Supply Chain Trend – Can this happen in near future?

The other day when I was travelling back from office to home, I saw a van belonging to a famous hotel chain carrying huge bunch of vegetables, fruits and milk and a thought came into my mind. Can this be an automated process driven by the historical as well as current demand pattern and managed by a system itself? I started thinking if an IT driven process can be deployed at hotels that not only tells them what material to procure, when to procure and how much to procure but also place orders directly with the vendors. Looks like an ideal supply chain in an manufacturing company but the days are not far, when hotels start using this as their chief methodology for procurement management.

 

Let me do a dissection of what exactly will they need to fulfill this:

• To start with, they will need multi bin refrigerators or deep freezers depending on their needs
  
• The bins needs to have a capability to store vegetables with level sensors so that an alert can be sent to the IT system in case of level of vegetables, fruits or milk changes
  
• An IT system that can be integrated with the refrigerator and have the ability to name the bins as well as define minimum and maximum required levels of eatables
  
• The IT system should also store the minimum and maximum shelf life of eatables which will help in calculating the size of batch of eatables that is going to be procured
  
• This IT system will store the contracts between the hotel and its vendors and will also be able to decide on prices base don historical patterns and logic defined in it
  
• The vendor either needs to have an IT system or a fax or a mail box or phone that can receive the automatic orders from the hotel system and have the capability to communicate the orders internally
  
• Finally a home delivery and logistics ability at the vendor’s end that can ensure delivery of the eatables as per need by date of hotel
  

Did I complicate this completely? Well, not completely but yes, it does not seem to be a simple way as lot of initial infrastructure and systems need to be in place for this to work. Now, let us go through the process taking milk as an example:

1. As soon as the level of milk goes down from the minimum level defined in the refrigerator, an alert will be triggered and will be sent to the IT system
   
2. Another validation of milk level will be done in the system and after this, an purchase release will be sent to the milk vendor with the pre-decided order quantity fed in the system
   
3. The prices will be decided by following options:
   
• Looking at the pre-identified websites and finding out milk prices on that day
  
• Using the contracted rates with the vendor
  
• Initiating an quick e-auction between couple of qualified vendors (too futuristic)
  
• Ordering at mean price for pre-decided period
  
4. This purchase release will go to the vendor(s) system of receiving orders and it will be processed at their end
   
5. In case vendor can not meet the need by date, their IT system will communicate back to the hotel IT system and a mail will be sent to the procurement in-charge for alternate planning
   
6. When vendor send milk to the hotel, it will be received at hotel’s end and the refrigerator milk bin is replenished
   

Multiple controls can be built in to make the above simple looking process foolproof and exceptions can be handled automatically with few logics defined in the system. So, what do you think now? Can this happen in near future or we will keep on doing manual buying of eatable for hotels for sometime to come?

Expand your supply chain visibility horizon

Supply chains globally are becoming more and more complex and one of the areas that are worst affected by this are the lead times and in transit inventory. This increases the overall supply chain management costs by not only increasing the time period of inventory stay in your premises but also by increasing the inventory obsolescence. So, reducing costs by driving down excessive inventory on hand should be the most important focus area for the best in class organizations and how can we do this? We can do this only if we know exactly, where the problem is or where are the opportunities of improvement that can substantially bring us tangible benefits.

This brings us to the business case for the need of increasing supply chain visibility (there are other factors too but we will just stick to this one in this article). Keeping an eye on the item movements within our organization is the primary metrics of supply chain visibility and be it incoming demand from customers or other channel partners or our own manufacturing or supplier receipts or shipping for that matter, all are mandatory parts of the supply chain visibility. All organizations, in form or another strive to keep things visible so that more informed decisions can be taken in the areas of manufacturing and supplier receipts specially but it is high time that we move to expand the horizon of supply chain visibility (SCV) and include our suppliers into it. Infact, best in class organizations have already started including suppliers into their SCV plans and they track metrics like:

• Receipts of raw material at their supplier’s end
• The shop by shop supplier manufacturing process and major production events
• Events of trucking from supplier end to their premises
• Custom clearance events

Including metrics like above will reduce your vulnerability of failing to fulfill demand on time and also will enable you to plan your own inventory in a much better way so that it stays the shortest time in your premises.

Coming back to internal factors or metrics that need to be included in the comprehensive SCV plan, we need to make sure that while we keep on measuring the manufacturing lead times, supplier lead times, customer-distribution centers proximity and relationships etc. but we also need to expand the metrics to include:

• Capacity constraints
• Shipping schedules
• Forecasted and actual landed cost of shipments
• Inventory rebalance among distribution centers or warehouses
• Shipment delays both before and after shipment and even in multi leg shipments
• Re-routing frequency of shipping specially for multi leg shipments
• Item level genealogy and traceability
• Availability of true and useful information for taking decisions

Expanded supply chain horizon will not only help you in tracking the metrics that might not be seen as directly impacting your operations (but still are) but will also help you in identifying the leakage areas that reduce the overall efficiency of the supply chain.

Strategy: Create Demand with Supply and Unlock Dollars

Yes, you got it right! I meant the same when I said "Create Demand with Supply". The economies have started looking up once again but still the level of demand, that was there two and a half years back, is still not there and organizations are working under capacity. In these times, you might think that creating more supply (and capacity) in market will only block working capital and will result in huge unused inventories. Well, in normal circumstances, this is right but have you looked at some of the scenarios where supply created demand on its own? Yes, there are so many examples in the world where we saw supply creating demand and not only companies but industries could turn around their performance levels riding on this. Why not, resort to one of the strategies of creating demand with supply and surge ahead of your competition? Let me discuss about some of the ways with which you can create demand...

Recession and Supply Chain Innovation

Current economic recession had impact on almost everything and innovation is supply chain was not something that was insulated from this. Innovation in Supply chain also has been impacted by this recession and it did in 2 ways in my view, I would say - one is negative that due to the cost reduction measures, the Supply Chain Strategies that needed sizeable investments in both technology or otherwise, were put on hold and we know that these strategies are normally the breeding grounds of innovation in the organizations; and the other factor that in-fact is a positive one in terms of its impact especially on innovation in supply chain management – this is the continued outsourcing push from organizations due to recessionary cost reduction pressures.

Few days back I had a discussion with Dustin Mattison, Founder of Logipi and the subject was same. We talked about the impact of recession, the learnings from it in the field of Supply Chain, what we will miss after it is over and how is the road looking ahead. The interview has been published on Logipi here.

I largely think that supply chain innovation will bounce back strongly and that time is not too far. The positive difference we will see this time is that we will see focus on improving micro elements of supply chain rather than looking to solve the larger pieces. As we see lot of times, executives complaining that inventory turns per annum are far from the target or their service levels are not improving even after increasing the inventory - these statements will now improve to granular statements wherein the measurement will not be done for inventory turns or service levels alone but for the root causes like stock outs, inventory obsolescence, perfect order shipments or on time delivery. This will in turn improve demand for supply chain visibility improvement systems which will evolve further due to this intelligence change.

Spend Analysis to Manage Supplier Risk

Most procurement executives that do not use spend analysis tools today, sort their suppliers only by approximate spend with their companies. They focus their attention on the top 20% of suppliers that make up 80% of the spend. The policy is not altogether incorrect but as the presseure these days on the whole supply chain to improve the efficiency and reduce the costs, it becomes imperative to look at each and every supplier. Additionally, low-spend suppliers can also be a source of significant risk. For example, a cheap part in an expensive engine can cause the engine to fail. Data theft enabled by the poor security practices of a small IT provider can cause irreparable damage to a retailer's brand, and lead to lawsuits. Using spend analysis, procurement organizations can find the low-spend suppliers that pose risks like this.

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This post, though, will not talk about the technical failures due to parts supplied by low spend suppliers so let me come ot the main topic of spend analysis need in terms of supplier risk and the challenges in it. We already use spend analysis to minimise risks in the supply chain (by taking informed decisions with the help of spend analytics data) and to reduce the cost of procurement, but there's no measurable return from a supplier risk management initiative until the risk materializes and you can quantify the avoided loss. Until then, it's only possible to estimate the impact using a metric that takes the probability of the risk and the expected magnitude of the loss. In any event, even the most successful risk management programs cannot eliminate the risk, they can only reduce its impact and spend analysis can help in this endeavor. In addition of determining the supply chain risk, the information it provides can help procurement executives categorize suppliers by spend, commodity, industry and geography, which they can use to create a short list of target suppliers. It allows the procurement organization to enrich the supplier information with data from external sources and internal supplier performance metrics, so that they can perform a risk assessment of that short list. Investment in spend analysis is the starting point to a comprehensive supply risk management initiative.

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Spend analysis gives procurement executives answers to such questions so they can prioritize which suppliers to focus on, as well as identify opportunities for cost reduction such as rationalizing supply base, increasing contract compliance and reducing maverick spending.

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The major challenges that a spend analysis exectutiove will face are:

• Spend data sits within multiple systems that need to be aggregated in order to get visibility into overall spend
• Different codes are often used to describe the same supplier or commodity across these systems. Aggregated spend information from multiple systems may not be accurate.
• Item codes used by systems do not relate an item to an industry standard classification. Consequently, it becomes difficult to aggregate similar and equivalent data and identify opportunities to save money by combining spend across commodities, locations, suppliers and programs
• Systems rarely identify relationships between suppliers. Your system may not tell you that Lab Safety Inc. is a subsidiary of WW Grainger. You may be spending a lot more money with WW Grainger than you thought
• Minority status of suppliers, shipment performance and quality data from last 12 months or even D&B credit rating usually does not exist within these systems. Such information is critical to assessing risk

Due to these issues, it is impossible to do a comprehensive spend analysis simply by bringing data from all the systems into a spreadsheet or a business intelligence system. The data has to be cleansed to remove errors, normalized to ensure that suppliers are represented in a consistent manner, and finally enriched with commodity classification data, subsidiary relationships and supplier performance data. Only then can the data analysis be performed to get a picture of the overall spend.

Inventory Optimization: Where to Focus and How?

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Traditionally, it has been understood that to improve customer service you have to have high levels of inventory. This ensures that orders are filled quickly. But it also means that the value of your inventory is high, to the detriment of your organization as it ties up cash and warehouse space that could be put to other and better uses. Managing inventory can be a daunting task for an enterprise with tens of thousands of products that are located in hundreds of locations. The fact that different functions in the organizations have different objectives and often conflict of departmental or sub-business interest adds another hurdle in inventory reduction.

Typically, the sales & service head of the organization will want the order fill rate, customer service and the order fulfillment lead time to be the best. This person will never want to lose any sales or for that matter do not want to see customer satisfaction going down just because the organization either could not supply the new product or the service parts at right time. This department will want that the organization should:

• Keep enough inventory of all product models or variants at multiple locations so that there are no stock outs, minimum transit time for product shipping and no unit down (production stopped) cases for their customers
• Make manufacturing operations flexible enough to respond quickly to changing market demand for a particular product model or variant so that they do not lose sales of a single unit for want of timely supply
• Ensure that the procurement & sourcing functions have quick replenishment efficiency with low supplier lead times or procurement starting at high safety stock levels

All of the above will lead in increase of inventory and will contribute towards what I call as reverse optimization of inventory.

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Let us see now, what will a manufacturing leader want to make sure, so that the success KPIs for the shop-floor are met and the production team increase production efficiency in terms of producing more units in same time, less over time is required and rejection rates are at the lowest ebb. Simple logic suggests that if the same model or variant is produced for a longer time, the jigs and fixtures will not need to be changed; the operations sequence will remain same and transition between production shifts will take minimum time – all this contributes to better productivity or efficiency in the production line but at the same time, producing not based on demand but to stock so that the production efficiency targets are achieved, will inflate the inventory.

Both the above examples are not bad practices and in-fact these are seen as best practices in industry if we see them in isolation, as they deliver value for independent business functions. The negative impact of these practices is that they make the job of the inventory owner more difficult.

The inventory owner’s main objective is to reduce the inventory to the lowest possible level so that more working capital is available for operations. This objective, as we saw above, conflicts with the manufacturing and sales/service business function’s objectives and this is the reason why inventory optimization and not reduction is the activity where we should focus on.

If the inventory owner decides to reduce the inventory in isolation based on some fuzzy logic which might be the best, keeping in mind different demand variations and patterns, it is highly likely that it will hit the objectives of other business functions negatively and the whole purpose will be lost. But, if the focus is inventory optimization in such a way that there is a trade-off between service levels and inventory level, production efficiency and order fill rate and so on, only then we can it a real win-win situation where organization as a whole, can gain substantially.

It is not that compromise between different business functions is the only way to optimize inventory. There are more factors that drive this initiative and can substantially impact the result. These are:

• Forecast accuracy – More is the accuracy of forecast, better will be inventory planning vis-à-vis market demand. So with less inventory, you will be able to maintain or increase your order fill rate and service levels
• Supply Chain Visibility – If, it is known to all stakeholders that the required material is in the way and will reach in a day or two, it will help in correct promises to the customer and while customer satisfaction will improve with better delivery performance, the inventory will also get optimized as no unnecessary panic buying will happen for emergency orders. Also, supply chain visibility means visibility of goods in the distribution centers or warehouses and other channels so that fastest and most economical way of shipping can be achieved which will again make sure that double inventory is not being purchased for a product that is available in some other warehouse or distribution center
• Supplier Lead Times – Less time to get supplies from supplier means faster replenishment and less time an inventory will stay in the warehouse. This also means that you will need to keep lower safety stock levels and thus overall inventory will be reduced
• Inventory turns – More is the number of times you sell and replenish your inventory in a given period, more will be available working capital and less will be obsolescence. The inventory carrying cost will reduce as a result, which is a key KPI of Inventory optimization
• Inter warehouse transfer – An analysis of inventory movement across warehouses might tell you that there is some inventory lying in couple of the warehouses for long with no demand for them in last 6 months and very low forecast in next 6 months. If this process can be automated to do the analysis and transfer the slow moving or dead inventory from one warehouse to another where it can be consumed faster, the inventory can be optimized considerably
• Field returns process – Lot of field engineers get the inventory (mostly service parts) issued from warehouse to service customer(s) and at least 40% of the time all issued parts are not consumed at the location. These parts are either kept at customer location or in the service van of the field engineer and either becomes obsolete/expire or are not visible at all for supplying against other demands. This results in duplicate buying and hence more inventory than required. A proper process around this, can not only ensure lesser inventory but will also reduce scrap (obsolete) inventory
• Accuracy in Bills of Material – Incorrect bills of material often increase inventory. For example, after a design change a casing will need only 5 bolts instead of 7 earlier but since the BOM was not changed after design change was approved and implemented, it still shows 7 bolts and every-time 2 extra bolts are getting issued as part of the back-flush which results in excess unused inventory in WIP. The production in-charge will return the excess parts to inventory as and when the priorities allow and till that time, more procurement of same part will be done based on the available visibility which results in inflated inventory. Correcting the bills of material will help in controlling this inflation of inventory
• Lot Sizes Review – Since the safety stock, demand and lead times that impact the inventory level requirements, keep on changing, a regular review of the lot sizes of items for procurement will always help in making sure that the procurement is as per the finalized strategy of stocking and will in inventory optimization
• Inventory accuracy – Lastly, if we are optimizing something but do not know the exact picture, then it is obvious that where will we reach. We need to make sure that the physical inventory matches the inventory in system as all the calculations on service levels, order fill rate etc. will be based on it only.
  

So, we saw that while it is important to iron out the conflicting interests between different business functions by discussing and finalizing the service levels, production efficiency and other KPIs along-with the inventory levels so that all business functions work as a team on one strategy and with same objectives in mind, there are other ways too that can help you in achieving optimized inventory without impacting other functions operations.

Key Constituents of Supply Chain Performance Measurement

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I got multiple questions/comments in my mailbox and post related to my Supply Chain Metrics post where I talked about some metrics that we generally talk about, to improve the Supply Chain efficiency and to measure its maturity levels. One of the comments from a reader were, "...these metrics are fine but how will you relate these metrics like perfect order and cash to cash cycle time with real measurement of Supply Chain maturity level? Are they tied with  higher level attributes in the supply demand train and if yes, then what are those attributes. Lastly, how exactly we should proceed scientifically to do a status check on our Supply Chain?".

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I did not answer this question in mail and want to take a shot at it in this post. Though, I would not like to dwell into how can we scientifically do a status check of Supply Chain as there are mutliple ways to do it and in my view, no way is a panacea for all organizational SCM issues. This has to be a custom approach looking at the KPIs first and then tying them to multiple dynamic org specific factors. To learn about this, I will suggest reading book called Strategic Supply Chain Management which is the authoritative, all-in-one reference and guidebook for creating value and competitive advantage for each core supply chain process: plan, source, make, deliver, and return.

Coming to the broad attributes which define the performance of a supply chain, as defined in the SCOR (Supply Chain Operations Reference) model, these are:

• Supply Chain Reliability - This is the performance of the supply chain in delivering: the correct product, to the correct place and customer, at the correct time, in the correct condition and packaging, and with the correct quantity and documentation. The key metrics that measure reliability are:

1. Delivery Performance
2. Fill Rates
3. Perfect Order Fulfillment

I will not talk about these metrics in details as these were explained in earlier post.

• The next one is Supply Chain Responsiveness - It is the speed at which a supply chain provides products to the customer.  This attribute is totally govered by Order Fulfillment Lead Times only.

• Supply Chain Flexibility - Flexibility is the agility of a supply chain in responding to marketplace changes to gain or maintain competitive advantage. The key mtrics that we need to measure here, are: Supply Chain Reponse Time and Production Flexibility.

• Supply Chain Costs - These are the costs associated with operating the complete supply chain. These costs include metrics like cost of goods sold (COGS), inventory carrying costs, value added productivity and warranty and returns costs (including their processing costs). This SCM attribute is one of the biggest ones and need to be further broken into multiple level2 metrics to make sure we do not miss on any of the costs.

• Supply Chain Asset Management Efficiency - Finally, the effectiveness of an organization in managing assets to support demand satisfaction. This includes the management of all assets: fixed and working capital. Metrics like Cash to Cash Cycle Time, Inventory days of supply and assets (inventory) turns per annum are key to measure this attribute of supply chain management.

I hope, I am able to answer atleast the first part of his question and we saw that all those SCM Metrics that we discussed earlier is tied to one step higher attributes of SCM, which are the direct inputs to calculation of Supply Chain Performance. All these attributes are part of balanced scorecards that have the capability to convert the analytical problem to a numberical problem so that the numerical problem can be resolved fast (We are always good in fixing numbers). After the numerical problem is fixed with a numerical solution, it can be again converted to analytical solution and this process is used in multiple organizations to fix even the most complex of supply chains.

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ERP Strategy after Go-Live

We have all seen lot of material available all over the internet in vendor white papers, research articles and independent blogs about the best practices on improving the ERP implementation cycle in terms of cost, cycle time and return on investment. Most of these articles stop at Go-Live and do not capture the challenges and the opportunities after Go-Live so that the envisaged benefits from ERP can be realized.

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If you ask me, I would say that Going Live successfully with the application is the first milestone in the whole business transformation exercise and we still need to not only measure and benchmark the process efficiencies as well as automation levels at fixed intervals to continuously improve them, but also make sure that the changes that have been brought in the organization as a result of the ERP Application Implementation, have gone down well with the users and they also see long terms benefits in switching to this new ERP, leaving behind their favorite legacy systems.

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I have tried to capture few challenges and opportunities that we stumble upon after Going Live with ERP that we all should consider so as to reap the benefits to the maximum. Let me first start with the challenges:

1. The first and foremost challenge after Going Live is to stop running parallel systems. While few organizations have really matured on this part and wither switch off the entire legacy systems or those functionalities in them that are now available in the new ERP and users are expected to work on them only in ERP, but still a very large number of organizations still do not have a well charted process in this regard. This poses multiple issues, the biggest being division of data in 2 or more applications and the very objective of having one source of truth is defeated.
2. Transition of Project Managers. While, all ERP projects have dedicated project managers who go well beyond the go-live to post production support period and make sure that the Live system is stable from bugs perspective before they off board, but often, role and responsibility clarity after that phase, dissolves and there are multiple owners (or shall I say Managers) and very less number of contributors that are needed to take it to the next level of change management, ongoing trainings, user access process, upgrade or enhancement decision processes etc.
3. Over dependence on support teams for knowledge management. It is often seen that after setting up a vendor team for providing post production support, organizations depend totally on their teams for preparing and updating the user manuals and other soft training material for users and new employees. Though they claim to review the documents before releasing to the business teams but I have my doubts on the review process. Again, not only the ERP documentation but defining the complete process of knowledge management for the process improvements using the application is a challenge.
4. Independent customizations in multi country rollouts. One of my friends, is working in an European company and they implemented ERP in 1999 and never upgraded after that. The implementation was done in 23 countries across the globe and finally when they thought of upgrading the ERP this year, they came to know that their ERP system is not a standard system any more. Every country has got done some or more country specific customizations in the ERP, making this a bunch of disparate systems that do not offer a standard process. The pain that they are going through now for upgrading the ERP is enormous and it has increased their costs multifold. The challenge here is to keep the standard system, standard enough so that future upgrades are done with minimum costs
5. ERP is not a magic wand. As soon as we go live with ERP we start expecting it to take over the organization and transform it to a world class organization. We want to be Best in Class as soon as possible, being done so much hard work during the implementation period. Keeping the expectations of business users to realistic levels is another challenge that needs to be addressed.

Likewise there are more Post Go-Live challenges that we all need to consider while making a strategy to realize maximum benefits from your ERP. I do not want to paint a gloomy picture by just highlighting the challenges here. It is not that you only have challenges after Go-Live and ours lives will revolve around them forever. Successful ERP implementation offers multiple opportunities to business beyond the expected benefits. Some of them are:

1. Standard and predictable process lets you plan future initiatives as well as further improve the process efficiencies
2. Improve the KPIs. Now that the as-is values of the KPIs are known to you, it is easier to make desired KPI model by benchmakring with the Best in Class and charting a roadmap to reach there
3. Rationalize the staff. It provides you with an opportunity to relook at the staffing levels and use them in more productive areas as automation will free up some staffing hours/days
4. Flank it with Best in Breed Systems. ERP might not be there in its present role for eternity. While ERP will give a standard platform and one source of truth, there are chances that it is not the best system in all areas. It might be the best transaction system (or financial reporting system) but still might need to be complimented with best in breed systems for niche areas like service parts planning, demand driven supply chain planning, procurement auctions or product lifecycle management for that matter. Having an ERP system tells you where you are currently and what do you still miss to reach the pinnacle of success

I have not captured the direct benefits that an ERP will provide to an organization but I understand that these opportunities sometimes look like the benefits (due to a thin line difference between them) only but believe me, you will still need to do some good amount of work to explore these as against the direct benefits that you will get after implementing ERP successfully. Essentially, the challenges are required to be part of our overall Benefit Realization Strategy from ERP and opportunities are the areas which show the way for reaping the by product benefits from ERP.

Supply Chain Metrics

We often ask this to the experts and sometimes remain silent in a meeting just because we do not know the exact definition of the acronyms used in the business and does not want to be seen as idiots among the elite. These acronyms are in almost business areas and since this blog is focused on few areas like SCM, ERP and Logistics - I thought of sharing with the readers some of the definitions that will help us understanding the discussions better and the meetings will have more ideas generated which were buried just because the idea man was not exactly sure. Some of them are:

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Perfect Order: An order that is complete, on time, accurate and in perfect condition. The conditions that prevent a Perfect Order are:

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1) Orders not delivered on time due to

• Stock Out or Manufacturing/Procurement Delay
• Late Shipment
• In transit or delivery delays

2) Order not meeting meeting requirements due to:

• Inaccurate shipment
• Poor quality of finished goods
• Damage to finished goods in transit

Forecast Accuracy: It is the difference between forecast and actual demand. This is also the inverse of the mean absolute percent error (MAPE) between forecast and actual demand

Cash to Cash cycle time: The length of time between when an organization spends money to buy raw material to the time money flows back into the company from its customers. This generally includes the metrics like:

• Ship to Customer Delivery - Time taken from shipment of finished goods from company warehouse to delivery at customer's address
• Raw material receipt to payment - Time from receipt of raw material to payment to supplier. This is called Days payable outstanding or DPO
• Inventory Days - Average days of inventory on hand
• Days Sales Outstanding - Measurement of the average collection period from invoicing to cash receipt

Supply Chain Management Cost - This is a general cost that have multiple factors like:

• Direct purchasing operating cost
• Manufacturing operating cost
• Transportation Cost
• Warehouse/Distribution center operating cost
• Inventory holding cost
• Customer service operating cost etc.

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Eye Opener Series: Global Supply Chain Maturity - An immediate need

I am starting a new series called "Eye Opener Series" that will bring out facts, methods and thoughts which have the potential to transform the business operations if utilized well. The first one is on my favorite topic Supply Chain. Read on...

Managing the supply chain and finances are the core factors that determine the success of any organization. For ages, executives keep on experimenting with different approaches to optimize their supply chain and cash flow. Since managing cash flow is not one of my strong areas, I will keep my post focused on supply chain needs.

So what are those Critical Dimensions or Key Performance Indicators that drive the agility and maturity of a supply chain? Most of them are quite obvious and most of the organizations keep a religious watch on this but even then those companies make only the 10% of all those organizations that can benefit much more if they streamline their processes, capabilities and compliance related stuff connected with SCM. Let us look at some of the critical dimensions in this respect:

1. Supply Chain Visibility: End to end supply chain visibility is the first major need to make it more agile and mature. It is highly recommended to use a commercially available best of breed (or ERP) solution to monitor line level statuses in orders, on hand inventory and those assets that are not stationary and this includes field inventory, service equipment, containers etc. Certain visibility initiatives like financing triggers, warning alerts on events that drive inventory stocking, tracking actual total landed cost as sales order progresses etc. are the hot initiatives in this area
2. Automation Level: It is not just automation of order entry to picking to shipping and from forecasting to demand to plan to build/procure but also end to automation of all systems that complements your main system of reporting and transactions. It includes systems like PLM or B2C order capturing portals that are input systems as well as Business Intelligence tools that act as the output systems to your main transaction system. The more the automation, more mature and agile is supply chain
3. Logistics Agility: Processes such as using nearest warehouse to the customer, supplier drop ship, transit order re-direction or grouping shipments in same route play a major role in streamlining the supply chain. Organizations need to keep on thinking on new actions in this space and plan to execute them frequently
4. Business to Business Collaboration: Customers and Suppliers are 2 businesses that one must collaborate with. This will not only keep the inventory to the minimum level but also will help in improving fill rates and reduce stock-outs. Identify the processes where collaboration will help the organization most and take actions accordingly
5. Risk Management: Supply chain resiliency is one of the most critical factors in maintaining the agility of supply chain and it is seen that though most of the organizations are worried about this but do not take substantial actions in this area. It is important to manage supply chain resiliency to risk related events. Also, employ network design and inventory optimization tools to quantify supply chain risk and create short-term and long-term crisis response plans
6. Compliance in Trade: The more manual hand-offs are present in the processes, more are the chances of inconsistency in compliance of trade laws. Also, not having a single source of truth and independent databases for import and export data per country will also contribute to non compliance ultimately impacting the supply chain processes. It is high time to have one single enterprise wide trade compliance platform that is automated and integrated with all the related processes
7. Competitive Resourcing: The times of in-house resourcing are now ripe and the success of outsourcing story has proven that while the in-house resources in certain areas are more costly, they also are less efficient that their BPO counterparts. Need is to evaluate carefully, where exactly this initiative is required and what are the tangible or non tangible benefits expected and take an informed decision. The good part is that most BPOs come with their own collaboration and visibility techniques and also share their best practices that they picked from their customer across the globe and this makes move a “check and mate” move to improve the supply chain maturity

So, let the brain adrenaline start jumping and flowing through these ideas and I am sure that better managing these critical dimensions will certainly improve the global supply chain maturity which is the immediate need of at least a Best in Class organization.

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Inventory Optimization: Another Insight to unlock working capital - Part 2

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Welcome to the world of Supply Chain again...

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Last time I said that Robust control on "Naming Convention Following Process" can reduce inventory and improve supplier negotiations. Let us start with couple of practical scenarios from industry.

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On 1o-Jul-09, a customer service executive, while talking to a customer for an over the phone order fulfilment, when entered the item "MW Metal Rotor Blade 17 inches " in the ERP/ System, found that the quantity ordered for that item is 6, whereas they have only 5 items in the warehouse. She took the order, entered the order, back ordered it - the ATP engine runs and she gets a date of its availability in warehouse. She tells the customer that the 6th item will be available on the said date and do the customer wants them to ship the 5 items now and the 6th item on that future date. Customer disagrees and asked to send all 6 on the said date only. The conversation ends and she started taking the next call.

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The planning engine of the IT system, saw the demand, checked supply available and accordingly planned a new purchase order for the item equal to the safety stock of the item that was 10. Everything worked well as per the script and the item arrives in the warehouse and got shipped to the customer.

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Now, the 2nd scenario is the same company same day (1o-Jul-09) - another customer service representative got a call for the same item and did the same thing in system. He entered the item as "MW Rotor Blade 17 inches" and found that the stock is 17 whereas the customer wanted only 1. The order got fulfilled immediately and since the quantity was more than the safety stock, planning engine did not take any action.

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What did we see now? I think we got the pointers now, as how the inventory for the same item increased by 10 and since this item is a high valued item ($500 per item), the inventory went up by $5000, not a small number by any standards. Just because the same item was named differently in the system and even customer service executives know it differently, the stock went up. But, look at the customer service levels - even at a high inventory the service level got impacted by no availability of one name of the item so double impact.

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The 3rd impact of this issue is that when you buy quantities from supplier, naturally you buy small quantities and hence you have low negotiating influence but if we club the demand of both these names of same items (and who knows how many more names of same item exist in the system and for how many different items), we have a larger order and hence more influence, we can exercise while negotiating with suppliers.

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Same can happen with the supplier names also, if different departments define the same supplier in the system by different names (assuming low control on naming conventions), they can end buying from same suppliers with different names and hence lose the potentially more influence to negotiate harder. In large companies, the impact of this small anomaly is quite large and my experience says that this issue exists in almost all large companies and just the extent is different. Some companies have this issue limited to just <10> 50.

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Now, what do we do if we want to check if we have similar issue in our system or not. So, there are intelligent data cleansing tools available in market that will extract the data from your ERP/System as per the rules defined by you, transform the data into an excel for analysis and correction and help you making changes accordingly. In these testing times, overlooking this issue is a crime and we all must take care of this as soon as possible in our organizations.

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Warehouse Management Systems - Drivers for Managing Supply Chain

Off late, warehouse management system deployments have gained good pace and all ERP and SCM products companies have started investing into their solutions to fine tune to map to industry specific solutions. It has been a proven fact now that this is one of those controllable areas which can really make an impact in improving supply chain of organizations.

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When it comes to taking the necessary steps to create a more flexible and agile warehouse that can adapt and change to the ebb and flow of the market conditions, the goal is to ultimately minimize the time product or inventory stays in your warehouse – ultimately creating a near real-time inbound / outbound activity that matches all inventory to orders intended to turn revenue as quickly as possible.

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The metrics that are required to be tracked to improve the warehouse system and process efficiency are:

• First time sales order line picking accuracy
• On time shipment
• Back order percentage
• Turn around time for converting an order into sale
• Labor cost in warehouse

The reason why I added labor cost in warehouse as one of the metric to measure is that while increase in number of pickers can improve the picking accuracy and turn around time but at the same time it will drive the labor costs in warehouse up, so this will not be an optimum solution. The best solution will be to study the whole process first and find out the areas where there is a room of improvement. Then we need to implement processes that create more warehouse efficiency in addition of bringing down the operating costs with no sacrifice of service levels.

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To create more flexibility and agility in the warehouse, organizations need to leverage technology that can bring automation and visibility. Visibility here, means that the picker knows the contents of every bin in the warehouse in real-time and is also able to track inventory attributes like lot number, size, serial number or date etc. in real time. This visibility needs to be blended with automation like:

• Automated receiving or put away with the help of Radio Frequency Identification device (RFID) or bar coding
• Automation in replenishment process
• Ability to send advance shipping notices
• Managing containers with the order lines they contain etc.

This combination will help in improving the overall efficiency of the warehouse system definitely with lower costs in the longer run. One thing that we need to note here is that while we have talked about the visibility, it has to be real time or near real time visibility. If the employee has access to data that is month old then still the issues will not be resolved and in fact it can increase the amount of re-work and hence will impact the picking accuracy negatively.

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Another factor that has weightage here is that what is the age or version of the warehouse system that the organization is using. While most of the industry leader organizations were early adopters of WMS system but they are the ones which are facing bigger pressures today as the WMS solutions have evolved over time and much better and efficient solutions are available today against what they are using. The organizations that kept pace with this change and kept on upgrading their solution, were in much better position today.

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While almost all major ERP providers are offering these solutions but there are a few best of breed solution providers also available in market and companies are divided in their approach towards who they want to talk for getting the solution deployed.

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While assessing the improvement areas in existing warehouse system or going to deploy a new solution, the organizations need to make sure that:

• They break the processes into smaller pieces and then focus at all potential areas instead of trying to address just the most glaring issues
• They spend quality time to measure the important warehouse processes like Labor management, Yard management and Dock management
• They need to keep looking at warehouse as the enabler for improving the end to end supply chain process rather than a standalone system
• The team identifies the future growth areas in this and adequate budget is guaranteed towards these areas. Remember that even in this times of recession, investments will not stop but every organization will become wiser to invest in right areas

Few other metrics that can provide the warehouse system readiness index to an organization are:

• Capability to process warehouse activities without paper – Yes, it is possible to avoid paper pick slip too
• Ability to confirm transactions and communicate with automatic data capture in real time
• Advanced picking and replenishment process practicing
• Distributed order management usage
• Cross docking practices
• Reverse logistics handling capabilities
• Event management handling ability

The remaining year of 2009, as many experts have put it, is a year of transition where the organizations need to take this as an opportunity to dust-off existing issues in the WMS side of the Supply Chain and ensure that they have the best of solutions available that have the potential of reducing their cost of carrying inventory and its potential obsolescence, the cost of warehouse labor and the potential inefficiencies of processes.

Future trends in Supply Chain - Can we identify?

Recently, I was reading a magazine on supply chain and saw that the whole world wants to know the trends in supply chain and infact the larger players are experimenting with newer practices to either start a trend in their favor or trying to gauge if those can be game changes for them. Well, if we follow a scientific approach, it is highly likely that we can go close to identifying the trends and their impact. In fact, there is some project going on in MIT on "Future focussed Supply Chains" that is using an approach that is used the new product development experts in supply chain ot identify trends.

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One of the methods which is used to make a roadmap of possible domilnant technologies and trends in innovation area is Scenario Planning. The method was originally invented by the oil company Shell (I believe around 30 years ago) and now is used extensively by innovation managers in global companies. In the scenario planning process, companies try to identify the possible trends in the market and new product (e.g. Children are spending more time working and playing with PC), the impact of such trends (They do less physical exercise and become fat) and the associated opportunities (Gym market will be booming, there will be a need for healthy products & related medicines); the innovation and technology planners do this for various scenarios and then allocate new product budget based on the output of such exercise.

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Their approach consists of three main steps: 1. Scenario Thinking: where they create various scenarios and simulate possible outcomes through scenario planning. The main output of this phase will be the identification of trends and market developments that the company should be monitoring. 2. Strategy Alignment: In this phase, the focus is on aligning the responses derived from the scenario thinking exercise with the company's strategic goals. 3. Implementation and Development: An at the end, Supply Chain Managers look at the nuts and bolts of implementing the strategies they have decided to follow as a result of the previous two steps.

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The important consideration which is derived from new initiatives like this one is that supply chain professionals have to change the way they approach uncertainty. No company can be in complete control of its commercial destiny, but with a future-focused mindset that can become more adept at navigating change.

World of Strategic Alliances

In almost all the fields these days, we see companies/units forming strategic alliances in order to be viewed as more global by the customers, to increase their capabilities, to build the brand and for various other reasons. While it is difficult to trace back, the first strategic alliance in the world but if we go for a "Non-Business" alliance for a common cause then I will vote for the strategic partnership with Sri Ramachandra and Vanar-Raj Sugriv. It surely worked big time and the objectives of the alliance were achieved perfectly.

In the new age, this process of forging alliances is still going strong and in the process, have added much more dimensions to it. The alliances between a service provider and a product company, between a re-seller and a product company, between companies having similar customer base, joint ventures in fields of research, manufacturing etc. and companies that co-brand their products are few examples . Talking about India, we have seen few partnerships going in a way where the major partner eats into minor partner or a partnership ends after having conflict of interest or having rock solid continuous partnerships that have been tested by times but have grown stronger everytime. I found some interesting websites that help us assess our strategies and find a partner in right areas with right strengths and these can be really useful in most cases. In fact one of the all time great books on developing strategic alliances is available on googlebooks.

I often wonder, what should be the criteria of selecting a strategic alliance for a company so that it bears fruit in short term, long term and more importantly the "longer term". For a manufacturing & distribution company, the choices are much easier than the service providers in my view and the most popular criteria are:

• Partner's strength in targeted geographic area
• Product line synchronization with overall strategy of company
• Credit rating and size of company
• Partner strengths complimenting other companies strengths and plugging weaknesses
• Brand value of partner
• Presence in targeted product range
• Corporate governance

The above list is obviously not the full list but the most looked upon criteria while selecting an alliance. While the partnerships in Mfg industry bore fruits in past and are looked upon as a useful tool for surging ahead in business, it has remained a challenge in service industry to get tangible benefits from strategic partnerships. Though, the number of partnerships we see in service industry outscore Mfg industry by many times but do they get the same advantage, is still a point that is debated in industry circles frequently. There are currently a big number of forums and conferences across the world that evaluate this and devise more and more ways of forging tie-ups so that all parties like both the partners, customers and investors get similar benefits and it is a win win situation for everybody. I remember attending one such conference on supply chain where we were showcasing certain newly acquired capabilities in the area and obviously few companies which were working in similar areas, got interested to know more. More than those companies, the conference management started presenting us the business sense of forging partnerships with one or some of them. Our team was amazed at this and found that while companies look for partnerships for different reasons, the conferences have a different agenda <> that more and more business decisions should take place during the conference, which helps them in building their brand also. So, one might think that is it just hype or we have some substance also in this?

Well....well, the substance is there certainly and not only for the partners but also for customers and investors. The companies that bond together can use each other's infrastructure, market presence, brand value, product range, research and design expertise & facilities and experience for thier benefit. The customers get things like easy and better access to products and services, price reduction, value added benefits, more options from same company etc. and the investors get better return on their money as the sales increases and brand value jumps to higher levels. Overall, as I said earlier, it is a win win situation for all parties involved.

Talking about the different steps in forming an alliance, the major steps will be 1. Strategy Design 2. Partner Assessment 3. Negotiation of contract 4. Alliance operation and nurturing and 5. Alliance Termination. More than forging alliances, my area of interest is point 4. i.e. Nurturing and Operating alliances and would like to talk more on this point in my next article.

Ontime Delivery - A top measure of customer satisfaction

Recently, I ordered a laptop online and was instantly given a promised delivery date and the product was to be delivered at my house. It is only when I was fully prepared for the laptop and was eagerly waiting for it to come, I got a mail from the company that the delivery will get a little late (by a week) due to sourcing issues. I had good faith in the orgnization's overall abilities in addition of their product quality and though I was disppointed a little bit but did not think bad about the company. It is only when they again sent a mail saying that the new promise date can not be met, I got not only worried but started thinking that what might be the issues the company is facing to deliver the product ontime. The image of the company in my eyes started getting dim and my confidence was shaken.

After few days, to my disbelief I got another mail from them telling me about another delay and this time I got furious and cancelled the order with them immediately. Though, this is not an incident that many will face in life but it surely emphasises the role of ontime delivery in not only customer satisfaction but long term brand building also.

As supply chains become increasingly more global in nature the ability to effectively manage a network of distribution centers is becoming a required core competency. Unfortunately, a surprisingly high number of companies that currentlypractice multi-site distribution are experiencing real challenges in this area impacting profitability.

There are still a few companies that have mastered warehouse network management which allow them to provide better customer service but with minimum extra costs. These companies, inturn have reached the level of

• 99% or more on-time and complete orders

• Less than 1% of orders containing a backordered line

• Lower inventory carrying costs over two years

• Reduced inventory write-offs for spoilage or obsolescence over two years

Since last few years I was of the opinion that supply chain visibility can drastically improve ontime delivery without increasing inventory carrying costs and not only this, the other thing which is equally important these days is that after you receive the goods from the supplier,the ability to execute the fulfillment as early as possible also adds to your capability to achieve better ontime delivery targets. This belief of mine has been validated time and again when I talk to my friends in differnt leading manufacturing companies handling supply chain roles.

In large organizations, couple of another areas that need attention are: 1. Improvement in item identification process - It is seen that there are times when they lose sales just because they do not know what item exactly is required by the customer and this happens more in spare parts business. 2. Reduction in manual steps in the process of demand fulfillment - The more the manual steps, more is the probability of delaying the fulfillment process and hence low on time delivery realizations.

These steps are small and can be achieved easily but the real issue is to understand these fully and gather management focus to take action in these as Supply Chain will likely to remain as one of major focus areas in coming time, for organizations who intend to lead in their areas of operation.