Supply Chain Strategy: The importance of doing RIGHT things

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If I ask a simple question that how do you think your supply chain is faring and which are the improvement areas you identified for this year, I will get more questions than answers requesting that the question needs to be more precise. Exactly this happens if I give you an answer for a question that what do you think is the definition of a perfect supply chain? If the answer is like, "A perfect supply chain means delivering the right product in the right quantity to the right place at the right time in the right condition to the right customer at the right cost."....oohhff...I lost my breath for few seconds. Did you get to understand the answer? I have more questions now after seeing the answer and similarly I am sure you will also be in same position.

Well, the answer makes a lot of sense but will need a little elaboration so that the correct Supply Chain Strategy can be out in place to reach that perfect level or to be nearest to it at least. Let me start with the first ingredient which is "Right Product" - some of us will wonder if it is really a big deal to ship the right product to the customer and the answer is - Yes, it is. consider an example where your organization manufactures rail engines that have long life. If after 12 years of engine operation, you get an order from the customer that they need the oil pump for an engine that you sold to them and to add a pinch of salt here, they also need a clamp of the hose pipe that comes out of the radiator. They do not have a drawing of the parts they need but since the engine has stopped working - they are losing revenue and need the parts urgently. After receiving the order, the order entry executives searched through the database and looked at the inventory but could not find the same part as long back your organization improved the part quality as well as design of the engine to next level and these parts are no longer available with them. But after discussion with the customer engineer, they conceptualized what exactly is required and ordered a supplier to send this to them at the earliest. What do you think - the chances of sending the wrong part exist or not? This is not an exception and its occurrence is substantially high to impact your supply chain. I have a personal example to state here - I ordered a pizza recently with the one of the popular chains and found that instead of delivering the pizza that I ordered, they sent me another pizza. After I called them to state my dis-satisfaction, they claimed that since the pizza I ordered, was not available so they sent me the higher priced pizza at the same cost but since the pizza they sent, had mushrooms in it and I am allergic to mushrooms, it was of no use to me. So again an issue of "Right Product". There are numerous examples like where we fail to understand the real need of the customer and hence fail to ship the right product - This is the starting point of your supply chain perfection aspirations - Ship the Right Product.

The next three important ingredients - the Right Quantity at Right Place at Right Time, is somewhat easy to explain as all of us understand if we do not supply the full quantity of the product at the requested time and place, we lose on customer satisfaction and service levels. Some times, we might have to face penalties and other times, we might lose the customers themselves. These ingredients drive the most important and cost centric supply chain strategy which is to decide on inventory levels, order entry & execution bandwidth and location & number of distribution centres. All three of them are cost centres and it is highly recommended to optimize these if we need near perfection in supply chain.

The next one is the right condition, which again is easy to understand that we need to send the shipments duly packed so that they reach their destination in the condition which we want them to be in, when they reach the customer end. Please note that this not only pertains to the breakable or brittle items only but almost to all items like in the case of hazardous material - enough risk mitigation is required, in case of eatables or flowers - speed of shipment is important, in case of complex toys - a catalogue of assembling the toy, is required etc. So we need to make sure that we ship the item in such a way that it reaches the customer in right condition.

We now move to the next right move, which is Right Customer. Sounds like an easy one and people will start saying that we know our customers, we know who has ordered and we always send to them. But, slowly we will start hearing that yes, we had sent the generator self start batteries last year to the Cincinnati plant of our customer instead of sending to Atlanta and we had to airlift them at our cost to ship them back to Cincinnati. What would have happened in this case? What are the SCM Metrics, that were impacted by this error - the most important of them all i.e. Ontime delivery. Whole measures that were put in place to improve supply chain performance were of no use and we still missed on our on time delivery despite huge inventory carrying costs that we were carrying to ensure better service levels. So it is ultra important to Ship to the Right Customer.

The last and the controller of supply chain performance is the right cost. Obviously, if cost is not one of the criteria of a perfect supply chain, it would have been much easier for us to reach the perfection level. We can easily pile on inventory to make sure that we never hit stock outs, employ more than enough people to execute shipping, have state level distribution centres to ship the item with minimum shipping time etc. but since the organization needs to make money and one of the important factors in that endeavor is cost, we need to make sure that the delivery of the product to the customer is at the Right Cost to the organization.

I hope, we are now more clear on the ingredients of a perfect supply chain and this can help all of us to make better Supply Chain Strategies to reach our goals.

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.

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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