Metrics, Symptoms and Cash Flow

Metrics can tell us if we are moving in the right or wrong direction and that, in itself, is useful.  However, metrics by themselves do not help us assess our competitive position or aid us in prioritizing our efforts to improve.

To understand our competitive position, metrics need to be benchmarked against comparable peers. Benchmarking studies are available, some of them free.  They tell us where we stand relative to others in the industry, provided the study in question has sufficient other data points from your industry (or sub-industry segment).

Many times, getting relevant benchmarks proves challenging.  But once we have the benchmarks, then what?

Does it matter if we do not perform as well as the benchmark of a particular metric?  If that metric affects revenue growth, margins, return on assets, or available capital, it may matter significantly.

But, we are left to determine how to improve the metrics and with which metrics to start.  

Consider an alternative path.  Begin with the undesirable business symptoms that keep you up at night and give you that bad feeling in the pit of your stomach.

Relate business processes to symptoms and map potential root causes within each business process to undesirable business symptoms.

Multiple root causes in multiple business processes can relate to a single symptom.  On the other hand, a single root cause may be causing multiple undesirable symptoms.  Consequently, we must quantify and prioritize the root causes.

“Finding the Value in Your Value Network” outlines a straightforward, systematic approach to prioritizing and accelerating process improvements.  I hope you will take a look at that article and let me know your thoughts.

Thanks for having a read.  Remember that “You cannot do a kindness too soon, for you never know how soon it will be too late.”

Have a wonderful weekend!

How Much To Buy And When?

I want to bring your attention to an important basic and “best” practice that is often neglected.

Once your advanced planning, DRP or MRP system runs and creates recommendations for purchase or manufacture at lead time such that the right amount of material is supplied when it is needed in your time-phased plan, the recommendations are likely approved and executed.

While there may have been a batch or lot size calculation (or estimate) at some point in the past that was used to set a minimum lot size (or maybe even an incremental lot size) parameter in your item master, I suspect that there is no check to see if you would be better off buying or making two, three or four or more periods of material, given the total cost of ordering, manufacturing, and receiving, etc., as well as the available quantity discounts balanced against the cost of holding any additionally purchased material.

The counter argument is that you have used “lean thinking” to minimize setup and ordering costs and therefore, should only replenish what is immediately required by the next link in manufacturing or distribution.  Hopefully, it is even delivered “just-in-time” during that week.  That is a very worthy effort.

However, the ability to drive toward a lot size of one and immediate changeovers can go farther in some industries than in others.  There are also other economic realities that need to be considered (i.e. quantity discounts, handling costs, fluctuating material costs, etc.) and which should never be ignored, not to mention the opportunity to intelligently hedge for any value network risks that may be spiking at any given point.

If you are able to put this into practice – the explicit consideration of this kind of “look ahead” calculation to optimize a purchase or work order by minimizing setup costs like ordering and handling and to take advantage of quantity discounts, but not to the point of incurring unnecessary carrying costs or obsolescence, keep in mind that your safety stock for the period in which the new material arrives should probably be much less than the calculated amount, if not actually zero.

One way of dealing with this challenge lies through the path of collaboration.  If you can reliably share your requirements, costs and goals with your suppliers, they can then leverage the processes under their control in order to make sure you have what you need at the lowest total cost and risk.  This places the burden on the party who can most effectively address these considerations, but it will only work if the collaborative arrangement provides for shared risks and rewards that drive both parties toward mutual benefit.

Some serious thought should go into the process of managing the collaboration, including what tools and metrics will enable efficient communication and management by exception.

You also need to quantify the potential benefit before entering into a collaborative arrangement.

In those cases where a mutually vested partnership is not, or not yet, possible, there are analytical approaches that your organization can take internally to address this challenge.  

These analytical approaches are likely outside of the core functionality of your planning system, but complimentary capabilities can be developed leveraging heuristics or optimization that will add the necessary value.

In fact, the presence of a collaborative partnership with mutually vested interests simply means that you can strengthen your analytics and make them more comprehensive.

Thanks for taking a moment to read Supply Chain Action this week.

Malcolm Forbes once said, “The best vision is insight.”  Let’s make sure we have done the analysis necessary to acquire the insight necessary for our vision.

Have a wonderful weekend!

Two Thoughts on Safety Stock

Jean-François Baril, Senior Vice President, Sourcing and Procurement for Nokia Corporation, based in Espoo Finland, commented this week in a panel discussion hosted by SCM World and moderated by Kevin O’Marah, that “risk management is embedded in everything we do,” pointing out that supply chain managers not only have to manage what they see, but also what they do not see. 

As we move into a shortened work week that launches the holiday season, managers of value networks face multiple risks including currency fluctuations, money supply, uncertainties about the future of sluggish economic growth, the directions of regulatory efforts, and lagging consumer confidence, to name a few.  Just as the management of information cannot be the sole purview of the IT department, so the management of risk in the value network must go beyond an executive or department that is designated by that name.  Management of risk in the value network will always remain a cross-functional endeavor. 

More exotic risk management approaches such as those I have touched on previously (Supply Chain Matters and Supply Chain Action 7 October) will be much more effective if some of the less exotic “blocking and tackling” is in place to deal with more regular volatility in your business.

Inventory decisions and decisions regarding supply chain flexibility rank among the most important that your company will make and are significant drivers of enterprise value or lack thereof (Journal of Enterprise Resource Management).  One the inventory side, safety stock or buffer inventories are key decisions to help deal with volatility in demand (and hopefully supply).  On this Friday, here are two ideas to consider in this regard:

1)      Since safety stock is calculated and intended to compensate for historical variability in demand and supply, you probably should not update it every time you rerun your supply plan (e.g. Oracle ASCP or SAP APO) unless there is reason to believe that there will be a step change one way or the other in that variability in the future over lead time (plus the review period).  Updating safety stock too often can create additional noise in your supply plan that will only cause excess expediting costs.

2)      I tend to be a purest when it comes to getting a mathematically rigorous answer for safety stock, even in a multi-stage, stochastic environment (Supply Chain Action 29 September), because I don’t want to leave any money on the table.  However, you can sometimes reach unanticipated diminishing returns if planners do not use the “rigorous” answer because they do not understand it.  So, consider the need for planners to understand and interact with the safety stock calculation and its result when you decide how “pure” the calculation needs to be.

Thanks for stopping by this Friday.  I won’t be making a post (or at least a full one) next Friday since we will be celebrating Thanksgiving in the US, so as you go into short week ahead, remember the words of one, W.T. Purkiser, who said, “It’s not what we say about our blessings, but how we use them, that is the true meaning of our thanksgiving. “

Have a wonderful weekend and a terrific Thanksgiving.

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