Do You Need a Network Design CoE?

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Whether you formally create a center of excellence or not, an internal competence in value network strategy is essential.  Let’s look at a few of the reasons why.

Weak Network Design Limits Business Success

From an operational perspective, the greatest leverage for revenue, margin, and working capital lies in the structure of the supply chain or value network.*

It’s likely that more than half of the cost and capabilities of your value network remain cemented in its structure, limiting what you can achieve through process improvements or even world-class operating practices.

You can improve the performance of existing value networks through an analysis of their structural costs, constraints, and opportunities to address common maladies like these:

• Overemphasis on a single factor.  For example, many companies have minimized manufacturing costs by moving production to China, only to find that the “hidden” cost associated with long lead times has hurt their overall business performance.
• Incidental Growth.  Many value networks have never been “designed” in the first place.  Instead, their current configuration has resulted from neglect and from the impact from mergers and acquisitions.
• One size fits all.  If a value network was not explicitly designed to support the business strategy, then it probably doesn’t.  For example, stable products may need to flow through a low-cost supply chain while seasonal and more volatile products, or higher value customers, require a more responsive path.

It’s Never One and Done

At the speed of business today, you must not only choose the structure of your value network and the flow of product through that network, you must continuously evaluate and evolve both.  

Your consideration of the following factors and their interaction should be ongoing:

1. Number, location and size of factories and distribution centers
2. Qualifications, number and locations of suppliers
3. Location and size of inventory buffers
4. The push/pull boundary
5. Fulfillment paths for different types of orders, customers and channels
6. Range of potential demand scenarios
7. Primary and alternate modes of transportation
8. Risk assessment and resiliency planning

The best path through your value network structure for each product, channel and/or customer segment combination can be different.  It can also change over the course of the product life-cycle.

In fact, the best value network structure for an individual product may itself be a portfolio of multiple supply chains.  For example, manufacturers sometimes combine a low-cost, long lead-time source in Asia with a higher cost, but more responsive, domestic source.

Focus on the Most Crucial Question – “Why?”

The dynamics of the marketplace mandate that your value network cannot be static, and the insights into why a certain network is best will enable you to monitor the business environment and adjust accordingly.

Strategic value network analysis must yield insight on why the proposed solution is optimal.  This will always be more important than the “optimal” recommendation.

In other words, the context is more important than the answer.

The Time Is Always Now

For all of these reasons, value network design is more than an ad hoc, one-time, or even periodic project.  At today’s speed of competitive global business, you must embrace value network design as an essential competency applied to a continuous process.

You may still want to engage experienced and talented consultants to assist you in this process from time to time, but the need for continuous evaluation and evolution of your value network means that delegating the process entirely to other parties will definitely cost you money and market share.  

Competence Requires Capability

Developing your own competence in network design will require that you have access to enabling software.  The best solution will be a platform that facilitates flexible modeling with powerful optimization, easy scenario analysis, intuitive visualization, and collaboration.  

The right solution will also connect to multiple source systems, while helping you cleanse and prepare data. 

Through your analysis, you may find that you need additional “apps” to optimize particular aspects of your value network such as multi-stage inventories, transportation routing, and supply risk.  So, apps like these should be available to you on the software platform to use or tailor as required.  

The best platform will also accelerate the development of your own additional proprietary apps (with or without help), giving you maximum competitive advantage.  

You need all of this in a ubiquitous, scalable and secure environment.  That’s why cloud computing has become such a valuable innovation.  

A Final Thought

I leave you with this final thought from Socrates:  “The shortest and surest way to live with honor in the world is to be in reality what we appear to be.”

 

*I prefer the term “value network” to “supply chain” because it more accurately describes the dynamic collection of suppliers, plants, outside processors, fulfillment centers, and so on, through which goods, currency and data flow along the path of least resistance (seeking the lowest price, shortest time, etc.) as value is exchanged and added to the product en route to the final customer.

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Digital Transformation of Supply Chain Planning

A couple of years back, IBM released a study “Digital operations transform the physical” (capitalization theirs).

Citing client examples the report states,

“Perpetual planning enables more accurate demand and supply knowledge, as well as more accurate production and assembly status that can lower processing and inventory costs . . .

Analytics + real-time signals = perpetual planning to optimize supply chain flows“

They are describing the space to which manufacturers, retailers, distributors, and even service providers (like say, health care delivery) need to move rapidly with value network planning.  This is a challenging opportunity for software providers, and the race is on to enable this in a scalable way.  The leading software providers must rapidly achieve the following:

1)      Critical mass by industry

2)      Custody of all the necessary data and flows necessary for informing decision-makers of dynamic, timely updates of relevant information in an immediately comprehensible context

3)      Fast, relevant, predictive and prescriptive insights that leverage up-to-the-minute information

Some solution provider (or perhaps a few, segmented by industry) is going to own the “extended ERP” (ERP+ or EERP to coin a phrase?) data.  Whoever does that will be able to provide constantly flowing intelligent metrics and decision-support (what IBM has called “perpetual planning”) that all companies of size desperately need.  This means having the ability to improve the management of working capital, optimize value network flows, minimize value network risk, plan for strategic capacity and contingency, and, perhaps most importantly, make decisions that are “in the moment”, spans the entire value network.  That is the real prize here and a growing number of solution providers are starting to turn their vision toward that goal.  Many are starting to converge on this space from different directions – some from inside the enterprise and some from the extra-enterprise space.

The remaining limiting factor for software vendors and their customers aspiring to accomplish this end-to-end, up-to-the-moment insight and analysis remains the completeness and cleanliness of data.  In many cases, too much of this data is just wrong, incomplete, spread across disparate systems, or all of the above.  That is both a threat and an opportunity.  It is a threat because speedily providing metrics, even in the most meaningful visual context is worse than useless if the data used to calculate the metrics are wrong.  An opportunity exists because organizations can now focus on completing, correcting and harmonizing the data that is most essential to the metrics and analysis that matter the most.

What are you doing to achieve this capability for competitive advantage? 

Thanks for stopping by.  I’ll leave you with this thought of my own:

“Ethical corporate behavior comes from hiring ethical people.  Short of that, no amount of rules or focus on the avoidance of penalties will succeed.”

Have a wonderful weekend!

Resilience Versus Agility

Just a short thought as we move into this weekend . . .

Simple definitions of resiliency and agility as they relate to your value network might be as follows:

Resiliency:  The quality of your decisions and plans when their value is not significantly degraded by variability in demand and/or changes in your competitive and economic environment.

Agility:  The ability to adjust your plans and execution for maximum value by responding to the marketplace based on variability in demand and/or changes in your competitive and economic environment.

You can take an analytical approach that will make your plans and decisions resilient and also give you insights into what you need to do in order to be agile.

You need to know the appropriate analytical techniques and how to use them for these ends.

A capable and usable analytical platform can mean the difference between knowing what you should do and actually getting it done.

For example, scenario-based analysis is invaluable for understanding agility, while range-based optimization is crucial for resiliency.

Do you know how to apply these techniques?

Do you have the tools to do it continuously?

Can you create user and manager ready applications to support resiliency and agility?

Finally, I leave you with this thought from Curtis Jones:  “Life is our capital and we spend it every day.  The question is, what are we getting in return?”

Thanks for stopping by.  Have a wonderful weekend!

Scoring Your Value Network for Risk

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A previous post in Supply Chain Action introduced some important questions for establishing and sustaining a resilient supply chain.  They included:

1. How do you evaluate the resiliency of your value network?
2. Do you have the capability to electronically represent your value network from one end to the other?
3. Have you determined how to represent the value of inventory, currency and data that pulses along the paths in the value network?
4. Have you quantified the consequences of a disruption (from whatever cause) that would impact that flow?
5. If so, do you have a plan for dealing with such an interruption?
6. What have you done to make sure key people know the plan and can execute it?

In addition to my previous two posts, “Building Resiliency into Your Value Network” in Supply Chain Action and my guest post on Bob Ferrari’s Supply Chain Matters, I promised more on the topic. This is a partial fulfillment of that promise.

In the network of suppliers, manufacturing plants, and distribution centers through which you create value for your customers, there reside potential points of failure.  These points of failure can be identified by an item and/or a location.  If the location, say a country or facility in a flood plain is the potential point of failure, then all of the items that are sourced, manufactured or stored there inherit that risk.  But the magnitude of the risk is not the same for every item at that location.  A scheme for scoring value network resiliency is required in order to answer the questions I have noted above.  Here is basic formula that I dreamed up to get your thinking started if you don’t already have one:

Simplistically, resiliency might be said to be (1 – risk) where risk is the outcome of the following expression:

LT/Rd * Rv * M * C * G

where the terms of this expression are defined in the following fashion:

• Lead Time (LT) – can be analyzed, quantified and expressed in number of weeks or months
• Redundancy (Rd) – how many substitute products/components or alternative sources exist?
• Revenue (Rv) – total estimated annual or quarterly revenue (e.g. in $millions) from the sale of an item or from the sale of products in which the item is a component
• Margin (M) – proportion of the revenue (from the sale of an a single unit of an item and/or from the sale of a single unit of each product in which the item is a component or ingredient) that is gross profit
• Competition (C) – qualitative strength of the competition (How easily would the competition gain share if your supply were disrupted?), perhaps on a scale from 1 to 5
• Geopolitical Stability (G) – a qualitative score, perhaps on a scale from 1 to 5

Such a score could then be viewed from either an item perspective or a location perspective.  Naturally, one could look at it by item and location as well.

This is an admittedly imperfect approach (is there a perfect one?), so I hope that you will leave a comment with a suggestion.  Obviously, scalers could be applied to each factor.  The point is that you need some way to evaluate and prioritize risk.

Could this be the basis of something useful?  How does your company measure risk or resiliency?

Philosophical thought for the weekend:  Winston Churchill once said, “Without courage, all other virtues lose their meaning.”

Thanks for dropping by Supply Chain Action.

Pricing, Promotion, Analytics and SCRM

First, I’d like to take this Veterans Day (it is this Sunday) as an occasion to express my appreciation to those who have sworn to uphold and defend our Constitution with their very life.  From one vet to another, “Happy Veterans Day”.  For those of us who have served or do serve as Marines, a “Happy 236th Birthday“.  May all of us remain faithful to the courage, honor and commitment required of Marines in all areas of our lives – Semper Fidelis!

Second, I’ve put together a few thoughtful questions and some questioning thoughts that I hope will stimulate your mind on three important topics – pricing and promotion of consumer goods, making the most of analytical decision support, and supply chain risk management.

On pricing and promotion in consumer goods

If you are a consumer goods manufacturer, you likely purchase syndicated data to evaluate product trends and share by category, market and channel.  If you are more advanced, you have figured out how to leverage this data in your demand planning process so that your SKU forecasts are more accurate.  But, many firms have not yet incorporated it for the purpose of analyzing and optimizing pricing and promotion decisions.  If you haven’t, why haven’t you?

On making the most of analytical decision support

I have argued in previous posts that the process of analytical decision-making is not just math and data, but it is an interactive process through which the analyst must use his or her experience and skill to artfully find information despite defects in the data and deficiencies in the data model.  One case-in-point would be multi-stage, stochastic, inventory optimization (MESIO – for more, see “Who Is Spending Your Cash?”, the 30 September post from Supply Chain Action).  Consider the possible objectives of an effort to improve inventory (a portion of working capital) efficiency.  Here are a number of possible goals:

1. Achieve a stated average time between stockouts
2. Minimize the total value short
3. Minimize the total stockout occasions
4. Minimize the cost per unit short
5. Minimize the cost per unit short per period
6. Minimize the combined costs of shortage, overage and replenishment (think about shipping an individual unit versus a more economical pack size)
7. Achieving a target likelihood of no stockouts in a period
8. Achieving a target likelihood of demand satisfied directly from the shelf (think fill rate)
9. Using idle capacity to build stock that will sell in a specified period of time

Most off-the-shelf applications will only give you one or two of these objectives and necessarily prohibit interaction of the modeler with the model because the software company needs to protect its intellectual property.

This does not mean that an off-the-shelf application will not work for your business.  It may, indeed, be the best answer and provide an enterprise-scale solution that is fully integrated with your other planning operations.  The point is that you have to do some careful thinking and testing in order to validate that it will work and that you will have whatever ability to interact with the model that your analysts will require.

On supply chain risk management

How do you evaluate the resiliency of your value network?  Do you have the capability to electronically represent your value network from one end to the other?  Have you determined how to represent the value (in terms of materiel, currency and data) that pulses along the paths in the value network?  Have you quantified the consequences of a disruption (from whatever cause) that would impact that flow?  If so, do you have a plan for dealing with such an interruption?  What have you done to make sure key people know the plan and can execute it?

Thanks again for dropping by Supply Chain Action.

Until next week, remember this thought from an anonymous source, “Make sure what you do today is important because you are exchanging a day of your life for it.”

Have a wonderful weekend!

My Guest Posting on Bob Ferrari’s Supply Chain Matters

As noted in Friday’s (28 October) post, my “Supply Chain Action” for the that day is a guest post that is out today on Supply Chain Matters.  Please take a look and consider adding Supply Chain Matters to your RSS.

Building Resiliency into Your Value Network

In June of 2005, Vinod Singhal from Georgia Tech and Kevin Hendricks of The University of Western Ontario published a paper entitled, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility.”  In this piece, Singhal and Hendricks quantified the negative impact of supply chain disruptions using empirical data.  They found that supply chain or value network disruptions impact both the value and profitability of the enterprise.  They specifically identified the following:

Firms suffering from supply chain disruptions experience between 33% to 40% lower stock returns relative to their benchmarks over a three year time period that starts one year before and ends two years after the disruption announcement date.

The average effect of disruptions in the year leading to the disruption announcement was a 107% drop in operating income, a 7% lower sales growth, and an 11% growth in cost.

Furthermore, they found that firms struggled to recover from supply chain disruptions.

In August of 2005, hurricane Katrina struck . . .

In September of 2005, Dr. Yossi Sheffi of MIT published his book, The Resilient Enterprise:  Overcoming Vulnerability for Competitive Advantage and simultaneously a related article in Sloan Management Review.

In the years since, the importance of supply chain risk management and of building resiliency into the value network has only become more apparent, most recently underscored by the earthquake, tsunami, and nuclear disaster in Japan, floods in Thailand, and other disruptions.

Both Sheffi and Singhal and Hendricks emphasized, among other points, the need for flexibility in the value network.  It is my observation that decisions related to flexibility are key drivers of enterprise value (“Don’t Manage a Supply Chain, Lead a Value Network”, The Journal of Enterprise Resource Management, Third Quarter, 2011), even without a serious disruption in the value network.

I will not recapitulate all of the advice from Sheffi and Singhal and Hendricks here, but I do want to make a couple of important points:

First, you need to plan to be resilient.  Planning to be resilient is a non-trivial exercise.  It should be very intentional and will require deep analytical expertise.  You will need to quantify the uncertainty, calculate a risk-adjusted total cost, identify alternative courses of action and select a primary best option (see the diagram below).  It may also be prudent to develop or acquire tools that will let you quickly asses challenges to your value network that you did not anticipate.   At the 2011 CSCMP Annual Global Conference, I heard Dow Chemical talk about how they apply analysis to understand the nuances of the tradeoffs along the frontier of profit and risk.  Don’t underestimate or short-change the analytical effort.

Second, you need to practice for how you will execute when (you cannot afford to think “if”) there is a disruption.  I have heard Kevin Harrington, Vice President, Global Business Operations, Customer Value Chain Management from Cisco Systems speak on how Cisco prepares and trains for the eventuality of a disruption.

We are only scratching the surface here.  You can, of course, get Dr. Sheffi’s book on Amazon.  I think that Dr. Singhal and Dr. Hendricks will be happy to provide you with their paper.  You can, and should, also get the support you will need to perform the analysis to support risk-adjusted decisions.  Finally, you should make an effort to rehearse or train on how you will handle various types of disruptions so that your people have at least minimal familiarity with the predetermined alternative courses of action or at least know where to find them.

I hope that this post has stimulated your thinking, and that it will motivate your action as well, helping your organization perform with a resilience that will serve its stakeholders well when “normal” operations are disrupted.

As you go into the weekend, remember these words of Leo Tolstoy, “Everybody thinks of changing humanity and nobody thinks of changing himself.”  Don’t be “everybody”.

Have a wonderful weekend!