could be built to match the pattern of vulnerabilities the organization faces, and therefore increase their state of resilience.
SCRAM™ is just one of many tools managers have at their disposal to help develop resilience and be better prepared for the turbulence that lies ahead. Risk registers, business continuity planning, war-gaming, supply chain mapping and simulation are others that can help firms understand the risks they face and develop action plans to mitigate them, or help the efficiency or effectiveness of recovery efforts if a disruption occurs. Regardless of the tool applied, the important thing is to think about risk and disruptions as inevitable – be proactive (don’t be an ostrich) and try to create a state of balanced resilience.
This article is based on the
following published articles, which would also make good further reading:
Fiksel, J., M. Polyviou, K. Croxton, T. Pettit,
“From Risk to Resilience: Learning to Deal with Disruption”, MIT Sloan Management Review, Winter
2015.
Pettit, T., K. Croxton and J. Fiksel, “Ensuring
Supply Chain Resilience: Development and
Implementation of an Assessment Tool.” Journal of Business Logistics. Vol. 34 (1), 2013, pp. 46-76. Winner of an Emerald Citations of Excellence
Award.
Pettit, T., J. Fiksel and K. Croxton, “Ensuring
Supply Chain Resilience: Development of
a Conceptual Framework.” Journal of Business Logistics. Vol. 31 (1), 2010, pp. 1-21. Finalist for the Bernard J. LaLonde Best
Paper Award. Most cited paper of the
decade (2010s).
In Part One we looked at Dr. Joseph Fiksel’s Resilience Model in general and the two slower changing quadrants in particular. In Part Two, we look at the dynamics of abrupt changes in the supply chain and what Fiksel’s Resilience Model suggests.
~~~~~~~~
As we move further to the right on Fiksel’s Model, we
venture into the territory of more abrupt change. This is the business equivalent of full
battle engagement. Sirens wail. Red lights flash. “Battle Stations!” is sounded over the PA. And supply chain professionals don flack
jackets and helmets as they charge toward their bunkers, telephones, and
computers.
To say the least, this is the part where things get a bit
less routine and a tad more interesting.
So, let’s look a little closer at these next two quadrants.
Sense & Respond in Fiksel’s Resilience Model
The Low Magnitude/High Abruptness Quadrant covers those
sudden disruptions you quite often didn’t see coming. These can range from short-term backorders to
the black swan – the rare and unpredictable event – that can have lasting
impact.
Sensing is an important part of this. Companies such as Resilinc
provide supply chain intelligence and monitoring that can alert its client companies
to upstream disruptions early on, allowing time to avoid or mitigate the impact. More on this in the future.
This type of data can be consolidated, visualized, and
utilized to respond to changes in the supply chain ecosystem. A perfect example of this is Flex Ltd.’s (formerly
known as Flextronics International Ltd. or Flextronics) Flex Pulse. Pulse is Flex’s End-to-End software-based, digital
collaboration tool that provides unprecedented levels of inventory visibility
and real-time global intelligence for managing supply chains. This software-based
system combines and interprets live streaming data from multiple sources to
provide intelligence on any global variables that may impact or disrupt
manufacturing supply chains. Flex Pulse also provides a consolidated view that
allows active monitoring of inventory, material quantities, and quality, as
well as transportation tracking, including shipment volumes, delivery times,
and other aspects of order management.
Flex Pulse Center is a physical location enabled with multiple
collaboration capabilities allowing real-time monitoring of different aspects
of Flex global supply chain.
Currently, there are nine Flex Pulse Centers located at strategic
manufacturing locations in Milpitas (CA), Guadalajara, Tczew, Althofen, Austin
(TX), Chennai, Migdal HaEmek, Wuzhong and Zhuhai.
In addition to Flex Pulse Centers, Flex Pulse is accessed through any
computer, tablet, or smart phone, and serves as a platform for collaboration
between multiple users.
Risk Management & Business Continuity
For most events that fall in this category, having well-defined risk management processes and emergency procedures in place will help mitigate the problem. Melinda McCants, External Supply Risk Management and Senior Resiliency Officer for Amgen, recommends the creation of broadly cause- or scenario-based (i.e., fire, flood, terrorist activity, etc.) playbooks focused on priorities:
Life preservation
Asset preservation
Business continuity
At the business continuity level, things begin to shift to both
a resource-based and more functional point of view. The switch to a resource-based perspective
means we no longer care so much about the situation which caused the disruption
(was it a chemical spill, a plant fire, etc.) to what resource was compromised
or removed from action (e.g., did we lose a fabrication facility, a metal plater,
or all our suppliers along the northeast coast of Japan?). In other words, the effect of the event. Here ISO
22301, Business continuity management systems – Requirements, provides an
internationally recognized standard that practitioners can use to architect their
organization’s business continuity management (BCM) program. From an operational standpoint, this ISO
Standard contains a requirement not previously addressed in business continuity
standards – the need to plan for a return to normal business. Key to this is identifying and maintaining alternate
supplier(s) for mission
critical materials, a plan for personnel substitution or replacement, and Business
Impact Analysis.
When establishing alternate suppliers, it is important to
confirm to the degree possible that these are, indeed, true alternate
suppliers. The point here is that Spacely
Sprockets and Cogswell’s Cogs are not genuinely alternate suppliers if they
both share a common, critical first-tier supplier, Harlan’s Hardware. A plant
fire at Harlan’s cripples both of these suppliers. Clearly, the more upstream suppliers
our suppliers share, the more fragile our supply chain becomes and the accumulation
of additional “alternate” suppliers that share those same upstream vendors adds
little more than further onboarding and maintenance costs.
This is where supply chain visibility comes into the
equation.
Survive and Flourish in Fiksel’s Resilience Model
“The green reed which bends in the wind is stronger than the mighty oak which breaks in a storm.” ― Confucius
The world of the Supply Chain Engineer is complex and
getting more so every day.
Offshoring. Nearshoring, Reshoring. Global suppliers. Regional civil unrest. Inconsistent trade regulations. On and on….
To address the issues associated with the Survive and Flourish quadrant, Fiksel recommends the following functional actions:
Scenario-based planning,
Crisis management,
Opportunity realization.
He also suggests the following structural configuration
changes to support this quadrant:
Asset security and fortification,
Modularity and redundancy,
Business diversification.
Antifragility
With each new layer of complexity comes an exponential increase in risk and vulnerability to disruption. And catastrophic failures in supply chains are consequently becoming increasingly frequent. For this reason, companies can no longer rely solely on risk management and business continuity plans. These are reactive survival tactics, a set of tools to get through a Terrible, Horrible, No Good, Very Bad Day …. They do not, however, do anything proactive to anticipate these disruptions and to build a capacity of resilience. To lift a phrase from Nassim Taleb, traditional risk management and business continuity planning do nothing to make the supply chain organism (SCO) “antifragile”. Taleb defines antifragile as the opposite of fragile. And while Fiksel argues that the term “resilience” incorporates Taleb’s concept of the antifragile, I think they are complementary, but somewhat different, concepts. Going forward, we will use the term antifragile to describe the resilience tools and processes used in the Survive and Flourish quadrant of Fiksel’s Resilience Model.
Taleb says,” Antifragility is beyond resilience or
robustness. The resilient resists shocks
and stays the same; the antifragile gets better. This property is behind everything that has
changed with time: evolution, culture, ideas, revolutions, political systems,
technological innovation, cultural and economic success, corporate survival,
good recipes (say, chicken soup or steak tartare with a drop of cognac), the
rise of cities, cultures, legal systems, equatorial forests, bacterial
resistance … even our own existence as a species on this planet. And
antifragility determines the boundary between what is living and organic (or
complex), say, the human body, and what is inert, say, a physical object like
the stapler on your desk.”[i]
Imbedded in Taleb’s definition are two key ideas:
Antifragile systems can actively benefit from
disruption, chaos, volatility, and uncertainty; and,
Antifragility is the hallmark of the “living”,
complex system and differentiates them from “inert” objects.
When we look at the specific ways to address and
mitigate risks in this quadrant in later posts we will examine these two
features along with a Paleontologist’s view of what happened following the K-T
extinction event 65 million years a
[i] Taleb, Nassim Nicholas. Antifragile (Incerto)
(Kindle Locations 331-336). Random House Publishing Group. Kindle Edition.
For me, a key function of the supply chain manager/engineer is to identify the risks his or her supply chain is exposed to, the potential impacts of those risks, and how to build resilience, and manage – even leverage– those risks if they manifest themselves. So, we will be doing a series of posts over time that identifies how those risks can best be classified, mitigated, and managed. This is the first in that series.
In order to reduce the fragility of a supply chain, we need to understand the disruptions to which it can be subjected. Being a graphical thinker, I tend to like to visualize these in matrix form, and the format I personally find most useful in this case is one devised by Dr. Joseph Fiksel. He uses the ubiquitous 2×2 format seen everywhere in business, with the X-axis in this case representing the abruptness of the change or disruption, and the Y-axis the magnitude.
Fiksel’s diagram depicts four types of change, analogous to those experienced in any environmental system, whether organic or manmade. In fact, it is illuminating to examine these strategies through the lens of the supply chain as a living organism. This is not as far fetched as it may at first seem. Consider that Merriam-Webster defines an organism as, “a complex structure of interdependent and subordinate elements whose relations and properties are largely determined by their function in the whole”[ii]. That seems like a reasonable definition of a supply chain to me. So, let’s take a look at Fiksel’s strategies from that perspective.
Natural Selection
Charles Darwin wrote, “…as natural selection acts by competition for resources, it adapts the inhabitants of each country only in relation to the degree of perfection of their associates”[iii]. Put in somewhat more contemporary terms, natural selection results from competition for resources, adapting the members of a given ecosystem against the effectiveness of other competitors in that ecosystem.
In nature, natural selection is a process – sometimes very
gradual, sometimes relatively fast – composed of five basic components.
Variation: Within any population there are
differences – variations – in traits between members. Some are larger, some smaller. Some have more color, some less. And there
are variations in the amount and color of hair, physical strength and speed,
height, etc.
Inheritance: It turns out that some of these traits are genetically heritable, being consistently passed along from one generation to the next, for example, dark skin coloration due to genetic melanin density. Other traits, however, are more a product of environment and as a result are not particularly inheritable, e.g., a dark skin color due to sun exposure and consequent tanning.
Resource Limitations: Most populations have the
capacity to produce more offspring than the local resources will support. Therefore, resource limitations create limits
on population growth.
Adaptation:
Some members of the population will possess traits that are better
suited to what Darwin referred to as, “the struggle for existence,” than
others. What that really means is that
the variation of traits will make certain individuals better suited for the
battle for limited resources. When a heritable trait confers a benefit or
advantage to its possessor in the struggle for resources and, hence survival,
it is called an adaptation
Selection: Those individuals with better adapted
traits will be able to produce more offspring with greater survivability than
the lesser competitors in the population.
Over time, this battle for resources will favor better adapted traits
over others and, therefore, gradually increase the frequency of those traits in
the population. This is selection.
The correlation between these aspects of these evolutionary
components and the supply chain organism (which, due to my dislike of unnecessary
typing, we will refer to as the SCO from now on) seems pretty intuitively clear
and we shall expand on that as we move forward.
Steer and Adjust
In the low magnitude, low abruptness
quadrant we address routine fluctuations and changes. These Fiksel represents with a low amplitude,
regular sine wave. This is the seasonal migration of birds and other animals,
the movement of the grazers and the hunter/gatherers following the easiest
availability of resources. It is, also, the Commodity Manager adjusting to
seasonality in demand and availability. It is the Buyer renegotiating contracts
on commoditized items to take advantage of price and volume variations in the
market. This is daily life in the ecosystem – any ecosystem.
Steer and Adjust is where business lives day-to-day. Naturally, we have plans and procedures in place to ensure our business operates as effectively as possible, but it is during times of routine operation we also need to be doing our continuous improvement. It is through continuous improvement that we derive variation, and it is through variation that we identify tools and methods that improve our ability to acquire resources or reduce our resource overhead. And as these advantages are tested and their benefit to the SCO is validated, they too can be codified in policy and procedure – either replacing less effective methods or adding greater breadth to our portfolio of capabilities and options to different situations. Once these new practices are proceduralized they are, in effect, inheritable, being passed down to each new iteration of the affected processes.
Adapt and Transform the Supply Chain
The next quadrant is the high magnitude, low abruptness
quadrant. Here we see significant but gradual shifts in
the operating environment: the growth of eCommerce and its related B2C
logistics, offshoring/reshoring of suppliers, new markets, new competitors,
etc. If left unaddressed, these can cause the gradual attrition of the
organization’s competitive advantage and brand confidence. To address these concerns, supply chain
managers and engineers need to keep a watchful eye on “drift’ in their supply
chains utilizing tools such as trend analysis, predictive analytics, and
scenario planning to recognize shifting paradigms.
But identifying these changes is quite often the easy
part. Once recognized, adaptation and
transformation become key. This is where those variations we discovered during
the relatively quiet times of the Steer and Adjust period really come into
play. If the SCO has developed a robust
portfolio of capabilities and options, it will have an easier and more
successful time adapting to the evolving environment having a richer range of
pre-tested options to choose from in responding to these changes. If, on the other hand, it lacks depth in its collection
of capabilities, the SCO will be forced to resort to rapid change management
and process re-engineering. While these
tools can be very effective when they occur in an organic and ongoing fashion,
when forced by circumstances and urgent necessity, the SCO is often left scrambling
after the elusive unicorn of business transformation in a last-ditch effort to
secure its survival.
This is part two of a two-part post on risk and value mapping. In part one, we provided some historical perspective on how procurement has evolved over the past century and how value-based procurement has become increasingly important. In part two we discuss the mechanics of applying risk and value mapping and how it relates to supplier relationship management.
Risk and Value Mapping
One of the primary tools – and a great place to start in
moving your company into greater value-based procurement – is risk and value
mapping your purchases.
The first question we need to explore when doing this type
of effort is to look at our purchases and ask a series of structured questions:
How much do we buy of this item, both in terms
of quantity and total annual spend?
What is the unit cost? The total landed cost?
How critical is this item to the customer
experience? How critical is it to the operation of the enterprise?
How many suppliers are there for this item? How
available is it in the marketplace?
We use the answers to these questions to define the nature
of our relationship with the vendors of these items. First, we need to rank each on the ubiquitous
2×2 matrix – this time one that ranks annual expense of the item on the X-Axis,
and the risk or impact of the item on the Y-Axis.
As we rank each item we are, in effect, defining how we will
address that item, and potentially its supplier, and our organization’s
relationship with them.
Those items that represent the lowest risk and values to the
organization and are sourced from simple commodity-type markets will retain a
transactional focus. Here our effort
will continue to be to reduce cost, both in terms of item total landed cost and
transactional cost. The more the
procurement team can reduce the total cost of ownership for these, the better. As
a result, Items in this item quadrant will have short-term contracts to allow
buyers to switch sourcing options frequently. These suppliers also have minimal
involvement with the business in terms of design, item specification or
planning.
At the other end of the spectrum, there are those items that
have a significant impact on the organization and its products/services. These are items that may have direct effect
on the customer experience or that have few substitutes and limited supply in
the market. They can be items that are
unique to, or differentiate, your products or may represent a highly complex
market segment.
As you might expect, the supplier relationship with these vendors
is considerably different. These
represent goods and services that have a significant, potentially vital, impact
on the business. As a result, we want to
create long-term relationships and contracts with these suppliers and include
them in design and strategy considerations.
In fact, the more strategic the supplier the more we should treat them
like partners rather than vendors. It may even be wise in some cases to
co-invest in these. We want to ensure
that they see our organization as a “Keystone Client”, the one they have the
strongest symbiotic relationship with, the one that gets service before the
rest.
A part of that, of course, is to understand the potential strategic
supplier’s relationship with the rest of the market. Are they also servicing our competitors? Will
they properly protect our intellectual property (IP)? Will they continue to see
us as their keystone client in the future?
Using Risk and Vallue Mapping
Our next step is to begin to look at the 2×2 matrix, the Risk and Value Map, first in broad terms and then, more specifically, how we should handle the goods and services that lie in each quadrant.
In our first step, we can quickly see that the products fall
into three general categories:
Low risk items, irrespective of the annual
volume, tend to be generic or commodity-type items. They are simple orders that can be generally
acquired from several different suppliers, so long as the form, fit and
function remains the same.
High Risk/ High Spend items, the upper right
quadrant, are items that define our competitive advantage. These are items that have a significant
impact on the customer experience, that are unique applications of IP, or that
are singles sourced due to technology or resources.
Finally, there are the potential problems, the
upper left quadrant. These are items
that are high risk, but we spend too little on to have enough leverage or
control with our suppliers to protect our firm in the event of disruption or
competition.
Now let’s look at how we should handle the goods and
services that fall within each quadrant
Tactical Spend
These purchases are characterized by high transactional cost relative to the item unit price. For example, a box of 100 U Drive Screws, 1/4 In , #4, Stainless Steel costs $9.22 at Grainger Industrial Supply, but let’s say your Procure-to-Pay cycle cost to buy and stock it is $92, then the transactional cost is about 1000% of the purchase price. Clearly, the focus for items in this category should be on minimizing the transactional cost associated with the item. To do this, we apply two broad strategies:
Streamline Procurement Process
Use eProcurement / eCatalogs
Use Procurement Cards (Pcards)
Use EDI for both the procure and pay cycles
Minimize number of transactions
Optimize inventory order policy
Leverage vendor managed inventory (VMI) and
consigned inventory
Further, we need to view these
products as commodities and therefore minimize time spent communicating with
the supplier. After all, these are low volume goods we can get from several suppliers. For that reason, we want to also keep our vendor
contracts for these items as short as possible, allowing the freedom to move
quickly and often in order to take advantage of price changes in the market.
Leveraged Spend
The Leveraged Spend Quadrant represents those low unit price
items that we buy in such quantity that they account for a large spend in
aggregate. For this group, the key components of our procurement strategy
should be:
Streamline the procurement process
Utilize reverse auctions, allowing the suppliers to compete between themselves for your business
Sealed Bid/First Price auctions. This is the standard request for quote (RFQ)/request for proposal (RFP) approach
Leverage purchasing volume
Consolidate orders across divisions and business units to maximize purchasing volume
Add volume for vendor with Combinatorial Contracts. These are contracts where you include additional products in the quote process to allow the supplier not only economies of scale but also economies of scope
Utilize Industry Portals and/or group purchasing organizations (GPOs). These allow multiple companies within an industrial vertical to consolidate their orders, again with the goal of getting volume discounts
Utilize Spot markets to ensure business continuity. As commodity items, multiple vendors are available. In the event of a shortage from your key supplier(s), don’t hesitate to utilize spot markets to ensure that the needs of the business are met.
In this quadrant our goal is to
minimize not just the unit price, but the total landed cost (TLC). And how we
do that is, in many ways, like what we do in the Tactical Quadrant:
Be prepared to change vendors based on TLC
Continuously be on the lookout for new suppliers
Keep contracts as short and flexible as possible
Strategic Spend
The Strategic Quadrant represents those high volume/high
spend items that give you a competitive advantage and/or have a direct impact
on the customer experience. Failure in this area of the supply chain can have a
long-lasting impact on the brand or the enterprise, and therefore the
associated suppliers and supplier relationships need to be carefully cultivated
and maintained. Consequently, the Strategic Quadrant has a very collaborative
focus. This may incorporate various elements of supplier partnership including:
Long-term Contracts
Partnership Agreements
Co-development of Products and Innovation
Potential Co-investment
To further mitigate risk, you should also consider what
other clients these suppliers serve. Do they
work for your competitors, too? Also, in this quadrant, it may make sense to
consider vertical integration, whether actual or virtual (i.e., contractual). Vertical integration can help reduce risk of
supply chain interruption, protect sensitive intellectual property, and provide
additional sources of revenue.
Here are a couple of other key take-aways on strategic
spend. First, DO NOT use eProcurement
for strategic items. The usefulness in
eProcurement is in its ability to streamline the purchase of routine, low unit
cost items to reduce the transactional cost and minimize time spent interacting
with the supplier. Since strategic items
basically represent the antithesis of that model, we want to stay away from
eProcurement for these items. Instead,
we want to stay in close contact with these suppliers about their shipments of
goods and services. Remember, this is
the collaborative quadrant, so pick up the phone and coordinate with
your strategic suppliers.
Second, while collaboration is the key here, don’t get so
wrapped up in your suppliers that you lose sight of what is best for your
company. Focus on strategic supplier collaboration, but ALWAYS protect the enterprise
first. And you do this, in part, by building resilience through cultivating at
least one alternate supplier where possible, be on the lookout for substitute
parts, and optimize safety stock levels for critical items at a
risk-appropriate level.
Critical Spend
The final area, the Critical Quadrant, is what should keep you
awake at night. These items are where nightmares come from.
You should have one goal with items that lie in the Critical
Quadrant – move them to another quadrant. Any other quadrant. As quickly as possible. These are goods and
services that put your organization at risk and at liability.
How and where do you move them? Each item will need to be
evaluated separately, but here are some general options.
Move to the Tactical Quadrant. In order to make these
items tactical consider looking for more suppliers, thus making them more
commoditized. This may require changing
engineering specifications to allow standardization with other, more common
parts. Also, you may find that the item’s function can be performed just as
well from the customer’s point of view using a less complex part or parts.
Move to the Leverage Quadrant. To make the transition
to a leverage part, may again require reviewing engineering specifications to
identify ways to simplify the item, making it more widely available. You may
also find that the part is used elsewhere in your enterprise. By consolidating purchases across your organization,
you may be able to identify enough total volume to move the item into a
leverage buy. And if not, you may be able to consolidate purchases with other
businesses – notably NOT to include any direct or indirect competitors – or
through an industry-specific GPO to achieve that volume.
Move to the Strategic Quadrant. If the item is
identified directly with your company or brand, or if it has a direct impact on
your customer’s experience of your products or services, or if it’s complexity
cannot be reduced, you must move this item to the Strategic Quadrant. In fact, if any of the above criteria hold,
these items should be your first priority because they represent the most
immediate and significant threat to the organization or brand. These are items
at known risk that are vital to your product. Don’t delay.
To move these items, you may want to include them in
existing contracts with your strategic suppliers to ensure the part’s
availability while strengthening that vendor relationship. Alternately, if the
item must stay with the current supplier you may need to partner with that
supplier. This can be done in several ways.
The quickest is often to agree to pay more per unit or to enter into a
long-term contract with a sole-source vendor to ensure availability and the
supplier, in turn, agrees to maintain a stock of the items and/or the materials
to continue building the item should a disruption occur. You may also want to
explore other ways of partnering with this supplier to form some degree of
vertical integration, whether actual or virtual. However you go about it,
though, moving items to the Strategic Quadrant is likely to incur additional
costs, either through higher unit prices, loss of flexibility in future
sourcing, or investment in partnering with the supplier.
Digitization
No matter what quadrant you are dealing with, however, it is
important to be utilizing the digital tools in your Procure-to-Pay (P2P)
toolbox. Each of these, when properly configured and deployed, can reduce
transactional cost while increasing operational speed.
Tools like advanced shipment notices (ASNs), Supplier Self-Service
portals, Electronic Invoicing and Electronic Payments cost relatively little to
implement, reduce both errors and touch labor, and therefore, tend to be “low
hanging fruit” that generate quick return on investment (ROI).
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 for corporates, 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%).
But when planning your supply chain digitization program, it
is important to remember that thorough knowledge and a solid roadmap are
essential for an organization to avoid a poorly selected starting point or a
failed deployment that can destroy momentum and discourage leadership from
further investments.
Conclusion
The importance and function of Procurement have evolved over the past century. In today’s environment, a focus not only on price but even more on value is critical to the enterprise to ensure not only its profitability but its survivability. For these reasons, the ability to identify, map, and address the risk and value of materials is a critical skill for the procurement professional. Along with risk and value mapping skills, the digitization of the P2P process reduces cost, increases revenue and encourages new business models.
[i] PYMNTS.com,
“Corporations Stuck in The Planning Phase of Supply Chain Digitization”,
Dec. 12, 2018
This is part one of a two-part post on risk and value mapping. In part one, we provide some historical perspective on how procurement has evolved over the past century and how value-based procurement has become increasingly important. In part two we discuss the mechanics of applying risk and value mapping and how it relates to supplier relationship management.
________________________________________
Risk and value mapping –
Then and Now: A Brief History of Procurement
Today we are going to briefly discuss the idea of risk and
value mapping, what it is, how it works in procurement, and how it helps
protect your organization. But in order to really get a sense of context, let’s
start by looking back at the evolution of procurement in modern business and
how its role in the organization has evolved.
If we were to step back in time about 90 years ago and find
ourselves in Dearborn, Michigan, we would likely see a scene like this.
This is the Ford Motor Company River Rouge Complex. “The Rouge” as it was called, was huge by any standard. It occupies a massive 1.5 square mile footprint along the banks of the River Rouge. And within the complex lie ore docks, sixteen million square feet of manufacturing floor across 93 buildings, and 100 miles of train tracks with 16 locomotives. There were steel furnaces, coke ovens, rolling mills, glass furnaces, and plate-glass rollers. There was a tire manufacturing plant, a stamping plant, an engine casting plant, a transmission plant, a radiator plant, and a tool and die plant. And, oh by the way, they assembled cars here, too.
But there wasn’t much of a procurement operation here. Why? Because Ford owned virtually EVERYTHING. The Rouge was one of the most vertically
integrated operations of all time. Ford
owned everything from the raw material production – such as ore mining –
through final assembly and sales. There was very little bought from outside.
Consequently, the procurement operation added very little value to Ford in
those days.
But times change and with them how markets work. While
vertical integration provides a company ultimate control over its material
suppliers, there are drawbacks. Here are two obvious ones. First, it is
expensive. Second, it induces
brittleness in the supply chain.
It takes a lot of time and money to be great in one
industry, be it automobile, glass, plastics, or steel manufacturing. This fact
is exacerbated by the complexity of today’s products. Compare Henry Ford’s
Model T to even the simplest car rolling off today’s production line. I imagine there are more components in a
car’s cruise control than there were in the entire Model T. And this complexity
brings with it greater barriers to entry at each level of a company’s supply
chain.
Then there is the lack of flexibility. If a company owns its source of supply in any
given area, it is unlikely to have a substantial relationship with alternative
suppliers. That means, when a disruption
occurs within a company-owned supply chain, there is little opportunity for
mitigation beyond their stockpile.
Henry Ford even saw this in 1927. The one raw material he did not control was rubber. That was produced in Southeast Asia and managed exclusively by British agents. So, Ford bought a huge swath of land in the Brazilian Amazon to build his own rubber plantation. The effort, however, was a colossal failure costing Ford a fortune and many workers their lives. Ford, in the end, was forced to return to the British rubber agents.
Over time, most businesses have moved further and further away from the vertical integration model and adopted a much more nimble, flexible and less asset-intensive approach – “We do what we do best and buy the rest.”
And with this change, the locus of cost to the operation moved steadily from wages, salaries and overhead toward goods and services expense. And just as early automation was an attempt to minimize the cost of labor per unit of production, this transition brought with it attention on reducing the cost of materials and services purchased.
This was the birth of Procurement as a critical business
function.
And it is a critical function. In their book “The
LIVING Supply Chain”[i],
Handfield and Linton describe a concept the biologist Sean Carroll termed Serengeti
Rule 1. “(S)ome species exert effects on the stability and diversity of
their community that are disproportionate to their numbers or biomass. These
are termed ‘keystone species’”. Applying
this definition to the departments within an organization, we can certainly say
that Procurement is a keystone department.
Let me illustrate.
In the example above we are looking at a hypothetical
company with $500M in annual revenue. The Baseline column shows its current
fiscal performance. Each column to the right shows what happens when the cost
of goods and services procured is reduced in 5% increments. All other expenses remain the same. As you can see, each 5% step down in cost
results in about 11 ½% increase in Net Income Before Taxes in this example.
Clearly, this is a case where a department exerts a disproportionate effect on
the performance of the enterprise.
And therefore, we have traditionally pushed Procurement
organizations to reduce costs, reduce costs, reduce costs!
But there are a lot of other factors that remain unseen,
hidden under the waterline of the “Price Iceberg”. Factors like delivery
performance, quality of material handling, production delays, inspection costs,
pre- and post-sales service and support, product training, supplier financial
health, and a host of other risks and opportunities.
While the impact of price negotiation is immediately
apparent on the bottom line, focusing exclusively on price often leaves other
potential risks and values on the table, unaddressed. There are many other
questions we need to be asking beyond, “What is the total landed cost of this
item?”. Questions like:
What other assets/capabilities the supplier can
offer in addition to the product/service procured?
Is the supplier better with existing activities
(e.g., inventory management; after sales support; product development…)?
Can the supplier decrease our risk (e.g.,
reducing bottlenecks/critical parts purchasing; disruption response; exchange
rates)?
Can the supplier provide some other competitive
advantage (e.g., differentiating factor; new product variant)?
Can the supplier help expand the product
portfolio to address new customer needs?
With value-based sourcing, you seek not only to leverage
price, but to leverage the skills and assets of your suppliers to develop and
expand competitive advantage in the marketplace. This means at times you may
pay a somewhat greater per unit total landed cost in order to reap a larger
value for your organization.
In shifting from a solely price-based focus to a value-based one, we need to take into consideration not only the total cost of ownership (TCO), but the additional value provided by the supplier. But this requires a bit of a shift in viewpoint and the broadening of a couple of skillsets. The procurement group needs to maintain as lean a purchasing process as possible for low-value items while developing a strategic perspective, both with internal customers and suppliers, to understand where supplier assets and skills can be leveraged to the organization’s advantage.
Value-based sourcing also means that cross-industry
benchmarks have a different purpose.
Instead of seeking to be as good as the benchmarks, with value-based
procurement we seek to be better. Better
and different through using the value the suppliers bring to the table. This is
done, in part, by moving the purchasing position in the organization from one
of tactical and operational specification and delivery to one of strategically
coordinating vendor resources and assets to meet the business’ goals. This
requires the procurement professional to expand his or her skills to encompass
greater general business and finance competencies.
Finally, value-based procurement lends itself to a center-led format. In this particular model, the central procurement organization coordinates enterprise-wide, strategic procurement in direct coordination with the business unit level purchasing organizations which, in turn, provides tactical and operational support to the individual operating units and stakeholders.
Next week in part two of this series we will look at the mechanics of risk and value mapping as well as how you can use risk and value mapping to guide your supplier relationship management strategy.
[i] Robert
Handfield & Tom Linton, “The LIVING Supply Chain”, Wiley, 2017, pg. 11
Last week I was at the Resilience 2019 Conference in Cambridge, MA, co-sponsored by Biogen™ and Resilinc™. Now I go to a fair number of meetings, conferences, and summits, but this one was indeed impressive. Yeah, they had great food and drinks, but that’s not what I’m talking about. And, yeah, we got to experience Biogen’s virtual reality “cave” where we could walk through architectural floorplans and inside molecules. Very cool, but again, not what I’m talking about. And we toured Biogen’s Global Security Operations Center (GSOC), a 24/7 command center that monitors incidents and potential threats globally while tracking the safety of employees, facilities, and products. An amazing state-of-the-art facility that made you feel like you were in the supply chain equivalent of NORAD’s Cheyanne Mountain Complex, but still not what made this conference a standout.
What I’m talking about is this summit brought together some
of the most experienced and brightest people in the world of supply chain.
People like:
Dr. Yossi Sheffi, Director of the MIT Center for Transportation and Logistics (CTL) and a father of supply chain resilience;
Bindiya Vakil, a former student of Dr Sheffi and founder/CEO of Resilinc™, the leading provider of supply chain resiliency solutions;
Lee Spach, Sr. Director of Supply Chain and Product Support, who manages all aspects of Biogen’s supply chain resiliency and threat detection, and still had time to be our gracious host;
Bill Hurles, Executive Director Supply Chain (Retired) at General Motors™;
Bill Marrin, Executive Director, World 50, Inc. which consists of private peer communities that enable CEOs and C-level executives at globally respected organizations to discover better ideas, share valuable experiences and build relationships that make a lasting impact.
M.K. Palmore, Field Chief Security Officer in the Americas for Palo Alto Networks and former Head of Cyber Security Branch for the FBI;
Tom Linton, Chief Procurement & Supply Chain Officer at Flex, and 2017 recipient of the Lifetime Achievement Award from the Procurement Leaders Organization at the World Procurement Congress;
Dr. Robert Handfield, the Bank of America University Distinguished Professor of Supply Chain Management at NC State University and, along with Tom Linton, co-author of “The LIVING Supply Chain”,
among many others.
Resilience vs Risk Management
And, as you have likely guessed by the title of this blog, the
conference’s focus was resilience in the supply chain. So, a quick aside – if
you are not really clear on the difference between risk management and
resilience, it’s pretty straightforward.
While the two are closely related and there is indeed some overlap, it
really comes down to this, risk management is, according to
BusinessDictionary.com, “The identification, analysis, assessment, control, and
avoidance, minimization, or elimination of unacceptable risks. An organization
may use risk assumption, risk avoidance, risk retention, risk transfer, or any
other strategy (or combination of strategies) in proper management of future
events.”[i]
On the other hand, Supply Chain Resilience (SCRes) is a
relatively new engineering and scientific field of research. An early
definition of SCRes was provided by Christopher & Peck (2004)[ii]
who defined resilience as the ability of a system to return to its original
state or move to a new, more desirable state after being disturbed. Joe Fiksel
of Ohio State University amplified this by saying SCRes is the capacity for
complex industrial systems to survive, adapt, and grow in the face of turbulent
change[iii].
While these are still common base
definitions of SCRes, shortly thereafter, Sheffi[iv]
made an interesting shift, asserting that SCRes also carries with it the
opportunity of a supply chain to be better positioned than the competition and
even gain advantage from disruptions. In other words, SCRes is a strategic tool
that can not only ensure the enterprise’s rebound from supply chain disruption
but can potentially leverage those disruptions to actually create a competitive
advantage!
So, in short, Supply Chain Risk Management (SCRM) is about identifying and avoiding risks, while SCRes is about rebounding from and leveraging disruptions that do occur. And since SCRes operates at the intersection of business and STEM, as we discussed previously, this falls squarely in the domain of the Supply Chain Engineer.
But back to the Conference
As you can imagine, with a cast of world-class academics and practitioners like those listed above, the array of topics and events was exceptional. The Role of the CISO and Cyber Risks in the Supply Chain. Managing Risk with AI and Deep Learning Tools. The Power of Analytics and Data in Manufacturing and Supply. Next Generation Operational Centers. Reshape the Enterprise to be a Risk-Ready Culture. Integrating Resilience into the Business Decision Framework. Converting Risk into Supply Chain Intelligence.
And that’s only about half of the sessions.
Obviously, there was too much information to even summarize in a blog but let me try to give you a taste of a few of the key takeaways, at least from my perspective.
Resilience Tools
The SCRes toolset has two main components, redundancy
and flexibility.
Redundancy takes several forms such as redundant
means of production, redundant suppliers, and redundant (excess or buffer)
stock. Each of these provides resiliency
with little or no loss of speed. If my
plant is damaged by a typhoon, I bring up a corresponding line on one or more
of my other production facilities (a bit more about that later when we discuss
plant standardization). If my primary vendor has an interruption of supply, I
simply use my buffer stock or shift demand to my alternate supplier. There are
a few caveats to keep in mind when it comes to redundancy, though. First, any
form of redundancy costs you money, money that you are gambling on a disruption
occurring at the expense of investment elsewhere. Second, when it comes to
alternate suppliers, what at first appears to be a hedge against disruption
isn’t always. Take this all too common
example: We get our Referential Universal Digital Indexer (RUDI) from Spacely
Sprockets. As insurance against disruption, we spend the time and money to
develop an alternate source, Cogswell Cogs. That should protect us from any
interruption of supply, right?
Not entirely.
Turns out that both Spacely and Cogswell share a strategic tier-one supplier who is the sole source for one of RUDI’s components, the Sub-Etha, without which the RUDI cannot be manufactured. So, no matter which supplier you go with, you have an equal danger of interruption when it comes to the Sub-Etha channel.
Flexibility is really interchangeability through
standardization. Okay, that’s a little oversimplified, but for a short piece
like this it will have to do. Think in terms of the Intel™ production
facilities. Each one is completely, totally identical … down to the paint on
the walls. Now that is standardization. But consequently, what is produced at
any Intel™ production plant can be made at any other. So, if an Intel™ plant is
knocked out by an earthquake in California, any other one in the world with
open capacity can pick up the lost production.
Then there is product standardization. Here the example is the HP™ Printer. In the
US they come assembled and complete with decals. But go to Europe and it’s a different
story. There, printers are built and
boxed, but there is a hole in the side of the box as it sits in the warehouse. When the order comes, a series of language
appropriate labels and font card are added to the container and the package
sealed. This one printer can be in western Europe, or in Greece, or Turkey, or
Russia. The core product is standardized,
and destination-specific details are added at the last minute.
Next there is part standardization. Years ago, I worked for an Aerospace &
Defense arm of Raytheon™. We had dozens,
perhaps over a hundred, government contracts going on in that facility. And each time an engineer designed a metal
fab part, he or she reached over, grabbed the nearest Granger catalog, turned
to the screw section and chose a screw. Consequently, we had several hundred
types of screws in inventory. Had we had
a part standardization program in place back then (I’m certain they do now),
that number could likely have been reduced to a few dozen. And standardization
= interchangeability = resilience.
To carry this whole concept of interchangeability one step
further, people should be pliable (read: cross-trained). No one should be the
only person who can do a particular job.
If he or she quits, dies, wins the lotto or even calls in sick, that
creates a potentially disruptive bottleneck.
By the same token, everyone should know how to do more than one thing. In many warehouses, each person may be
trained to be a forklift operator, a picker, a sorter, and a receiver. This
makes each one pliable, able to step in when there is a shortage in another
area. And this eliminates another area of risk.
Forethought
A little preparation can go a long way to avoid disruption
and to ease the pain when it does happen. The first step in that groundwork is to source
key materials and services with risk as part of the plan. Three specific ways
to do this are:
Single vs Multi-sourcing. Common wisdom
says to always multi-source where possible in order to minimize risk, but as we
have seen, that can just be an illusion.
If you multi-source a key product but those various vendors share critical
sub-tier suppliers, you are not really getting the diversification of risk you
were looking for. In cases like this it
may be better to partner with one vendor and collaborate on – perhaps even co-invest
in – mitigating risk together.
Supplier Location. When selecting a supplier
consider where the supplier’s production and distribution facilities are
located. Are they subject to
geo-political threats such as civil unrest, nationalization, or war? Are those
areas prone to natural disasters – earthquakes, floods, or tsunamis? Will your intellectual
property be adequately protected from competitors and foreign entities? Will
your brand be put at risk by local practices such as child labor or the use of
conflict minerals?
Supplier Financial Health. A vendor’s current
fiscal health is a strong indicator of future performance. Rapid Ratings™
reports that companies with poor fiscal ratings are twice as likely to have
very poor quality and 2.6 times as likely to have very poor delivery
performance as those who are financially healthy. A 2019 Gartner™ study identified several
causes of disruption. Of the top causes,
36% – the largest single cause – were directly attributed to poor supplier financial
health. Another 34% resulted from inadequate supplier capacity, an indirect result
of undercapitalization.
Another critical preparatory step is developing
playbooks. These are detailed,
step-by-step guides for what to do in a given crisis. Good playbooks are developed
through “desktop war games” where key personnel go to a conference room for a
day and simulate their response to a given catastrophe, critiquing, refining,
and documenting their responses as they go. Don’t waste a lot of time with
scenario planning – was the plant wiped out by a typhoon? A fire? An act of
terrorism? While each situation has
unique nuances, the main point is that the plant – the resource – is removed
from operation; how do we respond and rebound quickly?
Further, the playbooks should focus on three elements in descending
order of priority:
Life preservation;
Asset preservation; and,
Business continuity
They should also contain a prioritized list of roles to call
when a crisis occurs, listing not only the primary contact’s information, but
also that of a secondary and tertiary contact. In addition to business team
members, this list should include contact information for fire, ambulance and
other first responders including both local and federal law enforcement.
When it Happens
In the event the day does come and a catastrophe occurs,
take a lesson from GM: Create a Crisis Suite.
While this should ideally be on premises at the company facility, like
the contact list in the playbook, there should also be a secondary and even
tertiary location predefined. Those roles
identified in the playbook should report to the Crisis Suite as quickly as
possible. Don’t wait to be called as communication lines are sure to be maxed
out if it is a regional crisis. Just go.
And what roles should be included? Naturally, every resource
is going to require somewhat different teams, but in general you might want to
include local operational management from supply chain, operations/manufacturing,
engineering, and facilities. Note, I said operational management, not
senior management. In the chaos of crisis it is imperative that everyone “swims
in their lane”, and that means letting those people who understand the
operations best respond quickly.
Final Thoughts – Resilience Future-proofs the Organization
To wrap things up, it’s important to think about “future-proofing”
the enterprise.
Remember, resiliency is driven by speed. Accurate, real-time data drive speed in human
decision making. But it is the accurate part that people stumble over. “I need to clean up my Master Data.” Well, I‘m sorry to tell you, no matter how
much time you spend on it today, you’re going to need to work on it again
tomorrow. And the next day. And the next.
Master Data Maintenance (MDM) is an ongoing process in a living, growing organization. It always will be. So, don’t let that be the reason you aren’t building resilience into your organization. Focus on speed and transparency and the data will correct itself. Transparency is, in fact, the key. Broadcast the shortcomings in your master data rather than hide them. Use intuitive graphics to display what’s wrong, where, and who owns it. People will be motivated to correct those failures under their purview. Enlightened self-interest is a powerful thing, and none of us want to be seen as the weakest link (and, consequently, the greatest risk) in the organization.
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 20th 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]
Inventory management systems. Hardware and software systems that record, track, and manage inventory levels through the procurement value chain
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
Contract life cycle solutions. Solutions standardizing and automating contract initiation, creation, negotiation, and execution
Supplier quality management. Software allowing buyers to engage and collaborate with suppliers to manage product quality, delivery, and other aspects of supply
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:
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?
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.
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.
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.
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
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.