Principles of Supply Chain....Part 3

Let us start the last part of the trilogy and discuss the remaining SCM priniciples...

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Principle3: Listen to market signals and align demand planning accordingly across the supply chain, ensuring consistent forecasts and optimal resource allocation

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Forecasting has historically proceeded silo by silo, with multiple departments independently creating forecasts for the same products—all using their own assumptions, measures, and level of detail. Many consult the marketplace only informally, and few involve their major suppliers in the process. The functional orientation of many companies has just made things worse, allowing sales forecasts to envision growing demand while manufacturing second-guesses how much product the market actually wants.

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Excellent supply chain management, in fact, calls for Sales & Operations Planning (S&OP) that transcends company boundaries to involve every link of the supplychain (from the supplier's supplier to the customer's customer) in developing forecasts collaboratively and then maintaining the requiredcapacity across the operations. Channel-wide S&OP can detect early warning signals of demand lurking in customer promotions, ordering patterns, and restocking algorithms and takes into account vendorand carrier capabilities, capacity, and constraints.

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Normally, demand-based planning takes time to get right. The first step is typically a pilot of a leading-edge program, such as vendor-managed inventory or jointly managed forecasting and replenishment, conducted in conjunction with a few high-volume, sophisticated partners in the supply chain. As the partners refine their collaborative forecasting, planned orders become firm orders. Even before the customer sending a purchase order, the manufacturer commits inventory from its available-to-promise stock. After this pilot formalizes a planning process, infrastructure, and measures, the program expands to include other channel partners, until enough are participating to facilitate quantum improvement in utilization of manufacturing and logistics assets and cost performance.

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Principle 4: Differentiate product closer to the customerand speed conversion across the supply chain

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Manufacturers have traditionally based production goals on projections of the demand for finished goods and have stockpiled inventory to offset forecasting errors. These manufacturers tend to view lead times in the system as fixed, with only a finite window of time in which to convert materials into products that meet customer requirements. While even such traditionalists can make progress in cutting costs through set-up reduction, cellular manufacturing, and just-in-time techniques, great potential remains in less traditional strategies such as mass customization. For example, manufacturers striving to meet individual customer needs efficiently through strategies such as mass customization are discovering the value of postponement.

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Also, realizing that time really is money, many manufacturers are questioning the conventional wisdom that lead times in the supplychain are fixed. They are strengthening their ability to react to market signals by compressing lead times along the supply chain, speeding the conversion from raw materials to finished products tailored tocustomer requirements. This approach enhances their flexibility to make product configuration decisions much closer to the moment demand occurs.

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Consider Apple's widely publicized PC shortages during peak salesperiods. Errors in forecasting demand, coupled with supplier inabilityto deliver custom drives and chips in less than 18 weeks, left Apple unable to adjust fast enough to changes in projected customer demand.To overcome the problem, Apple has gone back to the drawing board, redesigning PCs to use more available, standard parts that have shorter lead times.

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Principle 5: Manage sources of supply strategically to reduce the total cost of owning materials and services

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Determined to pay as low a price as possible for materials, manufacturers have not traditionally cultivated warm relationships with suppliers. In the words of one general manager: "The best approach to supply is to have as many players as possible fighting for their piece of the pie—that's when you get the best pricing."

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Excellent SCM requires a more enlightened mindset—recognizing, as a more progressive manufacturer did: "Our supplier's costs are in effect our costs. If we force our supplier to provide 90 days of consigned material when 30 days are sufficient,the cost of that inventory will find its way back into the supplier's price to us since it increases his cost structure."

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While manufacturers should place high demands on suppliers, they should also realize that partners must share the goal of reducing costsacross the supply chain in order to lower prices in the marketplace andenhance margins. The logical extension of this thinking is gain-sharing arrangements to reward everyone who contributes to the greater profitability.

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Some companies are not yet ready for such progressive thinking because they lack the fundamental prerequisite. That is, a sound knowledge of all their commodity costs, not only for direct materials but also for maintenance, repair, and operating supplies, plus the dollars spent on utilities, travel, temps, and virtually everything else. This fact-based knowledge is the essential foundation for determining thebest way of acquiring every kind of material and service the company buys.

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With their marketplace position and industry structure in mind, manufacturers can then consider how to approach suppliers—soliciting short-term competitive bids, entering into long-term contracts and strategic supplier relationships, outsourcing, or integrating vertically. Excellent supply chain management calls for creativity and flexibility.

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Principle 6: Develop a supply chain-wide technology strategy that supports multiple levels of decision making and gives a clear view of the flow of products, services, and information

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To sustain reengineered business processes (that at last abandon the functional orientation of the past), many progressive companies have been replacing inflexible, poorly integrated systems with enterprise-wide systems. ERPs as they are popularly called, have already become very popular and are contributing in their own way to improve the supply chains.

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Principle 7: Adopt channel-spanning performance measuresto gauge collective success in reaching the end-user effectivelyand efficiently

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To answer the question, "How are we doing?" most companies look inwardand apply any number of functionally oriented measures. But excellent supply chain managers take a broader view, adopting measures that apply to every link in the supply chain and include both service and financial metrics.

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First, they measure service in terms of the perfect order—the orderthat arrives when promised, complete, priced and billed correctly,and undamaged.

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Second, excellent supply chain managers determine their true profitability of service by identifying the actual costs and revenues of the activities required to serve an account, especially a key account. For many, this amounts to a revelation, since traditional cost measures rely on corporate accounting systems that allocate overhead evenly across accounts. Such measures do not differentiate, for example, an account that requires a multi-functional account team, small daily shipments, or special packaging. Traditional accounting tends to mask the real costs of the supply chain—focusing on cost type rather than the cost of activities and ignoring the degree of control anyone has (or lacks) the cost drivers. Deriving maximum benefit from activity-based costing requires sophisticated information technology, specifically a data warehouse. Because the general ledger organizes data according to a chart ofaccounts, it obscures the information needed for activity-based costing. By maintaining data in discrete units, the warehouse providesready access to this information.

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with this, I will conclude the principles of SCM post...Enjoy Reading!