Continuous Improvement -- The Need For Standard Work

It's virtually impossible to improve a process that is a series of random activities.

Friday, June 01, 2007
By Ralph Keller

I recently worked with a group of office people in a nonprofit organization on a kaizen event to improve their internal processes. It's remarkable what you discover when you conduct one of these sessions.

This office has multiple products that it provides to its clients, so we started by working to develop the current-state value stream map of the fulfillment process for its largest product line. What became very clear in the discussion was that there was no standard work in place in the office -- people were just doing what they thought was "right" without any documented process to follow. Unfortunately, this is a common problem in many organizations.

As many of you already know from your continuous-improvement activities in manufacturing operations, it's virtually impossible to improve a process that is a series of random activities. This is just as true in the office and administrative processes as it is on the shop floor. What the group I was working with discovered was that the lack of a defined process led to a lot of delays, rework and quality issues. After considerable time spent talking through the process, we finally arrived at an "average" process that we could use to develop a current-state value stream map so we could begin brainstorming a future-state map.

The process we went through further illustrates the futility of trying to continuously improve a random process. Without documented standard work, your continuous-improvement activities are like trying to form a blob of semi-liquid material into a set shape. As soon as you push on it in one area, it oozes out in some other random area and you get nowhere.

When you start working on an improvement activity, whether on the shop floor or in some other functional area of the enterprise, make sure you have a documented process to start with. If one doesn't exist, the first order of business for the improvement team is to create one, using the inputs from everyone currently doing the work. You need to know how things are actually being done, not how someone thinks it is. Once you have this starting point, you can create your current-state map and begin to identify your opportunities for improvement to eliminate the non-value adding waste in the process.

With the group I was working with, once we had defined the "average" process and created a current-state map, we were able to proceed and brainstorm a future-state map. Like any kaizen event, we were able to make some immediate improvements and then generate an action item list with responsibilities and due dates to implement the process improvements. This would not have been possible if we had not started by first documenting the "average" process that the whole team agreed to. Once the new process is in place, it will be documented for everyone to follow and then they will have a starting point for their future continuous improvement projects.

Ralph Keller is president of the Association for Manufacturing Excellence,

How to hold the line on labor costs

By Maida Napolitano -- 8/1/2006

Labor costs account for more than 50 percent of a warehouse’s total operating costs. The recipe for a cost-effective operation is simple: Find ways to better manage labor costs and you’ll improve your bottom line. But for many managers, visions of cutting labor costs go hand-in-hand with visions of new equipment and fancy gadgets meant to reduce headcount and increase the productivity of the remaining workers. These managers may want to have their vision checked; their preoccupation with new equipment can be a little nearsighted. “Managers often forget that labor management is the best way to obtain savings and improve service.” says Don Cook, president of Cook and Associates, a N.J.-based consulting firm specializing in labor management for distribution centers and warehouses. Labor management taps “human resources” and converts them into “human capital” to drive process improvements. Today’s successful manager is armed with powerful information technology and systems support that help carry out the five steps to better workforce management: Improve, Measure, Allocate, Monitor, Communicate, and Motivate. The goal: Work smarter and faster while keeping a lid on costs. The following tips should help managers achieve this goal. 1. IMPROVE Focus on improving existing methods, not buying new equipment. In a 2005 “Census of Distribution” survey conducted by Material Handling Management, 80 percent of respondents reported process improvements as having the most positive impact on their distribution facilities—faring better than the implementation of new information technology (61 percent) and new capital equipment (49 percent). An example of the difference process improvements can make is the case of a small manufacturer that kept its slow-moving merchandise in mezzanine shelving. Supervisors were perplexed as to why pickers could only average 20 lines per hour, when theoretically they should be picking at 25 to 30 lines per hour. They observed that each picker was going up and down the mezzanine staircase many times a day to pick the same set of items. A quick fix involved reslotting products so that only true slow-moving items were kept in the mezzanine. A further increase in productivity occurred when mezzanine items were batch-picked by order and placed on a pallet, which was lowered by a lift truck to the main level for additional picks. No equipment was bought, yet more than a 25 percent increase in productivity was achieved. Consider adopting concepts such as Lean Six Sigma, which discourages pushing workers and focuses on devising better methods while enabling short supply cycles with zero start-up costs. Implement continuous-improvement programs to help you respond to business changes. The issues you deal with today may not be the issues you deal with tomorrow. John Gotthardt, president of Ridge Services, a 3PL that oversees 250 distribution-center workers in multiple facilities for Tommy Hilfiger U.S.A., Inc., concurs. “Our low-level managers tend to get stuck trying to get through the daily grind of running the operation. It’s up to our higher-level managers to step back and periodically question what we do and how we do it. It helps to look at it with a fresh eye and see how we can improve processes and make sure that they are still relevant to our current mission.” 2. MEASURE Set accurate work standards. Once process improvements are in place, the setting of accurate standards forms the basis for other labor management tasks, such as monitoring performance, scheduling work, and setting incentives. Many companies rely on total pieces shipped per man-hour to calculate the overall standard for the entire facility. “This information is not accurate enough to truly evaluate individual employees or provide equitable incentives,” counters Cook. Engineered time standards, on the other hand, break down each task into small elements that can be timed by a stopwatch. Adding in allowances for fatigue and personal needs determines an accurate, standardized measure of time for an operation. However, many feel that setting up time standards can get too expensive and time-consuming. An alternative is generating work standards based on historical data derived from individual task information supplied by Warehouse Management Systems (WMS). Figure 1 shows a sampling of work standards based on historical data for common tasks. Periodically update your work standards. Business conditions and requirements change, and so must productivity standards. For instance, value-added services such as ticketing and labeling that previously were accomplished in the warehouse may now be the responsibility of suppliers. Picking and packing standards must be updated to reflect this change and maintain accuracy. 3. ALLOCATE Use Labor Management Systems (LMS) to schedule and allocate work. A lift-truck driver drives back to the dock empty-handed. Workers stand idle as they wait for assignments. These scenarios are indicative of poor scheduling and allocation of work. Determining the appropriate staffing level for a given labor shift in response to seasonal requirements requires advanced planning and accurate standards. Many companies rely on spreadsheets to manually assign tasks in the warehouse. Today’s Labor Management Systems, either stand-alone or used in conjunction with a WMS, make it possible to allocate work by the day, by shift, or even by the hour—and in less time with more effective results. The software keeps a record of tasks that need to be accomplished and how long it takes to accomplish each one. The system determines the number of people required and via radio frequency assigns the tasks to individual employees. Other capabilities include task interleaving, which ensures that lift-truck drivers don’t leave storage areas or docks empty-handed by assigning them a retrieval or putaway task nearby. 4. MONITOR Monitor performance to instill productivity awareness. “In places where good workers don’t get recognized and no action is taken on poor workers, the prevailing attitude of 'Why should I bother?’ tends to dominate,” states Cook. Gotthardt adds that his managers judge workers’ performance against a bell curve. “We recognize that most people will fall under an average. We then concentrate on the people that are in the lowest 10 percent productivity level. First-level supervisors then talk to these employees on a weekly basis. If it doesn’t work, then second-level managers try to get to the root of the problem.” Use LMS to monitor worker performance in real time. Using LMS software also creates an added advantage for monitoring workers’ performance. With network connectivity, Web-based systems, and radio-frequency systems, data can now be captured in real time. LMS modules can track the actual progress of work versus its expected completion time, thus making it more effective for scheduling temporary workers, resolving current predicaments, and anticipating future bottlenecks. 5. MOTIVATE Initiate incentive programs. Acknowledging a job well done goes a long way, but the most dramatic results may result from monetary-incentive programs. “About 50 percent of our clients have some sort of incentive program,” says Cook. “They are far more productive than the other 50 percent who don’t have one. We also noticed that about 20 percent of employees will earn the most. Because they are earning more, these productive employees are satisfied and tend to want to stay with the company.” Figure 2 illustrates how incentives can be calculated. Share the savings gained by increased productivity with your employees. Gotthardt explains, “We calculate how much savings a productivity increase brings to the company, and we share that savings with the employees. For example, with a 5 percent increase in productivity, our company may save 40 cents per unit. Half of that, or 20 cents, goes to the employee as part of the incentive.” Generally, however, companies have learned to put a cap on incentive systems because some people will compromise their health and safety to earn bonuses based on performance. Improve employee morale by improving the working environment. Create a comfortable, clean, safe working environment with reasonable work requirements that employees can perform repetitively without straining themselves. Provide adequate lighting, a comfortable working temperature, proper rest breaks, and padded mats in areas where employees must stand for any length of time. 6. COMMUNICATE Recognize that communication is the link that binds all labor management functions. Training workers in the best way to accomplish their tasks, sharing engineered standards and incentive systems, and maintaining reporting systems that accurately track performance are important forms of communication in labor management. The value of maintaining open communication should be underscored. Gotthardt says: “There is a fine balance between getting people’s respect as a manager and being approachable enough to be able to listen to what your employee has to say.” Providing a suggestion box may uncover surprising results from those too timid to talk. Break down the language barrier. One of the biggest challenges for labor managers today is the increasingly diverse employee population, which has created a significant language barrier. Employees and supervisors alike may have to be trained in two languages. Complex information system menus should include bilingual capabilities. A FINE ART Labor management in the warehouse is a fine art. Not only must managers improve how they train, schedule, and motivate the workforce, they also must deal with external factors, such as health care and immigration issues. LMS modules can ease these burdens and provide comprehensive reports on productivity. With costs of over $100,000, however, not everyone can afford to take that plunge. A last word: Make sure you improve processes first before you urge your employees to go that extra mile. Figure 1:General Productivity Standards (color chart) Note: These rates are broad estimates based on experience in a wide variety of applications. There are additional variables that must be considered, such as: product slotting; travel distances; the use of paper, radio frequency, or voice-directed activities; and training, opportunity to dual cycle, carry multiple pallets in a move, etc. Fork-Truck Pallet Movement Lower Range Upper Range Units Counterbalanced 10 15 pallets/hour Narrow-aisle Reach 8 20 pallets/hour Man-up Turret 12 20 pallets/hour Man-down Turret 15 25 pallets/hour Narrow-aisle Articulating 8 15 pallets/hour Stacker Crane 24 30 pallets/hour Order Picking (Cases) Pick to cart 25 60 lines/hour Pick to powered pallet jack 30 80 lines/hour 50 120 cases/hour Case pick to conveyor 200 400 cases/hour Order Picking (Pieces) Pick to container/conveyor 60 150 lines/hour Pick to cart 30 100 lines/hour Carousel to container 200 400 lines/hour Flow rack to container 100 200 lines/hour Bin shelves to container 80 150 lines/hour Truck Load/Unload Unload floor to conveyor 350 400 cartons/hour Hand-stack into trailers 150 300 cartons/hour Palletizing from Conveyor 300 350 cartons/hour Source: Rules of Thumb, Gross & Associates, 2005 edition Figure 2: Productivity Index Calculations (color chart) By viewing this network screen, employees and managers see how well they are performing and how the Productivity Index (PI) is calculated. The current and previous week’s information is available by day, by worked-in department, and totaled for the week. The screen clearly shows how work in multiple tasks is summarized by using Engineered Time Standards. The resulting Total Standard Hours credited to the employee, divided by the employee’s Available Hours to perform the work, produces an accurate Productivity Index. Colored boxes indicate values used to calculate Incentive Payments. All employees are accounted for since the program is integrated with the Time & Attendance system. EMPLOYEE NAME: Jones, Tom 100-HOUR PI AVERAGE: 96.7% EMPLOYEE NUMBER: 39748 WORKDAY: Total Week PEP CENTER: 1890 – Picking DATE: 6/23/06 Summary Standard Hours Available Hours Current PI % 34.44 35.00 98.4% COMPLETED WORK No. Task Name Measure Time Standard Units Minutes % 01 Start picking cycle Cycle 2.00 50 100 5 02 Full cases picked Case 0.66 455 300 15 03 Broken cases picked Piece 0.25 2,265 566 27 04 Loose pieces picked Piece 0.10 3,995 400 19 05 Locations visited Location 0.17 4,120 700 34 Standard Minutes 2,066 Total Standard Hours (Standard Minutes/60) 34.44 Source: Cook & Associates www.cookpep.com HOURLY DETAILS Category Hours % Total Payroll Hours 40.00 Minus special projects 2.50 6.3 Minus paid relief 2.50 6.3 Minus hours loaned out 0.00 0.0 Plus hours borrowed in 0.00 0.0 Total Available Hours 35.00 87.5 Author Information Maida Napolitano is principal author of Making the Move to Cross Docking, Using Modeling to Solve Warehousing Problems, and The Time, Space, and Cost Guide to Better Warehouse Design. She is a senior engineer affiliated with Gross & Associates.

Posted by Supply Chain at 4:37 PM

How does your warehouse stack up?

By Maida Napolitano -- 11/1/2006

Much is expected from today's warehouse managers. Many have to ship orders within hours instead of days. Some must comply with changing customer and government mandates. Almost all are dealing with fluctuating energy costs. And let’s not forget the day-to-day need to track people, product, and information—all on a limited budget. In September 2006, Logistics Management, in partnership with Gross & Associates, a Woodbridge, N.J.-based consulting firm specializing in materials handling and logistics, launched the First Annual Warehousing Trends Survey. The survey was designed to help today's warehouse managers get a clearer picture of the challenges they face today and give them an opportunity to see how their warehouse operations compare with the industry average. "We wanted to find and define the critical trends that are moving the warehouse and distribution-center market," says Don Derewecki, president of Gross & Associates and a member of the research team. The results of the Warehouse & DC Trends Study are based on the responses of 485 participants involved in making warehouse-operations decisions at North American companies. At a 95 percent confidence level, results have a margin of error of +/- 4.4 percent. Here is an overview of the information this group of warehouse managers shared with us. Typical characteristics If you were to paint a portrait of a typical North American warehouse, it would look very much like this: It is privately owned (77 percent) with either an end consumer (32 percent) or a manufacturer (26 percent) as its primary customer. It is less than 250,000 square feet, and it receives and ships a wide variety of products, such as electronics, computers and software (25 percent); paper, packaging, and office supplies (24 percent); and chemicals and raw materials (21 percent). Within its four walls, the most common units handled are pallets (87 percent) and cartons (79 percent), with rack storage (86 percent) as the primary storage module, followed by floor storage (62 percent). (See Fig. 1 below.) Over 90 percent of warehouses still pick orders manually using carts and pallet jacks, while 20 percent have evolved to some form of mechanized picking to a conveyor. Only 3 percent of warehouses have fully automated picking requiring no human intervention. The typical warehouse uses some form of warehouse management system (WMS). Thirty six percent of respondents developed their WMS in-house, 22 percent purchased a stand-alone package, and another 22 percent purchased their WMS as part of an ERP module. Surprisingly, 23 percent of all warehouses still have no WMS, relying mostly on spreadsheets and order-pick sheets. This last statistic may seem less surprising when you consider that 35 percent of respondents have annual budgets of less than $25,000 for continuous-improvement programs—and 8 percent don't even have such a budget. Of the warehouse managers who have a budget of less than $100,000 (59 percent of all respondents), 37 percent said they would spend some of it on materials handling equipment, while 23 percent planned to invest in information management systems. Warehouse managers with budgets of $1 million or more (7 percent of total respondents) focused more of their spending on IT. Of the respondents in this category, 41 percent reported that they would spend on information management systems, while only 21 percent planned to buy materials handling equipment. Warehouse goals The top objective pursued by warehouse decision-makers this year was increasing customer satisfaction (40 percent). Reducing costs came in second at 32 percent, validating the continuing cost-control burden on today's warehouse manager. Only 7 percent of respondents reported that they were expanding their operations, while 1 percent said they primarily focused on maximizing efficiency by buying new equipment and systems. (See Fig. 2) When asked what their customers expected of them, warehouse managers were plain and clear: Customers demand accurate orders delivered on-time and without damage. In fact, 97 percent of respondents said order accuracy was most important. On-time delivery came in second at 94 percent, and damage-free shipment was in third place with 91 percent. (See Fig. 3.) Need for speed Judging from their responses, warehouse managers' need for speed is readily apparent. Some 82 percent can ship orders in one day or less, while an impressive 23 percent said they can ship in less than four hours. At the other end of the spectrum, 4 percent of warehouse managers reported that they are still taking more than one week to ship merchandise. This group appears to be handicapped by a lack of technology: 50 percent said that they don’t use bar coding, 56 percent do not have a WMS, and 67 percent don’t use radio frequency (RF). Compare this with warehouses that can ship orders on the same day they are received: 80 percent use bar codes; 82 percent use a WMS; and 61 percent have adopted RF technology. Considering that only 22 percent of the worst performers have a continuous-improvement budget of more than $100,000 for next year, it’s likely that they'll continue to achieve sub-par results. Dissecting the operation Since all warehouse managers face many of the same operational challenges, we asked respondents to identify the most critical elements that make their operations run smoothly. For receiving and shipping, carrier reliability—defined as the ability to depend on truckers being at the appropriate dock door when needed—was deemed most critical by 43 percent of respondents, while 40 percent reported that shipping productivity was another critical issue. Most warehouse managers appear to be properly managing their docks, as only 19 percent of respondents reported that dock congestion was a critical issue. For storage, maintaining accurate inventories (60 percent) was viewed as far more critical than storage capacity (36 percent). The prevailing attitude seems to be that it’s easier to find extra space but not as easy to find missing inventory. In keeping with the need to deliver correct orders, the majority of respondents (64 percent) rated order accuracy as a highly critical issue for picking. This isn’t surprising, considering that incorrect orders ignite a downward spiral of costly returns and even costlier deterioration of customer relations. When asked what metrics they are using to track order accuracy, 42 percent of respondents said that they track the percentage of orders with errors, while 40 percent track the percentage of orders shipped complete. At the other end of the spectrum, value-added services, such as ticketing and customization, were rated as very critical by only 19 percent of respondents. As for overall warehouse issues, warehouse safety was considered most critical by 44 percent of survey respondents, followed closely by warehouse security (32 percent). Material control was also considered a fairly significant issue, given the strong emphasis warehouse managers have placed on inventory accuracy. And despite the government’s recent emphasis on the growing immigrant population, 68 percent did not consider immigration requirements to be an issue in their warehouses—at least not yet. Finding a Solution When asked how they planned to respond to issues plaguing their warehouses, 46 percent of respondents said they had purchased materials handling equipment. Meanwhile, 40 percent purged obsolete/overstock inventory—not surprising, since by purging out-of-date inventory, resources are focused on current products that do sell. Other popular responses to warehouse issues included the purchasing of storage equipment (35 percent) and reconfiguring existing facilities (35 percent). Other companies turned to labor management by retraining personnel (27 percent) in more efficient working methods. As a rule, however, companies would rather tackle operational issues in-house before asking for help. A full 78 percent do not plan to hire consultants, and 65 percent do not plan to contract third-party logistics (3PL) services. (See Fig. 4) Turning to technology With so much technology inundating the distribution marketplace, we asked survey participants to rank the importance of each technology in their individual operations. Bar coding led the way with 52 percent. By electronically capturing data with a simple "wave of a wand," bar coding has revolutionized the industry, reducing errors and increasing productivity. WMS followed closely with 48 percent of respondents saying it is very important to their operations. Other technologies that have yet to gain traction in today's warehouses are such high-ticket items as automated storage/retrieval systems (ASRS), automated guided vehicles (AGVs), and voice-directed systems. (See Fig. 5.) In 2006, continuous-improvement programs dominated as the leading strategy adopted by warehouse managers, with 56 percent of respondents reporting that they have implemented this strategy and 24 percent saying that they are making implementation plans. Strong interest in relatively new strategies such as "lean" warehousing (34 percent), RFID (33 percent), and Six Sigma certification (30 percent) is apparent, yet few reported implementing these strategies or technologies. Many warehouse managers are adopting a "wait and see" attitude regarding new concepts, and are waiting for further proof of their value for their own warehouses. (See Fig. 6). Overall, today's warehouses rate fairly well in terms of speed and accuracy, but their level of technology can vary widely. While many companies have recognized the impact of bar coding, RF, and WMS technology, others have yet to implement them. But change is inevitable, and as time goes on, managers will need to cope with new challenges. "The key is acknowledging that there is always room for improvement," says Derewecki. "The best-in-class warehouse managers will be those who continuously strive to improve their operations." Fig. 2 Top Warehouse-Operation Objectives Objective Most Important Second Third Increase customer satisfaction 40% 24% 16% Reduce costs 32% 34% 22% Maximize efficiency with existing assets 17% 24% 32% Expand operations and capacity 7% 9% 12% Consolidate operations and capacity 2% 6% 12% Maximize efficiency with new assets 1% 4% 6% Source: Logistics Management, RBI Research Fig. 3 Importance of Deliverable to Customers Deliverable % Rating among top two Order accuracy 97% On-time delivery 94% Damage-free shipment 91% Responsiveness to changing requirements 81% Order cycle time 81% Operating hours’ accessibility 66% Visibility of orders 55% Returns-processing capability 51% Value-added service capability 50% SKU integrity 46% Responsiveness to marketing trends 43% Deferred customization and/or postponement 33% Assembly of promotional displays 21% Source: Logistics Management, RBI Research Fig. 4 Responses to Operational Issues Response to issue Implemented Plan to implement Do not plan to implement Purchase materials handling equipment 46% 26% 27% Purge obsolete/overstock inventory 40% 40% 20% Purchase storage equipment 35% 28% 37% Reconfigure existing facility 35% 36% 29% Improve turns 29% 42% 29% Balance daily/weekly workload 28% 45% 26% Retrain personnel 27% 47% 26% Purchase information-technology enablers 26% 37% 37% Evaluate customer profitability 25% 28% 46% Hire more-qualified personnel 23% 35% 42% Cross-dock 22% 20% 58% Contract third-party logistics (3PL) services 22% 13% 65% Purchase new software 18% 35% 47% Open new facility 17% 20% 63% Expand existing facility 16% 27% 56% Revamp old software 16% 24% 60% Hire consultants 15% 7% 78% Increase operating hours 14% 19% 67% Source: Logistics Management, RBI Research Fig. 5 Importance of Warehouse Technologies Technology Very important Somewhat important Not important Do not use Bar coding 52% 22% 5% 21% Warehouse management systems (WMS) 48% 27% 7% 18% Electronic data interchange (EDI) 41% 28% 7% 24% Real-time order tracking 39% 27% 9% 26% Advance shipment notices (ASNs) 36% 30% 10% 23% Radio frequency identification (RFID) 28% 19% 13% 41% Automated print and apply 17% 26% 11% 47% Labor management systems 16% 27% 13% 44% Shipping conveyor/sorter systems 13% 13% 15% 60% Very narrow aisle (VNA) storage 12% 21% 13% 54% RFID solutions 11% 21% 12% 56% Receiving conveyor/ sorter systems 8% 11% 15% 67% Automated picking systems 7% 9% 14% 70% Pick-to-light 6% 9% 18% 67% Voice-directed picking 5% 8% 17% 71% Carousels 4% 13% 15% 67% Automated storage 4% 8% 15% 74% Automated guided vehicles (AGVs) 4% 8% 15% 73% Source: Logistics Management, RBI Research Fig. 6 Implemented Warehouse Strategies Warehouse Strategy Implemented Planned but not implemented Interested but not planned Not applicable Continuous improvement 56% 24% 14% 6% Benchmarking/work measurement 32% 23% 24% 21% Value-added services 31% 19% 23% 26% Cross-docking 26% 14% 17% 44% Workload balancing 26% 26% 27% 21% Outsourcing 26% 9% 17% 48% Lean warehousing 22% 20% 34% 25% Six Sigma certification 13% 12% 30% 46% RFID solutions 10% 16% 33% 41% Source: Logistics Management, RBI Research

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Supply Chain Articles

The Building Blocks of Peak Performance

By Brian Franks -- 7/1/2006

The discovery of DNA more than 50 years ago paved the way for understanding the foundational elements of life. And yet, it has taken another 50 years for scientists to completely map the human genome, allowing us to understand why each of us is a unique individual.

Similarly, the retail supply chain has its own set of foundational elements: merchandise planning, sourcing, logistics, and store operations. And each of these disciplines has its own set of “markers,” pointing the way to excellence. But success in today’s retail marketplace requires more than excellence within each discipline. Kurt Salmon Associates is finding that world-class supply chains are those that integrate these functions to create new capabilities.

In leading companies, it is becoming commonplace to find our planning, sourcing, distribution, and retail “scientists” developing new end-to-end approaches to dramatically improve inventory management, margins, speed to market, and markdowns. Shared metrics are increasingly prevalent, as are new supply chain-related roles and responsibilities.

This article will outline those markers of excellence, or leading practices, within each of the foundational building blocks and provide examples of companies that are using those practices to drive significant business benefits. It will also show how companies can begin to rewrite the rules and link their supply chain DNA to create supply chain excellence.

Merchandise Planning

Many retailers expend significant time and energy on financial planning but fail to dedicate enough of a focus on the elements of merchandise planning that can drive significant business benefits. Yet elements of merchandise planning can have a direct and significant impact on the business. Merchants and planners, however, have historically been hampered by tools that have severely affected their ability to make effective business decisions in this area.

Leading Practices

Visionary retailers are adopting merchandise-planning techniques that result in improved margins and lower inventory liability. Leading practices in merchandise planning include:

Conduct “conceptual” assortment planning. Prior to market or line adoption at the conceptual stage, merchants are communicating their vision of the product line through more structured assortment plans. Within this process, merchants are defining key criteria such as product attributes, pricing and cost targets, and assortment required to create consumer demand. In addition, leading retailers have developed processes to segment product based on expected lifecycles. Within those segments, they’re also ranking product to indicate its importance to the line and to drive buy quantities and service levels.

The most effective conceptual assortment plans are those communicated early in the selling season to sourcing, manufacturing (internal or external), and retail personnel. These early communications help them understand the business direction and begin their respective supply chain activities, such as booking raw materials or ensuring sufficient network capacity.

Tailor assortments to smaller store clusters. “Micromerchandising” has been a buzzword in retail for some time. Retailers are finally implementing this concept by tailoring assortments to clusters of stores with common attributes such as level of affluence, urban vs. suburban, ethnicity, and climate.

By assigning each store to a cluster, retailers can tailor product assortments and subsequent allocation activities to address the unique needs of different store locations. This practice will drive significant changes in supply chain operations, including an increase in store-specific flows, greater store pick-and-pack activity from vendors, and smaller unit packs.

Replace “gut feel analysis” with optimization engines. Merchants and planners are increasingly leveraging optimization technology and techniques to drive pricing, promotion, and markdown decisions as well as to determine inventory flow paths and strategies.

At several hard and soft goods retailers, planners are using optimization models to determine the most appropriate product flow paths (for example, replenishment, hold and flow, direct-to-store, or flow through) based on those products’ attributes. These attributes include vendor reliability, demand predictability, product cost, cube, and seasonality and some retailers are reviewing up to 15 to 20 different attributes.

Case Study: Hudson’s Bay Company

Hudson’s Bay Company (Hbc) is a multibillion-dollar international retailer based in Canada with unique distribution channels and distinct brand strategies. Because of a history of acquisitions, Hbc’s processes, organizational structures, and infrastructure were not consistent. To address this inconsistency, the retailer established a multiyear vision to integrate and leverage its businesses. Hbc hoped this broad-scale integration would drive a significant level of business/sales growth. A considerable portion of the integrated effort focused on improving merchandise planning processes.

Hbc’s challenge was to implement quick wins with a new merchandise planning process. It intended to develop this process for its newly formed Centralized Merchandising Group. The effort would focus on optimizing assortment and on developing a merchandise strategy that ties together product and financial plans.

A cross-functional team of merchants, planners, supply chain, technology, and training personnel was formed to implement the quick wins and plan for the full implementation. The team developed detailed training materials and business requirements for assortment planning and optimization tools, created planning calendars for each business, performed workload analysis to confirm organizational requirements, conducted training, and supported implementation of new processes.

Through these efforts, this team identified an inventory-reduction opportunity of several hundred million dollars, which would free cash flow and reduce carrying and handling costs. A plan was created to realize benefits within 12 months.

As part of this planning initiative, Hbc developed a robust assortment planning tool to assist buyers and planners with the preseason process, which begins with conceptual assortment and continues through creating a detailed assortment plan. The tool and process were piloted in areas across the business and subsequently rolled out based on market dates.

The initial pilot, which consisted of 10 percent of the business, was structured to yield $11 million in net inventory reduction and positive comparable store growth.

Sourcing

The activities performed by sourcing organizations, which represent the second DNA building block, have historically been tactical in nature. They have worked to identify and certify vendors, oversee the sample process, receive quotes, and track vendor orders with a focus on hitting margin targets. While often cordial and professional, relationships among sourcing organizations and vendors can break down and become antagonistic when supply chain strategy or execution fails.

Leading Practices

Leading companies are taking steps to make sourcing more strategic and collaborative. Sourcing organizations have become an integral part of a company’s ability to bring product to market. As retailers strive to become faster, more responsive, and more flexible while reducing costs, there is a real need for sourcing organizations to connect better to other areas of the supply chain, such as planning and logistics, as well as directly to vendor processes.

In addition, dramatic changes in the quota rules and the continuing improvement of functionality in product lifecycle management (PLM) and sourcing systems are rewriting the rules on sourcing. Leading practices in sourcing include:

Continuously consolidate the vendor base. Leaders consider vendor consolidation to be an integral part of their sourcing strategies (and not just a one-time occurrence). They are seeing real benefits such as reduced costs, improved responsiveness, and reduced delivery variances. These improvements can reduce product cost of goods sold (COGS) 5 to 20 percent and improve schedule attainment for better fill rates and on-time deliveries.

Another benefit of having fewer vendors is that retailers have more opportunities to form mixed product containers from ports of embarkation. Finally, retailers require less overall supply chain overhead to certify and manage a focused vendor base.

Collaborate with vendors that have the best factories. The post-quota world has retailers searching for the “best” factories while, at the same time, balancing country-of-origin opportunities. These best factories offer long-term advantages in cost and enhanced capabilities, and they are becoming extensions of retailers’ rapid-to-market processes.

Sourcing organizations want vendors that can provide responsive production capacity, order visibility, and other supporting functional skills such as technical product development and distribution. Factory vendors with these enhanced capabilities allow retailers to eliminate redundancies and provide accurate, actionable information. The most collaborative vendors and retailers are linking their systems to gain visibility into key activities and to sequence the flow of orders from raw materials through shipping.

Shift activities closer to manufacturing. Several retailers have moved supporting functions closer to the source of manufacture to reduce cycle times and costs. Some of the relocated supporting functions include technical specifications, quality assurance, samples management, inventory planning, and even some aspects of concept development and merchandise planning.

Case Study: L.L. Bean

L.L. Bean is a multibillion dollar, multichannel vertical retailer of men’s, women’s, children’s, home, and outdoor products. Starting in 2004, the company initiated a three-year consolidation and collaboration initiative to go much deeper with select vendors and establish new supply rules for improved sourcing. It established an aggressive target to reduce COGS by 10 percent and lower customer prices. In addition, the company recognized the need to increase its product velocity and to build partnerships to do so.

L.L. Bean’s path to date can provide a useful approach for other companies interested in evolving the role of sourcing. Lessons learned include:

• Know your product’s true costs. You can’t identify the best factories if you can’t compare them to expected performance in their regions. L.L. Bean started the process by executing a costing model to establish benchmarks for the first dozen products it wanted to consolidate. It then shared the details of this analysis with its strategic vendors, providing the cost target goals needed to offer the best pricing for its customers. It is not sufficient to suggest arbitrary targets of “5-percent” cost reduction; reasonable improvement targets are based on justifiable analysis.
• Approach vendor relationships as a two-way street. As consolidation progressed into its second season and vendors witnessed increased volumes and the next level of cost targets, several vendors approached L.L. Bean with requests that the retailer improve its internal processes. The demand profile of orders coming to the vendors needed to change if the vendors were expected to hit the cost targets. Bean adopted the changes, realizing that the existing practices were, in fact, a hindrance to the process. It consolidated and resequenced orders, and together, the retailer and vendors were able to meet the next round of cost reductions.
• Develop trust with strategic vendors through results. L.L. Bean continued to share its product-positioning vision and objectives with its strategic vendors. The company approached vendors as true stakeholders. As time progressed, it became evident to vendors that L.L. Bean was indeed passing along the lower sourcing costs to its customers with lower price points for its products. This outcome was instrumental in building real partnership trust. Vendors may initially feel the benefits from a collaborative partnership are one-sided. It is up to the retailer to share its collaborative vision of a win-win situation for the retailer, its vendors, and the consumer.

To date, L.L. Bean has reduced its vendor base by more than 30 percent, and it expects to reach a 50-percent reduction by the end of 2008. The company is exceeding its milestone objectives in COGS reduction and is seeing on-time deliveries in the high 90-percent range. A byproduct of this work has been an improvement in quality. With fewer vendor partners, L.L. Bean has seen a dramatic reduction in product-defect levels. In addition, it is beginning to work with one of its vendors on a collaborative first-to-market initiative.

Logistics

The third building block, logistics, has traditionally been seen as a cost center, supporting other elements of the “retail DNA” but not necessarily creating a competitive advantage. Today’s retail leaders, however, understand how to integrate the power of their logistics operations with the rest of the enterprise, leading to quantum enhancements in sales, margins, and customer service.

Leading Practices

World-class logistics operations not only are driving continuous improvements in productivity and inventory effectiveness but also are helping to drive overall business growth and improved margins. Leading practices in logistics include:

Leverage “new-age” software solutions. Leading retailers are implementing a wide array of supply chain software solutions that allow them to react better to increasingly available store-level inventory data and demand forecast data. Transportation management systems provide visibility of merchandise movements from vendor source to store shelf, dramatically improving inventory performance. Advanced warehouse management systems are supporting increasingly “smart” distribution operations, streamlining and prioritizing activities to ensure that the most critical transactions happen first. And the increasing prevalence of labor management systems supports implementation of comprehensive performance management programs that ensure the best return from the human elements of the supply chain.

Focus on flow. Leading retailers are questioning past distribution paradigms that favored a “one size fits all” merchandise flow path. Instead they are using new tools to evaluate the optimal flow path based on product characteristics and demand patterns, thereby realizing dramatic inventory reductions, labor savings, and increased speed to market.

Motivate and reward for success. The leaders have realized that success demands more than just plugging in the newest technology and assuming that excellence will follow. At the end of the day, it’s still the associates that make the technology tick. Accordingly, world-class logistics organizations are implementing comprehensive performance management programs focusing energy on training, measuring, motivating, and rewarding people for sustained excellence.

Case Studies: Ace Hardware and Big Lots

Ace Hardware and Big Lots represent excellent examples of retailers that constantly challenge the status quo. Both companies are finding creative ways to enhance supply chain productivity not only inside the silo of traditional distribution functions but also through increasing cross-functional integration and collaboration with merchandising, sourcing and procurement, store operations, and IT.

Ace Hardware recently completed a comprehensive strategic evaluation of its supply chain network. This evaluation focused on defining and implementing the optimal merchandise flow path for each of its 600-plus product categories. The evaluation pointed to an opportunity to convert a significant percentage of volume from traditional distribution center (DC) replenishment to “flow through” operations. This change would reduce inventory in selected categories by 25 percent or more while also significantly reducing DC labor and space requirements.

The implementation of increased flow through, coupled with a parallel distribution network optimization, will allow Ace to extend the life of its current DCs. By doing so, it will defer the need to construct a new facility and will create fully realized annual savings of $20 million.

Concurrent with the merchandise flow evaluation, Ace has completed a comprehensive review of its technology applications. The focus here is to ensure the alignment of its enterprise and point solutions with the needs of its unique customer base. The resulting roadmap for technology development calls for a variety of initiatives from consolidation of redundant applications to development of new and creative retail replenishment tools. Combined, these initiatives are expected to deliver annual savings in excess of $5 million.

Discount retailer Big Lots also understands how to get the most out of its investment in distribution infrastructure. Over the past 10 years, the company has doubled the size of its distribution network; it currently operates five large regional DCs and two national furniture facilities. These facilities are strategically located to efficiently service its store base.

To drive consistent service and competitive logistics costs, Big Lots’ Logistics Group, in partnership with its world-class training department, has implemented a comprehensive engineered standards and associate incentive program. Called the P.O.W.E.R. (Performing Outstanding Work Earns Rewards) Program, it has been put in place across the five regional DCs and one of the furniture DCs. Through the program, Big Lots has improved direct labor productivity across the entire network by 40 percent, while providing its average associate the opportunity to earn an additional 15 percent of base pay.

The work that Big Lots has done in its flagship Columbus, Ohio, facility is equally impressive. To increase capacity and productivity, Big Lots recently completed a significant retrofit of this 2.7 million square-foot facility resulting in a 20-percent reduction in labor cost and a 20-percent increase in throughput capacity.

The savings generated through this comprehensive retrofit were expected to pay for the project in three years. In actuality, it only took one and a half years. The project is on target for a 57-percent internal rate of return (IRR). As a result, Big Lots’ Logistics Group not only improved productivity but also helped support future business growth by enabling its flagship DC to support significantly more stores —and in the process, defer the need for costly capacity expansion.

Store Operations

Traditionally when we discuss the key elements of the supply chain, we think primarily of the heavy lifting performed by distribution and logistics operations. Much less often do we hear about the last 100 feet of merchandise movement and the presentation processes performed at the store. But it is in the last 100 feet that a retailer makes money. It is here—by delivering against a service promise—that a retailer keeps customers coming back.

With the proper tools, a retailer can plan and execute the unloading of trucks, unpacking and preparing of stock, managing of backrooms, and refilling of merchandise fixtures with a great deal of accuracy and efficiency. And for general and consumable merchant/operators, timing, accuracy, and speed of inventory movement from door to floor has become a competitive advantage. After all, if it’s not on the floor, what are the chances you will sell it?

Leading Practices

Forward-thinking executives are focused on developing an integrated approach that recognizes the linkages among stores, planning, manufacturing, and distribution inside and outside of their organizations. They have recognized the critical importance of the last 100 feet and have developed specific operational best practices using integrated relationships. Leading practices for retail merchandise operations include:

Balance inventory to demand. In-store inventory levels that are balanced to consumer demand turn more quickly, require less handling, and are sold at higher margin and profit levels. Retailers can create this balance by developing accurate allocation, replenishment, and promotional plans based on each retail location’s unique demand curves. Although seemingly similar, each retail location has unique supply and demand characteristics shaped by the demographic it serves. These differences are expressed in the what, when, and where of consumer shopping patterns. Analysis of these patterns provides the key to unlocking and managing inventory with a high degree of accuracy.

Gain visibility into inbound deliveries. A common issue for retail stores is a lack of advance notification about the frequency, quantity, and content of arriving shipments. Gaining visibility into such details provides the retailer with greater insight and opportunity. For example, it allows a store operator to schedule labor resources more effectively and prepare the store for new arrivals. For all retailers, improved visibility allows greater inventory control. Greater control produces two benefits. For the retailer, it allows them to focus more on the consumer and drive sales. For the consumer, increased visibility translates into a more “shopable” store.

Apply consistency across the store base. A major challenge for all retailers is scaling best practices across a large population of stores. For many retailers, store counts range from 500 to 5,000. To optimize network sales and profitability in this type of environment, stores need to execute consistent processes and operating practices. Establishing a permanent, corporate-based store operations group can help sustain consistent performance through:

• Designing and piloting best practices for the entire supply chain.
• Developing comprehensive rollout processes to implement changes.
• Reinforcing and measuring results through reporting visibility and controls.
• Providing remedial correction to cure best practice issues.

Case Study: Discount Department Store

A nationwide apparel and home goods retailer recently piloted and is currently implementing an integrated store-operations program across its locations. The program includes the following elements:

• In-store communication of timely, accurate, and actionable information regarding the content and disposition of inventory.
• In-store tools to better plan, organize, measure, and manage merchandise and labor resources.
• Consistent management oversight, performance measurement, and controls.
• Ongoing execution of best practices developed centrally by a permanent store operations group, using rollout process and change management toolkits that are combined with ongoing reinforcement.

When the implementation across the store network is complete, all retail store locations will share characteristics that will ensure consistency of execution. This consistency will optimize overall organizational growth and profitability.

The retailer has focused on improving consistency in three areas in its stores: inventory flow and replenishment, performance management, and backroom reorganization.

To improve flow and replenishment, the retailer is increasing visibility in the supply chain. This increased visibility drives the timing, location, and accountability for merchandise receiving, processing, and stocking. The retailer is also better utilizing tools for sell-through reporting, carton labeling, and location identification to plan the replenishment of sold-down merchandise from new receipts and back stock.

To improve performance management, the retailer is using: 1) automated tools to forecast and balance workload to labor availability; 2) short interval coaching and productivity management techniques to increase workforce efficiency and effectiveness; and 3) automated productivity measurement and reporting to provide more timely and actionable response.

Finally the retailer is using industrial engineering techniques to help its stores make more effective and efficient use of backroom and processing floor space, equipment, and shelving. Labor efficiency and increased merchandise velocity to floor is being driven by plan-o-grams for the placement and adjacency of merchandise on shelves and in hanging rails. Similarly, improved maintenance and accountability for the condition of the backroom supports accurate and timely inventory replenishment to reduce out-of-stock conditions.

Through this integrated program, the retailer achieved the following: increased velocity of merchandise from the back door of the store to the floor fixture; enhanced in-stock, on-shelf inventory condition at the style, color, size, and SKU levels; and lower in-store merchandise handling costs.

Bringing It All Together

These leading practices and case studies provide a glimpse into how companies are taking a core supply chain building block function and using it to drive real value across the business. But it is no longer just about how well a supply chain function performs. It is becoming more about how each functional area interacts to drive end-to-end supply chain excellence. The leaders have adopted a number of techniques to achieve the necessary interaction. Two techniques that have proven particularly successful involve building “end-to-end” teams and implementing a supply chain dashboard for key performance metrics.

Build End-to-End Teams. Companies whose supply chains yield the greatest results approach the “supply chain” in the broadest terms, which means assigning staff to be responsible for bringing product from concept to store shelf. Several retail leaders have created project-focused teams that cover the end-to-end supply chain and have aligned their objectives to achieve significant business results. Here are some success stories:

• A department store brings together planning, logistics, and sourcing to execute “push and pull.” Through this technique, the retailer breaks out the overall buy quantity for an item into an initial “push” for setup across all stores, a series of replenishment “pulls” based on selling season trends, and a final “push” to mark the end of the product’s lifecycle. This approach improved margins on key items by 9 percent for this retailer.
• A billion-dollar specialty retailer formed a team of planning, distribution, and retail executives and created an integrated plan to improve turns across the business by 50 percent.
• A multichannel retailer brings together leaders from merchandising, planning, supply chain, and distribution to create cross-dock capabilities to support a doubling of store growth.

It is doubtful these initiatives would have yielded the same results under the traditional model in which each function optimizes for its own area.

Implement Supply Chain Dashboards. Just as scientists rely on electron microscopes when working with DNA, retailers require a means to gain low-level visibility into their end-to-end supply chain operations. Increasingly, the leaders are gaining this visibility via a performance dashboard. Their objective is to turn raw data into knowledge, then into action, and ultimately into results.

A dashboard is a reporting tool that displays key (not all) performance metrics to enable retailers to quickly and easily see how their business is performing and where things are breaking down. The tool should include a combination of operational and financial metrics that spans the broader supply chain.

To be effective, this core set of metrics should be shared across the supply chain. Examples include “guest in stock” (product actually on the floor and in a saleable location) and total supply chain costs. These are metrics that everyone—within planning, sourcing, logistics, and store operations—can rally around and have an affect on.

Retailers should expect to face challenges as they move down the path of implementing shared metrics and functions discover they are out of their comfort zones. For example, most retailers are not accustomed to capturing total supply chain costs. They are used to measuring DC costs, transportation costs, or retail-handling costs instead of end-to-end supply chain costs. It’s important to overcome this mind-set, however, because alignment around metrics is a requirement for significant improvements to margin, inventory, and other key business drivers.

Discover Your Unique DNA

It took genetic scientists 50 years to fully understand how to leverage the discovery of the building blocks of DNA. In today’s marketplace, the building bocks of supply chain success are increasingly available to retailers. These building blocks enable retailers to create and sustain operations in which functions are integrated across the enterprise and are focused on the efficient movement of merchandise from vendor source to the store shelf.

Leading retailers are venturing outside the silos of functional excellence to embrace the new concept of cross-functional, enterprisewide excellence. The challenge lies in discovering the combination of foundational building blocks that defines the equation for excellence in your business. Doing so will help you discover and unleash your own unique retail DNA.

Author’s note: The author wishes to acknowledge the following individuals at KSA for their contributions to this article: Curt Clark, manufacturing specialist and Karl Bjornson, retail operations specialist.

Getting to World-Class Supply Chain Measurement

By Debra Hofman -- 10/1/2006

At AMR Research, we field inquiry calls from companies on a wide range of topics related to supply chain and technology. One topic that is becoming increasingly prevalent is supply chain measurement. The questions we receive run the gamut, from “What should we be measuring?” to “How do we get these numbers?” to “What do we do with the data once we get it?” What companies are in essence asking is, “How do we get to world class supply chain measurement?” Challenges of Supply Chain Measurement The road to world-class supply chain measurement is scattered with obstacles. Some of the challenges that we hear about from companies as they attempt to institute metrics programs include: Too many metrics. One of the most prevalent issues companies grapple with is having too many metrics. We see companies that are looking at hundreds, sometimes thousands of metrics. The result, of course, is that 1) it's very difficult to actually gather the data for so many metrics, and 2) if you do manage to gather the data, it's difficult to figure out what to do with it without drowning in the detail. What happens then is all too common: Eventually, pressing business needs take precedence, and the metrics and data sit on a shelf collecting dust. Endless debate over metric definition. Another issue we hear about is people endlessly debating the pros and cons of each metric. Clearly, some debate is healthy and, more importantly, necessary. It's important to vet each metric, challenge it, make sure it's going to provide useful information, and so on. It's also important to allow debate so that the organization buys into the metrics. There is a point, however, where debate becomes a form of resistance, providing a way to put off change. Recognizing when the organization has crossed the line and addressing it appropriately is critical to moving ahead. Constantly changing metrics. This is the flip side of the endless debate issue: You've identified the metrics, you've put them in place, and then you find them changing constantly. One company we talked to described this as the “metric-of-the-year syndrome.” Old data. Another challenge we hear about is an inability to collect the data in a time frame that allows it to be meaningfully used. If the data is old by the time it's collected, you've wasted valuable time. For example, one company we talked to said they had decided to look at on-shelf availability using point-of-sale data. However, it routinely took four weeks to collect and cleanse the data, and the result was that the data was useless by the time they got it. Gaming the system. This is a common challenge to any change effort but particularly to one that involves metrics. Inevitably, people will find creative ways to get around the system, particularly if they feel there will be personal negative repercussions otherwise. For example, in our benchmarking studies at AMR Research, we measure the perfect order, which is defined as an order that's complete, accurate, on-time, and in perfect condition. An order that is split because product is not in stock for some of the lines on the order is considered incomplete, and therefore the whole order is imperfect. What some companies have found when they instituted this metric is that in these situations, people were canceling the original order and replacing it with two new orders that could be filled, thereby keeping the perfect-order rating up. So what can companies do to address these challenges and get to world-class measurement? First, we'll describe the dimensions of good supply chain measurement, and then we'll identify some best practices to follow and pitfalls to avoid. Performance Measurement Maturity In our supply chain benchmarking studies at AMR Research, we've found substantial differences in companies' measurement maturity. What differentiates the leaders are two dimensions: first, their ability to measure, and second—and just as important—their ability as an organization to act on the results. We refer to these in Exhibit 1 as “measurement aptitude” and “results actionability.” Differentiating between these two is critical because many companies do not have both capabilities, and both are essential. Companies that score high on measurement aptitude: Know what to measure. Have a program in place to measure it. Are able to easily access the right data in a timely manner. Measurement aptitude is about quality, not quantity. Where a company falls on this axis is not about how much measuring they do, it's about how well they do it. There are companies that have an entire department dedicated to performance measurement and have made huge investments in it, but they still can't easily get at the metrics that matter at the level of the business that matters. Results actionability is made up of two components: The ability to accept the results. This can be particularly difficult when the numbers don't turn out the way some people expected or wanted them to. It's important to note, though, that accepting the results is not necessarily the same thing as agreeing with the results. We often see a lot of debate regarding the numbers and the interpretation of what they mean. In fact, some debate about the results is desirable. But at some point, it's time to stop the debate, move up from the details, come to the key overarching conclusions about what the data is telling you, and move forward. Often companies get mired in the minutiae of the way this or that metric was calculated and never get out of it, losing track of the ultimate goal. • The ability to act on the results. Once the results are accepted, there needs to be organizational mechanisms in place to act on them. If, for example, the measurement exercise identified an issue with supplier performance, initiatives and deadlines need to be put in place with resources assigned to address the issue. To get to a world-class supply chain measurement capability, managers need to know where their organization is along the measurement-maturity curve and where its strengths and weaknesses lie. We've seen companies generally fall into one of four categories: 1) Excellence Addicts. These are the companies that rate highly on both dimensions. They are always looking for ways to get better, to improve, and to constantly tweak their performance and excel. They go beyond simply accepting the results of a measurement project—these companies actively embrace the results and enthusiastically look for ways to implement change. In our benchmarking studies at AMR Research, these are the companies that tell us that if the measurement results only give them good news, the effort will have been a failure; if they're good in their peer group on a certain metric, they want to know what the best is outside their peer group and how they can achieve it. 2) The Right Stuff. Companies with the “right stuff” have the ingredients with which to act: the right level of executive involvement, an open attitude and culture with regard to measurement, and the necessary organizational structure and processes. What they lack is the hard data and metrics foundation on which to make sound decisions—they don’t know what to measure or how to collect the data. Typically we see this in situations where a) there has been a change in leadership of the supply chain organization, or b) there’s been a change in the marketplace that is driving the CEO to mandate measurement from the top down. 3) Ingrained Inertia. Companies in this quadrant rate low on measurement aptitude and results actionability. Sometimes it’s a case of not measuring at all. In other cases, a company does a lot of measuring, but it takes them three times longer than average to get at the numbers, and there is no organizational momentum or executive support to accept and act on the results. Sometimes the people who are responsible for measuring do not have the influence they need and are outside the group being measured. As a result, there is no buy-in to the data collection effort, and they often meet subtle (or not-so-subtle) resistance from the people that have the best access to the data. 4) Analysis Paralysis. Sitting in the fourth quadrant are the companies that measure well but do not have the organizational buy-in or acceptance to act on the results. The culprits here often are a lack of a strong and clear management directive to resolve conflict and an organizational culture that is defensive rather than open. There may be too many stakeholders with conflicting agendas, or one naysayer who has been not dealt with appropriately and derails the effort. Or it may just be a case of organizational disconnect—there’s a group who is doing the measuring, but there’s no action in the part of the organization that needs to actually do something with the results. What happens typically is that the company gets bogged down in the results and loses sight of the ultimate goal. The result: measuring simply for the sake of measuring. Moving up the maturity curve requires putting in place a comprehensive and ongoing measurement program. In implementing a measurement program, it’s important to distinguish between what it takes to define the metrics your organization will use versus what it takes to implement the measurement process itself. Below are some best practices related to each of these stages. Doing these well will allow companies to improve on both dimensions of the performance measurement maturity model and move up the curve. Metric Definition Best Practices Design different metric portfolios for different goals. The first and most important thing you can do before you start deciding what metrics to collect is to clearly define your goal. Who will be using these metrics and for what purpose? Different goals or purposes will require different metrics, and each should have its own distinct portfolio. For example, the metrics that a CFO needs in order to know how the supply chain is performing are very different from the metrics that the vice president of supply chain needs to manage the supply chain and fi x any problems that arise. There may be some overlap, certainly. They both want to see inventory levels, but the CFO wants to see them in terms of total inventory value. In contrast, the vice president of supply chain needs to see inventory days, not just value, and should see it broken down into raw material, work-in-process, and finished goods inventories since each indicates something different about the possible root causes of any problems. We often get requests from companies to review and provide feedback on their metrics. Sometimes it’s possible to tell who decided what metrics to collect simply by looking at them. One company we worked with sent a list of five metrics, and all five were finance-related supply chain metrics such as days sales outstanding and manufacturing operating cost. Clearly the CFO had mandated that these metrics be used. However, although the metrics were very useful for him, they were not as useful for the supply chain folks who needed to identify the potential root causes and solutions of any problems they were having. Keep it small: avoid the "mushroom effect." It’s important to keep each portfolio to a manageable size for all the reasons noted earlier. The more metrics in the portfolio, the harder it is to consistently collect current, valid data that you can really use. Moreover, the larger the number of metrics, the harder it is to fi gure out what it all means even if you do manage to collect the data; the potential for confusion, lack of focus, and getting mired in the details all increase exponentially. What we’ve seen is that, without a concerted effort to minimize them, the number of metrics has a tendency to proliferate like mushrooms in the dark. Everyone has his or her favorites and often very good reasons for wanting to include or exclude certain metrics. Clarifying what you’re trying to do with the metrics, as noted above, will help guide decisions by providing objective criteria for what metrics should be included. Take the example of fi rst-pass yield. This is a very useful manufacturing metric, and it may be important to include it in a portfolio of deep-dive manufacturing metrics that aims to identify the root cause of any time or cost issues in the plants. But it’s not as important to include it in a portfolio of supply chain metrics that aims to look across the supply chain at a higher level and to identify and delve into potential root-cause areas. Many companies start their metric-defi nition effort by gathering all the metrics that people are currently measuring in the organization. They then trying to rationalize them and take out the metrics that they don’t need. We find that this method doesn’t work very well. It’s diffi cult to throw out metrics that are already in. Once a metric is in, people are worried about what they will lose by not collecting it, and there’s always a good reason to keep just one more metric. What works better is to start with an empty portfolio and put metrics in, using your clearly defi ned objectives as a guide. Finally, be sure that the guidelines you use to choose metrics help you focus from the outside in—that is, from the customer in, rather than from the inside of your company out. The goal is to create a portfolio that measures the performance of your supply chain as your customer experiences it. Address the Basics: Balanced, Cross Functional, Practical. These are the basics of good supply chain metric development. The portfolio should be balanced from the perspective of cost, quality, time, and effectiveness (and regulatory if applicable). Having a balanced portfolio will help ensure, for example, that you’re not measuring cost at the expense of service. Your portfolio should also be cross-functional to avoid "siloed" behavior that may optimize a particular function at the expense of suboptimizing the whole. For example, if logistics is holding shipments back so that they can consolidate loads to keep transportation costs down, you need to have metrics in your portfolio that will allow you to clearly see the impact of this on customer service metrics such as the perfect order. Finally, make sure the metrics you choose are practical. How easy is it to get the data required for the entire portfolio of metrics? If your organization is early in its measurement maturity, it’s best to be realistic about what can be accomplished. For example, some companies that have never measured the perfect order start with fill rates or ontime shipments because they can more easily get at those metrics. Over time, they then shift to a fuller measure of the perfect order. Align execution and strategy. Ensure that the metrics you choose don’t mask and do drive the correct behavior. One global company we worked with, for example, measured pockets of local inventory in different regions instead of global days of supply. By doing this, they created undesirable hoarding behavior. Another global company rolled up the performance of five divisions, which masked the fact that one of the divisions was carrying the other four on certain metrics. Understand the interdependencies. It’s important to clearly and explicitly understand the relationships among the metrics in your portfolio. Each metric does not sit in a vacuum. Similar to the supply chain processes they reflect, the metrics are interdependent, and certain metrics drive others. For example, we have found in our research that demandforecast accuracy is highly correlated with perfect-order performance: Companies that have better demand-forecast accuracy also tend to have better perfect-order performance. At the same time, perfect-order performance tends to be inversely correlated with performance on reducing supply chain cost; most of the companies we benchmark make a tradeoff between perfect-order performance and cost. For example, many companies hold higher inventories (increasing cost) to keep their perfect-order performance up. Clearly outlining these interdependencies addresses two important issues. First, it helps identify the metrics that matter, which in turn makes it easier to discard the less critical metrics and keep the portfolio small. Second, it serves to illuminate the path for root-cause analysis, which means that it will be easier to figure out what to do with the data once you’ve collected it. Rather than getting overwhelmed by a potpourri of numbers, you will have a structure in place with which to analyze results. AMR Research’s "Hierarchy of Supply Chain Metrics," for example, is a useful tool for understanding the relationships (see Exhibit 2). The hierarchy is a three-tiered framework that gives managers a progressively more granular view of performance. The top tier presents a 50,000-foot view of the overall health of the supply chain and the high-level trade-offs. The middle tier uses a composite cash-flow metric that provides an initial diagnostic tool, and the third tier uses a variety of metrics that support effective root-cause analysis. (For more information, see "The Hierarchy of Supply Chain Metrics" from the September 2004 issue of Supply Chain Management Review.) It’s worth noting that we often find a disconnect here between concept and practice. Everyone conceptually understands that metrics are interdependent. However, because companies are still largely organized by function, it’s easy to develop tunnel vision and focus on just the metrics that relate to one function or another, losing sight of the interactions among them. Balance the need for standards versus customization. One of the issues we see companies struggle with—particularly companies that are implementing a standard metrics portfolio across multiple divisions—is how to balance the need for standardization versus the need for customization. Often each division operates in very different markets and geographies, and each runs very different supply chains. At the same time, there are basic metrics that apply to any supply chain, no matter what environment it operates in. Every supply chain should aim to deliver a profitable perfect order, and as such, every supply chain should measure demand-forecast accuracy, the perfect order, total supply chain costs, and cash-to-cash cycle time (which includes inventory). What’s important here is to recognize where there are similarities and differences across supply chains and to put rules in place to address them. One option is to mandate that certain portions of the portfolio will remain standard, while other limited portions will accommodate some customization. Some of the companies we work with are implementing our hierarchy of supply chain metrics as their portfolio of metrics. In a few cases, they’ve kept the top two levels of the hierarchy standard but have allowed some customization in the third level. Another technique that works in some cases is to keep the metric label the same but allow some modifi cation to the definition where absolutely necessary, keeping in mind the conceptual intention behind the metric. Take the example of the request-to-quote metric. This metric measures the time it takes to respond to a request from a customer with a commitment (amount of product that can be provided and when). In a material-release environment where customers are not making individual requests but are rather pulling against previously defined commitments, this metric would seem to be inapplicable. However, it’s important to keep in mind the spirit of the metric, which is to measure the time it takes to respond to a customer request. Even in a material-release environment, there are occasionally requests that exceed contracted ranges, and the metric can be used to track the time it takes to respond to those requests. Metric Implementation Best Practices Develop a Metrics Strategy and Time Frame. The first step to take before implementing a set of metrics is to outline your strategy and time frame. This may sound obvious, but most companies don’t typically put the words "metrics" and "strategy" together. Implementing a measurement process is an organizational change, often of great magnitude, and as such it warrants a plan. The strategy should draw a line between the metrics defi nition phase and the implementation phase. It should identify the evolutionary stages of the metrics portfolio, or the points at which the metrics will be allowed to change. For many companies, implementing the metrics they want to collect all at once would be too diffi cult to accomplish in one step. For example, one company we worked with decided to implement the perfect-order metric. However, at that point in time, they were only measuring on-time shipments. Their strategy The first step to take before implementing a set of metrics is to outline your strategy and the time frame for executing it. This may sound obvious, but most companies don’t typically put the words "metrics" and "strategy" together. Implementing a measurement process is an organizational change, often of great magnitude, and as such it warrants a plan. The strategy should draw a line between the metrics definition phase and the implementation phase. It should identify the evolutionary stages of the metrics portfolio, or the points at which the metrics will be allowed to change. For many companies, implementing the metrics they want to collect all at once would be too diffi cult to accomplish in one step. For example, one company we worked with decided to implement the perfect-order metric. However, at that point in time, they were only measuring on-time shipments. Their strategy therefore outlined that in the first year, they would measure on-time shipments; in year two, they would expand to measure on-time delivery; and in year three, they would further expand to the full perfect-order measurement. The issue of constantly changing metrics noted above is a symptom of lacking a metrics strategy that clearly states when metrics definition is over and defi nes when metrics may or may not be changed. Define Scope. The implementation strategy also needs to outline the measurement scope. Most companies have more than one supply chain, and the definition of what constitutes a supply chain is often independent of a company’s organizational structure. For example, consider a food and beverage consumer products manufacturer that makes both dry and refrigerated goods. While the different product lines might reside in one business unit, they are very distinct supply chains and need to be measured separately. Pay Attention to Roles, Responsibilities, Structure, and Process. Make sure you have the structure and processes in place or at your disposal with which to act on the results of your measurement exercise. The goal of measuring is not only to identify problem areas but also to fix them. That requires a team of resources with processes in place and the authority to enact change. Otherwise, the results will simply turn into shelfware. It’s also important to choose the right resource to manage the data collection effort. The actual data will obviously come from multiple people in the organization who are responsible for different areas (for example, order management, production, and procurement). The person responsible for coordinating the effort must have influence in the organization and be well-respected by his/her peers in order to be successful in mobilizing their effort. Manage the Culture. Finally, one of the most important nissues to pay attention to is the measurement culture of your organization. The culture around measurement is separate from, but related to, the larger corporate culture. Is your existing culture one which will embrace the results of a measurement exercise, or will people be defensive? Will people get mired in the details of the metric calculations, or will they be able to step back and see the big picture? The way people respond to the results is tied to how the results will be used and, even more importantly, how people believe the results will be used. If people believe the results will be used in a way that negatively affects them—for example, their bonuses will be reduced, they will be blamed for any problems that are uncovered and their performance ratings will be negatively affected, or simply that they will be perceived as not doing their jobs—they will naturally resist and be defensive. Here is where senior management plays an important role. People take their cues from the words, attitude, and, most importantly, behavior of their senior managers. Executives need to clearly state that the purpose of measuring is to continuously improve rather than to place blame. They then need to make sure that their actions are consistent with that statement. Doing so will go a long way toward making a measurement program successful. In this way, each of the solutions listed above will help companies surmount the obstacles to world-class measurement as summarized in Exhibit 3. Ongoing measurement is key The growing interest in implementing a solid measurement program for the supply chain suggests that more companies are aware of the strategic importance of metrics. A worldclass, ongoing supply chain measurement capability allows companies to accomplish three distinct goals: 1. Set targets: Having hard data that tells you where you are versus others will help you determine what are realistic and desirable performance levels to target. 2. Achieve targets: The best companies use the data not only to tell them where they stand. By looking at the connections among the metrics, they use the data to help them analyze the root cause(s) of any problem areas that are uncovered and thereby achieve their targets. 3. Stay excellent: It’s not just about where your performance is today. Excelling at measurement gives you the capability to constantly improve. Without that, even the best company is at risk of being leapfrogged by existing or new competitors. In the end, excelling at supply chain measurement is crucial not just because it allows you to set targets to get to best, but because it also helps you get there and stay there.

The Leaders' Edge: Driven by Demand

By Kevin O'Marah -- 5/1/2005

Supply chain leadership drives business value; there's little debate about that proposition. But what exactly is business value in the 21st century? AMR Research argues that it's more than operational cost efficiency. We believe that value today is derived from new metrics that consider not just operational cost efficiencies but also innovation. Going forward, supply chain leadership and the business value it delivers will be found in a new model that incorporates excellence in both operations and innovations while leveraging the right information technology (IT) tools. We call this new model the demand-driven supply network (DDSN). In this article, we'll define the demand-driven supply network and explain its core components. We'll also explain the key metrics involved as well as the central role that the right technology plays in creating a demand-driven approach. The relationship between excellence in the DDSN and market value also is explored. Finally, the article presents a list of those industry leaders that are realizing value from the supply chain—the AMR Research Supply Chain Top 25. Driven by Demand AMR Research defines the demand-driven supply network as a system of technologies and processes that senses and reacts to real-time demand across a network of customers, suppliers, and employees. Reflecting on this definition, it's clear that the DDSN model differs from the supply chain model that has ruled most industries for decades. In large part, that may explain why so many companies have difficulty fully embracing the new approach. What's the difference between the new and old models? First and foremost, the 20th century was all about the factory. What marvelous advances were possible through the application of mass-production techniques! In the 1920s and 1930s, Henry Ford's fabled River Rouge auto plant was a legend of production efficiency —rubber, glass, and iron went in one end, and cars came out the other. Plus, you could get any color you wanted..."as long as it's black." The biggest oversight of this type of factory-centered supply chain was the management of consumer demand. Specifically, end-user demand was only casually considered and hardly ever managed aggressively. The lingering effects of this oversight are reflected in certain deficiencies that exist to this day—all of which suggest that the supply chain still largely serves the factory and not the consumer. Among those deficiencies are: The bullwhip effect—Disruptions downstream ripple back ever more loudly, creating tremendous demand uncertainty. The result: About $3-trillion worth of inventory is locked in U.S. and European supply chains as of June 2005. Failure to account for variability—Variability may not be a serious problem in a factory with known task cycle times, but it can have a devastating impact across a network of flexible-production facilities. Variability—which is exacerbated by the use of linear optimization techniques—today accounts for a 20-percent order-error rate across U.S. industry. No support for product innovation—The "black box" approach to research and development assumes that new products go through the same chain as existing ones. This assumption creates slow, wasteful, and error-prone product launches, which result in a 75-percent new-product-failure rate globally. Here are some additional metrics from AMR Research's Benchmark Analytix Service that underscore the lingering effects of the traditional factory-based, push orientation. Median time to market for a new product in the consumer packaged goods industry: 27.5 months. Median days of supply on hand for semiconductor manufacturers: 190 days. Median order-error rate for industrial electronic equipment suppliers: 26 percent. Demand-Driven Networks Are Different Demand-driven supply networks replace the factory-driven, push model of the 20th century with a customer-centric, pull model. This model embeds product innovation in the supply network, proactively manages demand, and utilizes stochastic optimization methods to deal with variability. It's a circular, self-renewing approach that never takes its eye off end-user demand. The result is a nimbler business that takes advantage of intellectual property and more quickly seizes fleeting business opportunities. (Exhibit 1 depicts the key differences between the two models.) One big difference between a DDSN and a traditional push supply chain are the metrics used. Traditional supply chain metrics include things like plant utilization, labor costs, and freight-handling costs. The metrics that matter most in a demand-driven approach, however, are a handful of overarching process measurements. These measurements cut across traditional functions like manufacturing, engineering, and sales and relate more closely to business value and actual demand. They span two key dimensions: operational excellence and innovation excellence. Operational Excellence: On the dimension of operational excellence, the two measures that work best are perfect order fulfillment rate (orders received at the right place, at the right time, in the right quantity, and at the right price) and total supply chain management (SCM) cost. The first metric is a strong blanket measure of customer service; the second accurately captures the cost of service. AMR Research's benchmarking of supply chain operational performance across several industry peer groups details how these metrics are defined and how best-in-class, worst-in-class, and median performers currently grade. (See "The Hierarchy of Supply Chain Metrics" by Debra Hofman of AMR Research in the September 2004 issue of Supply Chain Management Review.) Two important insights emerge from the data collected in this research. The first is that the leaders' clear operational superiority rolls up to a substantial (5 percent of revenue) overall cost advantage, proving that supply chain performance does go directly to the bottom line. The second insight is that best-in-class supply chains seem to consistently manage the trade-offs between cost and level of service by accepting slightly less than top performance on subsidiary or contributing metrics (for example, plant utilization and logistics costs) in order to maximize performance at the higher level (total supply chain costs). Innovation Excellence: Less reliable data has been gathered on the dimension of innovation excellence. The most common metric traditionally applied here is some version of time to market. In recent years, however, shorter product lifecycles have forced some industries to define this metric differently. In the high-tech and semiconductor industries, for instance, time to volume is often used. The reason: The ramping up of a reliable, high-yield manufacturing process is a more strategic consideration than getting a viable first version to market. In today's demand-driven environment, we propose time to value as a blanket measure that captures these kinds of complexities and puts time in a business context, rather than strictly in engineering or product-development terms. Time to value is defined as the total elapsed time between a new-product concept receiving its first formal development budget and the time it achieves breakeven with all development and launch spending. In addition to a metric on speed of innovation, the DDSN model calls for a metric on the success of that innovation. While measures like patents issued or new-product sales are widely used today, they are incomplete as gauges of innovation success. The ideal measure should reflect the business impact of blockbuster products as well as line extensions and should roll up failures with a full cost allocation. Further, the measure should help managers look at product-innovation efforts as a portfolio of initiatives. The metric that meets all of these requirements is overall return on new-product development and launch (NPDL). The cost allocation of NPDL is a critical consideration here. Specifically, launching a product, as opposed to simply "introducing" one, implies readiness for market rather than merely existing as some sort of prototype. A product launch means the company has allocated costs for sales training, marketing, promotions, and documentation and has populated the channel with launch inventory. The ideal numerator for return on NPDL is contribution margin by product. Operational and innovation excellence along the metrics discussed above can drive value in the business in the form of higher cash flow, profits, and price/earnings (P/E) multiples. (See Exhibit 2.) AMR Research has documented this value in our research as well in our observations of the industry leaders. IT Matters...A Lot In addition to the proper metrics, IT capabilities play a crucial role in the demand-driven supply network. To get a better sense of what that role entails, let's begin by revisiting the definition of a DDSN: A system of technologies and processes that senses and reacts to real-time demand across a network of customers, suppliers, and employees. The key information technology elements of this definition are "system" and "network": System. A DDSN needs system architecture that can scale without compromising flexibility. Such as system should comprise technology that incorporates applications and databases with business-process tools like workflow, analytics, and reporting. Network. Contract manufacturers, outsourced design and development activities, and third-party logistics providers are all part of the rapid transformation of the supply chain away from vertically integrated corporations toward core-competence based networks of businesses. For such a network to succeed, standards and communication must be pervasive and reliable. DDSN pioneers have discovered that building the required system across the network calls for sharing ever richer and fresher information about both demand (orders, forecasts and change requests) and supply (leadtimes, capacity, and compatibility). This is where IT comes into play as an enabler of the demand-driven processes. Some early successes with IT in enabling DDSN include: Electronic engineering change management pioneered by Agile Software among high-tech original equipment manufacturers (OEMs) and their contract-manufacturing partners. Component and supplier management solutions like those from i2 Technologies that drive down sourcing costs in aerospace, automotive, and high-tech industries. Price optimization analytical tools from DemandTec, ProfitLogic, and others that yield higher margins in retail sectors like grocery and fashion apparel. These implementations have often been very successful in terms of the project's return on investment, with a payback that is both measurable and dramatic. And as indicators of how IT is improving labor and asset productivity in the supply chain, they point to big operating-margin advantages for leading adopters. Taking a broader perspective and viewing the U.S. economy as one big supply chain, consider the key information flows that drive value creation in manufacturing sectors. At the most basic level, manufacturing industries start with some raw material, typically sourced from suppliers known as fixed-capital managers that build and maintain large fixed-capital facilities. Outputs from these producers flow to tiers of manufacturers ("tier n") that make and deliver the components that go into final products. At the consumer end of the chain are the demand creators. These OEMs conceive new products, line up a supply network to produce them, and sell through channels to the ultimate consumer. The fundamental business issues for each type of manufacturer are very different, and the information flows specific to each interaction are therefore very different, as suggested by the graphic in Exhibit 3. Back in 2000, we extrapolated anecdotal data from the field to estimate where IT was ready to contribute to margins and by how much. The estimates were broken down according to several broad buckets of applications including collaborative supply chain management, direct materials sourcing, product lifecycle management, and sell-side e-commerce. In the five years since that initial analysis, we have continued to drill down into these opportunity areas and have seen our original estimates validated with countless case studies and rigorous benchmarking. The estimates have also been validated at the macro-economic level by huge and persistent gains in productivity, which have driven higher corporate profits. Updating our margin-impact estimates to reflect the known gaps between best-in-class, median, and laggard performers, we find that the overall gains from full exploitation of these tools amount to hundreds of basis points. After correcting for double counting of benefits and excluding the still-unproven revenue effects of some key customer-facing applications, the overall margin impact on companies runs as high as 1,200 basis points. If this range of impacts is applied to 2003 U.S. sales across industries clustered into three broad sectors at the four-digit SIC code level (fixed-capital managers, tier-n manufacturers, and OEMs), the potential incremental profit creation adds up to hundreds of billions of dollars. Exhibit 4 shows the DDSN leaders' margin advantage and their macro-profit potential. The gains inherent in those numbers may be competitively reflected in lower prices or rolled back into the business as investment in new markets, brands, products, or capabilities. As a basis for building a business case, however, these numbers offer some idea of the real value of IT in enabling demand-driven supply chain initiatives. One key takeaway from this analysis is that measurable benefits depend heavily on IT's ability to improve the richness, freshness, and depth of information exchanged between businesses in an increasingly interconnected supply network. Gains in operations or innovation stem largely from enhancing specific supply-demand balancing points with IT applications, and very few of these applications are truly universal. For these reasons, real gains come from targeted projects that change processes, tools, and data. Looked at another way, gains do not come from systems that are merely dropped on users. Further, the credibility and sustainability of supply chain improvement efforts are far higher when the starting point is an unacceptable operating benchmark and the finish is a validation of an improvement trend in that same benchmark. If the goal is to quickly capture operating-margin benefits, then companies should first consider targeted projects. These projects often involve packaged software solutions that earn their payback as they proceed—as opposed to a platform or suite of application licenses.Who Should Lead? Within the organization, who should take the lead in defining the right metrics and using the IT tools in a targeted fashion? Put another way, who should be the champion of the demand-driven supply network? CEO sponsorship is essential to have, but it's not enough. To make the DDSN transition, the practitioners' knowledge of the product, supply, and demand domains of the business is essential. In fact, it is the continual interplay of these three domains that drives growth and renewal in the DDSN model. Executive ownership of demand-driven initiatives should fall to the leaders of these three domains of the demand-driven supply chain: Supply. Among our clients, the most common executive sponsor of demand-driven initiatives is the vice president of supply chain. This role is best suited to be accountable for such major business metrics as total supply chain costs and perfect order fulfillment rate. Purchasing, manufacturing, and logistics all need to be included in this domain to enhance chances of an initiative's success. Product. In our six-plus years of research into product lifecycle management (PLM), we have seen many different potential leaders for the product domain. These have included engineering, R&D, product development, marketing, and even supply chain itself. Product-domain leadership is so fundamental to developing a demand-driven supply network that management may need to create a position accountable for time to value and return on new-product development and launch. Toward that end, some forward-thinking companies have created a "chief innovation officer." Demand. The obvious starting point for the leader of this domain is the head of sales. But the marketing and service functions also are critical to managing demand. Appropriate business metrics to assign to this domain may include market share, total revenue growth, and gross margin. Reviewing this ownership lineup, the obvious question is, What about the CIO? The chief information officer has overall accountability for technical infrastructure supporting the DDSN. This means enforcing standards, identifying critical enablers, and setting the timing and sequence of their availability. It also means charting a path that leaves existing systems in place wherever possible. Ranking the Leaders The principles and practices of the demand-driven supply network have been outlined above. Now let's take a look at the leading practitioners of this emerging model. We have identified the AMR Research Supply Chain Top 25—companies that excel at both operations and innovation—and in so doing, lead the demand-driven evolution of their industries. (The sidebar on page 35 lists these companies along with our comments on their accomplishments.) These companies exemplify how setting and managing to goals like perfect order rate, total supply chain costs, time to value, and return on new-product development and launch makes all the difference for competitiveness and growth. These leaders also disprove the notion that information technology doesn't matter. They have redefined supply chain strategy in their businesses by utilizing the tools and new business models made possible by IT. The companies were selected based on a set of criteria that included known operational activities, publicly reported business results, and direct field research and observations by AMR Research analysts. (For more detail on the evaluation criteria and the survey, access the full report titled "The AMR Research Supply Chain Top 25 and the New Trillion-Dollar Opportunity" at www.amrresearch.com.) With this report, we hoped to shed light on which companies are set to gain ground and what is expected in the future from these leaders. Essentially, the companies in our Top-25 ranking are ones that are rising to the opportunity. They understand that cost control alone offers limited competitive value in a world where new markets and opportunities spring up faster than traditional silo-ed organizations can handle them. These leaders have started to tackle both operational and innovation excellence within a single, unified supply chain strategy. Innovative approaches like Procter & Gamble's consumer-driven supply network, to cite one example, are changing behaviors across the network—extending well beyond traditional, supply chain functions in logistics, sourcing, and manufacturing. Although these companies will concede that much remains to be done, all are on the path toward building new operating models that are designed to drive day-to-day decisions out of a fundamental understanding of demand. The principle they are following represents a dramatic reversal of industrial logic from the traditional 20th-century push model. Lessons from the Leaders What's the message behind the DDSN gospel we preach and its validation by the top supply chain practitioners? Certainly, a key one is that supply chain leadership today means more than just efficiency. Growth and the ability to create profits depend on a level of agility that is available only to those who operate with demand-driven supply networks. Getting on track starts with measuring operational and innovation performance and reporting that performance to the market. Making lasting impacts on margins requires the targeted use of IT tools to build and maintain a system that connects and supports the supply network. Such a system can only be effectively built through a campaign of projects headed by business leaders representing supply, demand, and product domains. Following leaders in this case is a wise course of action—provided you understand what these leaders are doing. The AMR Research Supply Chain Top 25 all have successfully embraced change in the form of the demand-driven model. Going forward, these are the companies worth emulating. The AMR Research Top 25 Supply Chains Company Comment 1. Dell The defining DDSN business. Growing 17% in the PC business on a $40-billion revenue base is phenomenal. 2. Nokia Historically a great innovator; supply chain best practices turn ideas into profitable business. 3. Procter & Gamble P&G's consumer-driven supply chain is the defining architecture for large consumer companies. Best practices in product innovation and supply chain effectiveness are tops. 4. IBM IBM is growing the equivalent of a $10B business every year and has overhauled its hardware supply chain and product- development processes to the tune of 70% better, faster, and cheaper. 5. Wal-Mart Everyday low prices defines the customer demand driving this and, increasingly, everyone's supply chain. 6. Toyota Lean is one of the top three best practices associated with benchmarked supply chain excellence. Toyota literally wrote the book. 7. Johnson & Johnson J&J shows consumer and life-sciences leadership delivered with embedded innovation into multiple channels. 8. Johnson Controls Little known but much admired, Johnson Controls has pioneered such principles as product platform strategies in the hyper- complex engineering challenge of the auto industry—all the while making money and growing. 9. Tesco The UK-based grocer was the first to really succeed with direct-to-consumer sales while maintaining killer inventory turns and growth. 10. PepsiCo Pepsi's consumer-centric business "senses and responds" to the pulse of demand with product innovation and lean supply chains. 11. Nissan Lean and stylish, Nissan combines much of Toyota's execution with its own, highly successful design. 12. Woolworths The supply chain operations of this Australian retailer are regarded as pioneering in the use of 21st century supply chain principles. 13. Hewlett-Packard The IT megaprovider combines some units in transition (Server Division) with others that are world class (Printer Division) and has merged the CIO and Global Supply Chain function in a single individual. 14. 3M Diversified is putting it mildly for this industrial- and consumer-products leader. Its extraordinary combination of the practical and the cutting edge has units like Industrial Services operating in a DDSN mode. 15. Glaxo-Smith-Kline Maybe the strongest big pharmaceutical player to emerge from the industry's current troubles, GSK innovates not only on discovery but also on industrialization and commercialization of new drugs. 16. POSCO The Korean steel giant has begun to garner attention for its extraordinary success in managing a hugely capital- intensive business. 17. Coca-Cola Like archrival Pepsi, Coke knows how to quickly cycle consumer needs, tastes, and trends back to the market with winning products; witness the Dasani bottled water success story. 18. Best Buy The ultimate short-lifecycle retailer, Best Buy sells cutting-edge electronics to the gadget enthusiast. By realizing the DDSN principle, the retailer has radically leaned inventories and delivered enviable in-stock positions. 19. Intel By working across the electronics value chain, Intel has managed what few could—to be massively asset intensive and yet nimble in the market. 20. Anheuser-Busch Born-on dating is no marketing ploy. It is a supply chain challenge that other brewers can't easily meet. No one has taken real-time demand responsiveness further than AB. 21. The Home Depot A pioneering category killer, The Home Depot is on the cutting edge in logistics and innovative services. 22. Lowe's Lowe's faster growth challenges nemesis The Home Depot via a consumer-friendly shopping experience. 23. L'Oreal By telling consumers they're "worth it," L'Oreal has shaped demand and delivered. 24. Canon The world's largest maker of copiers has engineered a new supply chain and rapid growth. 25. Marks & Spencer A pioneer in the use of RFID in stores, M&S manages to grow and stay lean. Author Information Kevin O'Marah is vice president of research at AMR Research Inc.

The Secrets to S&OP Success

By Maha Muzumdar and John Fontanella -- 4/1/2006

Ask any supply chain professional this question: Is sales and operations planning (S&OP) important to your company? The chances are good that no matter what type of company they work for the reply will almost always be “Yes!” But if this attitude is so commonly held, why are so few companies willing to step forward and say they are actually doing something to institutionalize a strong S&OP process in their business? It is no secret that most companies struggle with even the basics of balancing supply and demand in their supply chains. Retailers have excess inventories for some products while facing high product shortages for others. Consumer products companies are challenged with building ahead of the seasonal curve, which is based at best on questionable histories and more often on uninformed hunches. High tech and industrial companies work hard to put master plans in place only to have them unravel in the face of customer and supplier churn and uncertainty. And distributors must balance not wanting to have an oversupply in their distribution centers against the hefty discounts that usually result from carrying too much inventory of their product in the stores. Even worse, stories abound of companies that were not prepared for the demand created by highly discounted promotions, resulting in product shortages and a record number of unsatisfied customers. Could all of these symptoms have a common root cause? Could significant progress be made in reducing these undesirable effects in so many companies? Certainly all supply chain professionals and executives want to reduce uncertainty and continuously improve how they manage risk. If there are so many opportunities for improvement and so much support for S&OP, what are the obstacles and what are the steps to overcome them? In this article, we address these key questions. The Potential of S&OP Regardless of size and industry, most companies in recent times have faced significant business challenges including shrinking profit margins, reduced customer loyalty, growing global competition, and increased supply chain velocity. At the same time, business growth is either below plan or below potential. These market factors have created new obstacles for supply chain executives and managers and have altered the global competitive environment into one of high uncertainty and risk. What has become clear is the importance of integration across operational silos as well as trading partners. Sales and operations planning is one of the key strategies and approaches that successful companies are taking to respond to an increasingly complex business climate. The need for S&OP is being fueled by customer demand for faster response to market shifts and for more made-to-order products and services. For companies looking to create a sound strategy to mitigate and manage risks while increasing profitability—S&OP is the answer. First a definition: S&OP is the set of business processes and technologies that enable an enterprise to respond effectively to demand and supply variability with insight into the optimal market deployment and most profitable supply chain mix. S&OP strategies help companies make “right-timed” planning decisions for the best combination of products, customers, and markets to serve. The typical planning period ranges from four weeks to as long as two years. When applied correctly, S&OP has the power to enable an enterprise to achieve an immediate and significant increase in return on investment. It can have a direct impact on profitability, performance, customer satisfaction, and the product portfolio. Many company executives, however, are unsure what the key elements of an S&OP program really are. Common questions include: Isn’t S&OP only for large enterprises? And, why would my company need to implement S&OP now? To help answer questions like these, Oracle sponsored The Sales and Operations Planning Benchmark Report, a study of more than 200 companies conducted by the Aberdeen Group. The goal of the S&OP study was to survey a wide variety of large and mid-size companies to identify successful strategies for sales and operations planning. One of the key findings was that most enterprises have some sort of S&OP process to align demand and supply. In fact, more than 70 percent of respondents to Aberdeen’s survey indicated that they are actively engaged in enhancing their existing S&OP capabilities. As shown in Exhibit 1, a significant number of participants revealed that they expect an enhanced S&OP program to significantly improve operational performance across the value chain, from sales to procurement. These respondents are motivated to improve their S&OP process by a combination of decreased business growth, diminishing profit margins, and competitive pressures. The benchmark study also revealed that leading S&OP practices are evolving away from merely balancing supply and demand. They now involve a more powerful and holistic process that allows companies to improve revenues, reduce inventory, increase profits, create a more dynamic product portfolio, and maintain longer-term customers. The study results also demonstrated that as S&OP strategies have evolved, the market drivers have changed. This article details the results of the study and highlights the best practices being used by leading companies to meet customer demand while maximizing financial gain and synchronizing all operational plans. This article will also help readers determine if they need to update their current S&OP and rethink outdated processes. Current Realities in Today’s Market In the past few years, we’ve seen a sharp increase in the number of trends that are putting growing pressure on traditional S&OP practices. For example, brand loyalty has been declining, demand for customized and configured solutions has increased, and market uncertainty and global competition has eroded margins. Acquisitions, joint ventures, and outsourcing are changing organizational structures and are requiring rapid changes in plan objectives and targets. Companies are forced to concentrate efforts and resources on the best products, customers, markets, and channels while being constantly on guard in this unpredictable environment. Companies have also come to realize that the risks and costs associated with poor decision making have increased—particularly in the area of aligning supply and demand and linking that to profitability. When companies target the wrong customers, products and services, or channels and geographies, they court disaster! Today’s market is less forgiving and much riskier. Excess inventory is frequently discounted. Unsatisfied customer demand now runs the real risk of lost sales and revenue. Further, current market dynamics have rendered traditional S&OP processes and technologies obsolete. In the past, S&OP was characterized by demand-supply balancing in aggregate units such as tons, cases, cubic feet, and so forth. A key difference for today and for the future is that S&OP is no longer just about balancing supply and demand. It is about searching for and executing the most profitable strategy out of many possible scenarios. It is about relying on and enhancing those critical factors that give the business a sustainable competitive advantage. Beyond the need for analyzing scenarios is the need to respond in real time. In the past, companies were faced with a big dilemma: Daily events, such as better-than-expected success with a big promotion, required a quick response, but the current planning-cycle capabilities were not up to the challenge. Planners could not replan quickly enough and in a consistent, measurable way to take advantage of opportunities as they arose. This failure has led senior management and staff to lack confidence in their companies’ current S&OP “balancing act.” This is important because executive sponsorship is one of the necessary conditions to S&OP success. Lack of executive-level influence hinders a company’s ability to improve its planning capabilities. This is because, in real time, urgent priorities arise. When management lacks confidence in the S&OP process, reaction and expediting become the norm. Other internal difficulties that present obstacles to the implementation of better S&OP programs and methods include budget constraints and the lack of credible benchmarks. Key S&OP Business Findings The results of the Aberdeen research demonstrate that improving S&OP practices drives gains in key performance areas across the value chain—in sales and marketing, distribution, manufacturing, and procurement. There is an explicit and clear relationship between the quality of an S&OP program and actual business performance (Exhibit 2). Enterprises that leverage S&OP best practices significantly outperform companies that are S&OP laggards. These findings hold true across companies of all sizes and industries. Most enterprises today have at least some S&OP process in place to align demand and supply. However, there is a growing gap in performance between those that are focusing on a holistic S&OP strategy and those that operate S&OP tactically. Tactical S&OP, for instance, merely brings all stakeholders together once per month to agree on how the business plan will be implemented by operations. Holistic S&OP, on the other hand, introduces tools such as scenario-based modeling into the process so that rapid assessment of daily opportunities can be made. Holistic S&OP means the company’s local decisions can be measured against the success of business-unit and corporate goals. S&OP can benefit all companies regardless of their size or S&OP maturity. For companies at all stages, S&OP programs have generated significant positive improvements in complete order fill rate, gross margins, and customer retention, as shown in Exhibit 3. The analysis further indicates that S&OP programs have a critical impact on profitability, help reduce inventory, and are crucial to enabling an effective and diversified product portfolio. An effective S&OP program can substantially improve a company’s ability to plan and take orders for customized products and services—at the same time allowing the organization to focus on the most profitable and strategic customers and products. The Effect of Globalization One trend having a profound impact on the development of more advanced S&OP practices is globalization. In the 1980s through the ‘90s, much attention was given to the Japanese supply chain success stories. At that time, many of these companies maintained a local supplier base, which led to short lead times and enhanced flexibility to demand changes. Even some U.S. companies, such as Dell, became famous for their demand-driven supply chains where suppliers were local, often just across the street. With the advent of global supply chains—where links of the chain are moved to where capital is best deployed and resources are best found—the situation has changed dramatically. Now, even the Japanese and Korean companies are engaged in offshoring. The globalization of the supply chain brings rewards but also new challenges and risks. In turn, it further shapes the need for and approach to sales and operations planning. Some of the challenges of globalization that can affect S&OP include: Longer supply chain lead times. Increased reliance on security and risk management programs. Less control over data quality. The extended supply chain means that in many cases logistics lead times are longer than production lead times. In the past, the focus of S&OP might have been on in-house or localized production capabilities and capacities. More and more, however, the focus has begun shifting to the capabilities and capacities of distant logistics and supply chain partners. Increasingly, strategic planning depends on outsourced and third-party providers. As a result, management begins to see their influence decrease, which introduces a heightened need for risk management, scenario modeling, and execution strategies. All of these factors enable companies to cope with an environment of increased variance not only in demand forecasting but also in capability management. As lead times become longer and more global partners must be considered in the S&OP process, the quality and predictability of data is also at risk. Therefore, the S&OP process must be flexible, focusing improvement efforts on gathering critical constraint information rather than detailed data from every node in the supply chain. As a result, the demand management component of S&OP shifts away from “one-number” forecasts for each and every SKU. Instead it focuses more on analysis of pessimistic and optimistic scenarios, with the executive team giving guidance on what products to push Best Candidates for S&OP Companies that are prime candidates for a significant S&OP upgrade will share similar characteristics and face many of the same challenges. For example, one of the strongest indicators that your S&OP is outdated is failure to achieve key business metrics for targeted markets, channels, or product families. Also, if your organization lacks the agility to respond to new business opportunities or threats in real time (between planning cycles), you need to rethink your S&OP. In general, the following are some early warning signs of an ineffective S&OP process that is in need of major change, replacement, or technology support. If you are trending negative on three or more of these for one or two periods, you should consider taking major action soon. Forecasts are missed for some critical product families. Earnings projections are missed. Inventories are increasing. Backlogs are increasing. Expedite charges are increasing. Agreed-upon alignment of supply and demand is not being sustained across the entire organization. Inventories are not aligned with planned deployments. The planning process takes too long. Another sign that you are in need of S&OP emergency care: Operational plans are not tied to business plans. Many companies can say they have alignment only once per month, or worse. This is unacceptable and is definitely not best practice. Implementing a Successful S&OP Strategy The more successful enterprises focus their S&OP on profitability and continuous improvement. Their S&OP initiatives empower decision making at all levels and are supported closely by an integrated business information architecture. A successful sales and operations planning program will include the following five components: people, process, technology, strategy, and performance. 1. People First and foremost, it is essential to obtain executive-level sponsorship. S&OP strategies fail without top-down support for the plan. Next, it’s important to create cross-functional teams that consist of sales, operations, finance, product development, and R&D. This step will eliminate the organizational silos and promote shared communication and collaboration across the enterprise. You’ll also gain better visibility into the pain points and success factors within every department. Some additional S&OP conditions that will affect the people in the organization include: Only operational metrics approved by the S&OP team should be used, and all parties must be trained on the actions to take as business intelligence is delivered Management must establish guidelines for real-time response; for instance, what types of business events will trigger what possible response scenarios? All departments and business units must follow the formal S&OP system. Finally, don’t forget to collaborate with your business network. It’s critical that the S&OP process leverage the capabilities and influence of customers and suppliers to expand the scope of potential improvements. This is particularly important when a company needs to exert its influence several “links” deep in their supply chain. 2. Process Effective S&OP involves more than just holding formal monthly and quarterly meetings—although those meetings are extremely important. It is also about having real-time supply and demand visibility and making sure that business intelligence is continuously monitored at a strategic level, made relevant at the operational/actionable levels, and kept in alignment with the business goals. Take, for example, a new product introduction that is driving loads to exceed capacity for a critical, constrained resource, such as a plant or key raw material. Based on that information, the company must put into effect preplanned actions to cut back on other production (and possibly other sales) to optimize net profits and product-introduction goals. To ensure this alignment, the formal meetings should begin with the CEO (or general manager) setting the tone for the meeting by bringing up any special, driving themes or situations that require priority attention. This way, all other aspects of the business can be subordinated to satisfying the stated needs. All key functional areas of the business must be represented in the S&OP process, and a logical progression through the business must be made, including: Reviewing consolidated demand for all product families. Achieving consensus on the demand-side of the business. Testing the effect of plans on key constraints. Making adjustments to ensure optimal profit and achievement of strategic goals. Gauging the effects of new product introductions. Reviewing other special projects. Documenting all decisions and actions to date since the last meeting. Discussing possible process improvement. It is very important to ensure alignment of performance metrics. Managing plants only on efficiency and keeping score at the corporate level based only on profitability is certain to doom S&OP improvement to failure! Once you’ve got your metrics aligned, deploy contingency plans based on multiple “what if” scenarios to determine the risks and opportunities. This helps to provide clarity on how to respond when the actual demand and/or supply is different from the plan. Further, this approach empowers people to anticipate any potential action or outcome. It also helps to pre-empt the competition and focus on the areas where the greatest risk currently lies in achieving business objectives. When creating “what ifs,” be sure to establish benchmarks that enable you to study outcomes and modify future plans accordingly. Finally, create a documented plan. The plan should drive execution and continuously challenge base assumptions, processes, and technologies including benchmarking against other best-in-class enterprises. 3. Technology Technology upgrades and advancement are also necessary parts of success. Incredibly, many otherwise excellent companies are hamstrung when it comes to technology. For example, we see many companies relying on spreadsheets for S&OP. The result: siloed, inaccurate data; nonrepeatable outputs and outcomes from period to period; and an inability to scale up or down as the business changes. Further, we see results that don’t provide a comprehensive view across all areas including procurement, manufacturing, sales, operations, marketing, and finance. We’ve also noticed that a growing number of companies are finding that their current business processes and supporting systems for enterprise resource planning, supply chain management, planning, and budgeting don’t deliver what they need to keep ahead of the competition and customer demand. It’s important to utilize technology enablers by developing and implementing a strategy that leverages transaction, decision-support, and business-intelligence capabilities in a real-time environment. 4. Strategy Through the course of the Aberdeen research, three strategic elements continually outshone the others as delivering the most business benefits and the best capabilities for mitigating risks. The first element is the formal alignment of supply and inventories to demand. This effort is supported by a planning process that spans the entire enterprise and crosses all functions. Start by focusing on the greatest risk to achieving your business objectives. In nearly 90 percent of the cases, this involves demand management. Improving demand management has an incredible way of resolving supply problems such as low customer fill rates and excessive inventories. Noted author Richard C. Ling has pointed out that the areas for greatest potential change center on demand and new product introduction. Yet historically, companies have focused most of their planning systems initiatives on the supply and financial side. The second strategic element is a focus on profit. We know that S&OP has moved beyond the practice of merely balancing supply and demand volume. Today, it’s important to measure all planning scenarios based on their profitability impact. Cherished assumptions regarding which products are most profitable must constantly be challenged and changed if necessary. The third essential element involves paying attention to the value chain. Working collaboratively with customers and suppliers is one of the main ingredients of a successful S&OP program. Listen to your customers and include your business network partners in the design of the process and success metrics. By leveraging the capabilities and influence of customers and suppliers, you’ll be able to expand the scope of potential improvements. It is impossible to try to compete in all customer, product, channel, and market segments. The key is to dominate the most profitable markets with the most profitable products. This requires the ability to define different segments, forecast revenue and profit potential, prioritize segments by desirability, and dominate the most attractive markets for you. Finally, when it comes to strategy, you must emphasize continuous improvement. Keep the roadmap dynamic—you cannot effectively deploy plans too far ahead because you can’t predict the risks and market changes. It’s necessary to continually reassess the S&OP process and progress against actual results. It’s more important to develop guidelines to follow for making decisions during the period (such as what to do when product mix changes dramatically) rather than to rely strictly on the forecast for each product (which is probably wrong). 5. Performance You cannot improve what you cannot measure. Even companies with very informal S&OP practices must measure performance. Historically, metrics have been specific to a single function (such as sales forecasting accuracy) and involve volumetric types of measurement (such as actual vs. planned sales volumes). The drive for competitive advantage, however, has spurred a rethinking of what metrics should be used to determine the success of the S&OP program. The emerging best metrics, such as gross margin, encompass the two-way impact of demand and supply decisions, rather than having separate and unrelated metrics for each. Business intelligence systems today can give decision makers an accurate, up-to-the-minute picture based on pre-defined key performance indicators (KPIs). These KPIs are related to value chain processes, product and customer profitability, order fill rates, customer satisfaction or retention, sales per employee, percent volume growth, and gross margins. The metrics can all be delivered through highly flexible role-based portals and executive S&OP dashboards. For a S&OP program to succeed over the long term, companies must consider how performance measurement itself must change. This means putting new metrics into place as business conditions change as well as increasing the frequency of reporting and analysis. Going forward, the S&OP system will feel growing pressure to manage consensus across key stakeholders. Exception-based workflows are not enough when external partners are key to the success of the program. Instead, the system must support proactive decision rules (such as permissible buffer levels) to enable the performance levels needed to achieve strategic goals. S&OP Best Practices The Aberdeen study discovered that companies utilizing S&OP best practices share a common set of approaches, namely: (1) reliance on a phased approach; (2) development of an “outside-in” sequence of S&OP initiatives; and (3) a focus on critical information, not just more data. Rely on a Phased Approach S&OP is much more an integrated set of business processes and technologies than a single, all-encompassing process or technology. If you just focus on the implementation of a new technology and think that S&OP will miraculously take shape, you’re wrong. Begin the S&OP plan by creating specific phases with defined business objectives and identify the metrics to be improved. These phases should be designed to generate measurable business benefits in three to four months. With a longer time horizon, you may be late in detecting fatal flaws in the initiative, thereby losing critical time and value before the issues could be identified and, hopefully, resolved. Develop an “Outside-In” Sequence of S&OP Initiatives Typically, the events that will have the most profound and negative impact on your sales and operations planning are those outside of your control. For the most part, these are due to the decisions and actions of your customers, partners, and competitors, which have a direct impact on your revenue and your competitor’s strategy. Again, your biggest return will likely come from improving how you manage and respond to the demand component. This is true because no amount of added flexibility and adaptiveness invested in the supply chain can compensate for an ineffective demand management process. Focus on More Information, Less Data Another key to successful S&OP is clean, current, and accurate data. The Aberdeen research indicates that often times, less than 10-15 percent of all available data has a critical impact on the business objective. Plans are often slowed down by the effort of gathering data that has minimal importance to the overall project. It is important to ensure that you know exactly what business problem you are trying to resolve and understand the minimum data necessary for the project. The 80-20 rule is very much alive when it comes to S&OP! No Standing Still Clearly, there is a strong link between sales and operations planning and dramatic improvements in a company’s growth, profitability, and customer satisfaction. The market is placing increased pressure on companies to align sales with operations. S&OP has never been more strategic, difficult, or crucial than it is today during a time of lean manufacturing, shortened production schedules, demand for customized offerings, global sourcing, and increased market competitiveness. We cannot just stand still with supply and demand matching. We must push harder to use the S&OP process as a “capability improvement” tool. The Aberdeen study demonstrated that all companies can benefit from enhancing their S&OP capabilities, regardless of size and S&OP maturity. All winning approaches are based on a tight integration of business processes—across the entire organization and value chain. With integration in place, companies can move down the path of proactive rather than reactive sales and operations planning. An S&OP Success Story In the mid 1990s, one of the largest telecommunications and data services providers in the United States realized that its business would benefit significantly from improved collaboration between suppliers and internal operations. The company was challenged with balancing supply and demand because of the extremely short life cycle of its cell phone products. Additionally, order lead times for handset accessories were as long as 16-18 weeks, making it difficult to achieve forecast accuracy and supply chain responsiveness. The repercussions of this environment were significant. Limited product availability meant that the company lost customers to competitors with little hope of recapturing them in the future. Excess inventory produced lower margins as incentives were used to sell product or disposal costs were accrued for obsolete product. The company recognized that the challenging nature of phone supply, short product life cycles, and the competitive market pressures made it critical to collaborate better with suppliers and internal stakeholders to improve forecast accuracy while maintaining supplier fill rates. A Business Transformation What the company needed was a way to understand its demand drivers and supply risk so that it could make sourcing decisions that ensured product availability while minimizing inventory. Good decision making was especially critical at the end of the product’s life cycle. Inventory varied significantly because constant changes in pricing and promotions made demand unpredictable. However, rather than allow the market to dictate demand, the company decided it would adjust its promotion strategies to increase consumer interest in products at the end of life that were slow to sell or that were in short supply. The company implemented a multi-step process to initiate and drive S&OP across the organization. A formal, monthly S&OP meeting was conducted with the stakeholders to review demand patterns and supply risks and to establish the supply plan for the next quarter. Participants of these regular meetings included executive staff and key stakeholders from operations, marketing, and finance. The S&OP team meetings were organized around a “stoplight” system (green=okay, yellow=warning, red=problem), where all products were reviewed to identify the opportunities, risks, and areas that need the most attention. Once the supply chain plan had been developed during the S&OP process, the marketing organization committed to making sure that pricing and promotion programs consistently supported the supply plan. Between monthly S&OP meetings, a portion of the S&OP team began to hold weekly meetings to analyze the current sales pace. The goal of these meetings was to determine what was working and what was not and to project performance eight weeks into the future. A second meeting involved suppliers in order to complete weekly collaborative planning, forecasting, and replenishment. A critical success factor for this company’s S&OP process was uniting the key stakeholders. For this reason, suppliers were engaged in the formal process. This resulted in improvements in the supply base in the areas of cost, product availability, and capability. Technology Enablers As part of the S&OP process, the telecommunications leader created unconstrained demand plans using a demand planning software. This functionality enabled marketing to manage changes to the current product forecast, the introduction of new products, and the retirement of selected current products. Then a constrained plan was created and utilized, acknowledging supplier shortages and taking into account the need to drive unfulfilled demand to other suppliers. The company used price and promotion changes to manipulate demand. Finally an advanced supply chain planning solution was leveraged to create planned orders, drop requisitions, and plan the final packaging. Relying on the demand planning software, the telecommunications company was able to sustain S&OP best practices in a high-volume, data-intensive environment. The solution served as an S&OP “demand hub” data repository, which alleviated the burden of data collection. All relevant sources of critical information were consolidated, enabling data transfer and validation. As a result of implementing S&OP, the telecommunications company realized substantial benefits. First, the company demonstrated the ability to triple the number of products offered. Through the course of an eight-year period, forecast accuracy was improved by 36 percent and inventory-related working capital was reduced by 25 percent. Finally, store service levels increased to 98 percent or better. Authors’ note: This case study is based on material appearing in the Aberdeen Group’s Sales & Operations Planning Benchmark, 2004.

S&OP Psych 101

Each functional area needs to contribute its own expertise to make the sales and operations planning process a success

By Larry Lapide -- 4/1/2007

The noblest goal (and real purpose in life) of any supply chain organization is to optimally match supply and demand over time. I define this as optimized demand management (DM). “Optimized” is the key adjective in the definition. As I like to remind people, in the long run, supply and demand will always match—though not necessarily in the best manner. For example, a lack of short-term supply will lead to customers just going away, thus reducing demand to match supply. Similarly, a surplus of inventories will eventually be disposed of (often at distressed prices) to reduce supply to match demand. Larry Lapide Achieving optimized supply-demand decision making requires the successful implementation of “bridging” processes among customer-facing managers from sales, marketing, and customer services, and supply-facing managers from manufacturing, operations, logistics, supply chain, and procurement. This is not an easy task. My career experiences on both sides of supply and demand have taught me how difficult it is to align the goals and views of demand- and supply-facing managers so that they can really collaborate. This challenge is evident in the crucial and most prevalent DM process, sales and operations planning (S&OP). The S&OP process is always a “work-in-process” since the personalities of the participants frequently get in the way of developing consensus-based plans. When this happens, the S&OP “bridge” runs the risk of getting blown up. Color Coding I had no good ideas on how to avoid such a blowup from happening until I met Dr. Shalom Saada Saar, who teaches leadership to our graduate students in MIT's Master's of Engineering in Logistics (MLOG) Program. Dr. Saar ran a session titled “Critical Success Factors for Bridge Building in Demand Management” at a Demand Management Symposium held at MIT last fall. He described corporate research from the 1970s that had identified 220 different mindsets among managers and explained how these had been distilled down to the following three color-coded types of people: Blue Mindset: These people are very focused on doing what is right. They tend to be decisive because they inherently know what is the right thing to do, based largely on their historical perspective. Of course, they also tend to be judgmental and have little patience for people who don't get it as readily as they do. Red Mindset: Red-minded people aim for doing what is true. They are the analytical types who rely on facts and figures. They don't want to make decisions until they can get the most recent and complete set of data available. Green Mindset: These people believe in doing what is new. They are futuristic thinkers and can imagine all of the possibilities and opportunities down the road. Green-minded people are creative types (though often loosely connected to reality) who think that members of the other mindsets are too rigid in their thinking. While most managers have mindsets that are multi-colored, they usually have a dominant orientation that draws them to a functional discipline. Basically, that's what makes them good at what they do. However, when you have a cross-functional process such as S&OP, things can get muddy as the colors collide. Varied thinking and perceptions can make for a dysfunctional team if people don't recognize, value, and leverage the strengths of each member. A Meeting of the Mindsets In order for an S&OP process to be successful, it must leverage all three mindsets. If it is driven only by “blue” managers, the resulting plans will be totally rooted in the past. In fact, chaos could result if team members differ on the right things to do. Similarly, domination of the “red” mindset will lead to plans based only on today's realities. It could further result in indecisiveness if all the facts and figures are not readily available. Lastly, if the “green” mindset wins the day, the plans will be linked mainly to possibilities and dreams—with little relation to reality. Recognizing that all functions have something to contribute, I recommend the following S&OP roles based on the mindsets typically found in each functional area: Operations and Logistics: Managers in these functions tend to be red as they are analytic and focused on getting the data. Their responsibility and role is to develop supply plans that are predicated on demand plans and forecasts developed by others. Once they have these forecasts, these managers are very comfortable systematically planning out manufacturing, inventory, logistics, and procurement plans. Supply Chain: Managers in this function tend to be a combination of red and blue; they are analytical but also recognize that the right thing to do is to coordinate all planning activities for the good of the company. These managers are good at moderating a disciplined and collaborative S&OP process. Marketing: Marketing managers tend to be a combination of red and green. They are analytic when using information gleaned from marketing and sales research to develop plans designed to shape and create demand. They rely on their green side when developing creative and competitive programs. Sales: Managers in this area tend to be green as they are optimistic about sales prospects. They are best at developing sales plans that deal with sales possibilities and for positing future market conditions. (A mistake often made is expecting them to be analytic and to quantify these possibilities.) Finance: With their highly analytic training and background, finance managers tend to be red. Their role in the S&OP process is to monetize the demand and supply plans so that everyone can see the future financial picture, especially in the context of Wall Street expectations and the budgets. If team members are given the roles I've recommended above, the S&OP process stands a good chance of working well. Having each S&OP team member aware of the roles played by others, in the context of their own roles, will leverage everyone's strengths to the max. And this will keep you from having a dysfunctional S&OP team that, in turn, will lead to dysfunctional, inaccurate supply-demand plans. These are certainly not the types of plans you want to rely on for competing in the market today. Author's note: The article “Bridge the Gaps That Fracture Sales and Operations Planning,” by Ken Cottrill in the MIT Supply Chain Strategy Newsletter, December 2006, was used as a reference for this column. Author Information Larry Lapide is Research Director at the MIT Center for Transportation & Logistics. little patience for people who don't get it as readily as they do.

Warehouse and distribution center: Clocking performance

By John Kerr, Contributing Editor -- 4/1/2007

Steve Belardi, Vice President, Logistics Steve Belardi knew things were going well when he recently observed what his warehouse workers were doing on their breaks. They weren’t opening the newspaper or sitting down for coffee. Instead, they were crowding around the bulletin board to check their individual job performance data—and to see how their performance efficiency stacked up against their co-workers’. Some months earlier, Belardi, the vice president of logistics at sporting goods retailer Sport Chalet, Inc., let the warehouse associates know that he intended to begin time-and-motion studies in an effort to boost productivity and contain costs as Sport Chalet grew. The consultants soon showed up in the company’s Ontario, Calif., distribution center (DC), stopwatches in hand. Belardi knew the challenge ahead: He had to communicate the changes without alienating his workforce—some of whom had been with the California retailer for as long as 20 years. But instead of provoking a backlash, the introduction of time-and-motion studies sparked better communication about goals, fairer comparisons between jobs, more self-direction by warehouse associates; and in turn, productivity has soared. Today, Belardi and his team are in the process of rolling out an incentive program that’s tied to a fair, fact-based labor management system (LMS) that has not only helped the company trim costs and reassure its growth plans, but has created a workforce that’s eager to play a role in constant throughput improvement. Here’s how he got there. Fast out of the blocks Sport Chalet’s employees are certainly no strangers to change. Over four decades, the $350 million-a-year specialty retailer has grown to 45 stores in California, Nevada, Arizona, and will open its first store in Utah this fall. In 2001, the company concentrated its distribution efforts in a new 325,000-square-foot DC in Ontario with a major emphasis on “put-to-store” processes; the idea of having merchandise ready for sale as soon as it leaves the DC. In 2002, Belardi and Ted Jackson, the company’s CIO, launched a major overhaul of the warehouse management system (WMS) to improve the “put-to-store” process by moving to a flow distribution system that would enable the staff to move merchandise through the DC faster, more accurately, and more “floor-ready.” “Being first to market is very important to us,” explains Jackson. “We want our customers to be able to get the products from our stores before they’re available from our competitors.” Today, the company’s WMS solution (HighJump Software) identifies what’s coming in and where it should go as soon as it arrives. For example, an incoming shipment of a new basketball shoe from Nike can ship out to stores the same day. “Now when merchandise arrives at the stores, it’s ready for purchase,” says Belardi. “We touch the product one time—when it comes in, we label it for the store, and it goes. We save a lot of labor in put-away and picking.” The system, which went live in May 2003, leverages batch store picking techniques: Staff no longer run all over the warehouse fulfilling one store’s orders at a time—they pick in zones for several stores. Overall, the system has boosted the number of line items picked per hour by 90 percent and lifted DC efficiency by 35 percent. However, those gains were still not enough. Sport Chalet needed new solutions if it wasn’t to grow itself into a corner. Early in 2005, the retailer had 40 stores and a little more than 140 staff over two shifts at the DC; plans called for 52 stores by the end of 2007. Management saw that the DC was approaching its throughput capacity, but new facilities were out of the question because the DC’s lease still had five years to go. New material handling equipment wasn’t a viable option either, given its long payback periods. It was time to revamp the playbook. Setting the course Growth projections showed that the warehouse would need to add at least 50 workers by 2008 to meet the needs of the new stores. But it wasn’t practical to add so many employees—and management knew it. Heavier payroll wasn’t the only deterrent to adding more direct labor; availability was also a problem. Although turnover was low among Sport Chalet’s 100 or so full-time warehouse associates, it was very different with the temporary workers on whom the company depended several times each year. “It’s a tough labor market out here,” says Belardi. “There are a lot of DCs and we’re all competing for the same labor. A temp will move for 15 cents an hour.” Sport Chalet had no intention of getting into wage escalation wars. Its next best option: a labor management system (LMS) that would take productivity to the next level. Fresh from their successful WMS implementation, Belardi and Jackson turned to their vendor for answers. They could have searched for an off-the-shelf labor management system (LMS) solution, but HighJump was developing its own LMS—a solution that would require no customized interfaces with its existing WMS. By 2005, the decision had been made to go forward with an LMS system: HighJump was selected as the vendor and enVista Corp., a provider of logistics and transportation cost management services, was brought on to implement the solution that was still in development at the time. The objectives were clear: Sport Chalet wanted to be able to plan, measure, view, and simulate labor activities within the DC in order to improve processes, work measurement, workload planning, productivity reporting and incentives; and to provide an accurate and fair assessment of the performance of its nonexempt direct labor associates. To set expectations for what the incentives could do, the enVista consultants mapped out the productivity levels into four categories: 1) without measurements, 2) with measurements but without feedback, 3) with feedback added, and 4) with financial incentives on top of measurements and feedback. The message was simple: an acceptable engineering labor standard (ELS) would not be possible without measurement or feedback, but it could be exceeded easily given the right incentives. It would be important to convey to employees that the incentives would be transparent and easy to achieve. As such, the specifications for the LMS involved a wide range of factors, among them: clear standards for travel distances; coordinates and stopping points in three dimensions; equipment speed, acceleration and deceleration; and measurement of fatigue and delay by activity, configurable by hour and by shift. The LMS would use “key volume indicators” to help make apples-to-apples comparisons between different types of merchandise. Cycling shirts, for example, are far easier to handle than skis or surfboards. The LMS would also measure labor performance by the associates’ utilization rates (the ratio of total time in the building divided by total time on task) and by their efficiency (total “standard allowable” minutes divided by actual task time.) Importantly, it would provide regular feedback to allow employees to know where they stand and how they can improve. There would be corrective instruction matched to preferred methods—as well as clearly identified disciplinary action for repeated failure to comply with basic performance requirements. On your mark... Now it was time to introduce the concept to the employees—all of them nonunion. Belardi laid out the plans for the workers from each shift at one of the DC’s regular monthly building-wide meetings. He needed to make sure the message sank in. He let the team know there would be consultants with stopwatches timing what they do and noting how they do it. He explained that Sport Chalet would use the information to develop preferred methods and standards centered on an engineering labor standard (ELS)—in effect, a practical “best practices” level. He also explained that there would be weekly feedback on employee performance and there would be generous incentives for those performing above the 100 percent level—above the ELS—using individual measures rather than averages. Belardi emphasized that the LMS would be a lasting program, not just a one-time project. It would be fact-based all the time, removing the subjective bias of supervisors and managers and motivating all associates to perform as entrepreneurs. The plan would call for supervisors and managers to remove barriers to productivity improvements—and for employees to require them to do so. The LMS would be applied fairly and equitably, allowing all associates the same opportunities to participate and would be modified only when changes in procedures, equipment, layout, or systems were required. The big message from the logistics chief: We’re making the shift to a performance-driven culture. Jump on board and you can make a lot more money. “I just told them straight out: Sport Chalet is a growing company and we need to control our costs. We’re trying to figure out how long each job should take at a reasonable pace,” recalls Belardi. “The more assertive people saw it as an opportunity to make more money, and yes, some of the weaker associates saw the writing on the wall.” To ensure that the messages resonated, and to make certain that the staff had ample opportunity to ask questions, Belardi followed the big introductory all-shift meetings with department and small-group meetings where employees were not shy about saying what was on their minds. Interestingly, very few employees expressed concern that they were going to be replaced or let go. Fair play According to Belardi, employees immediately recognized and applauded the fairness factor in the program. One example: incentives for some jobs in receiving had been biased toward certain products. “The person doing shoes could do a lot more than the person doing baseball bats, but there was no fair way to account for the differences,” says Belardi. “The associates told us: 'It’s about time that you guys got down to the item level.’” Of course, when the enVista consultants first began monitoring actual jobs in progress (measuring “travel to workstation,” “log on to PC,” “remove shrink-wrap/tape from pallet,” “dispose of empty receipt carton,” or “scan UPC”) the tendency of many employees was to pick up the pace. So, he and his team leaders had to reaffirm who the consultants were, what their roles were, and why it was not necessary—and not helpful—to hurry the work. The consultants gradually became part of the DC’s working environment; they began to receive direct input from employees about better work practices, and they factored those ideas into their implementation of the LMS solution. However, the presence of the consultants and the regular dialog that Belardi held with the DC associates raised expectations—particularly about when the incentives would be introduced. It also meant that the company had to be able to validate the performance numbers. “Before we showed these numbers to the associates, we would validate them with the consultants and with management, making sure that the software was all working correctly,” says Belardi. “Once we did that, we would turn it on and let the associates take a look at it.” And look at it they did. Some of the earliest posted numbers concerned performance in the put-to-store area, where merchandise is serviced and prepared for the store floor shortly after it leaves the receiving dock, without being put away at the DC. The ensuing discussion was intriguing. “One employee said, 'I always thought I was the best put-to-store guy, but if I’m not, then I’m going to be.’ It brought up a lot of competition,” says Belardi. But what he savored most was the fact that they were reviewing the posted numbers during their breaks. At time of writing, the LMS implementation was almost complete. According to Belardi’s records, some associates are already performing at 120 percent of ELS, even though the incentives are only now being introduced. Productivity has soared: it climbed 11 percent in hard goods receiving from August 7, 2006, to October 6, 2006, and by 10 percent in hand stack picking over the same period. Most of the productivity gains come from improvements in the performance of the lower performers—the largest group of associates. Healthy sign Warehouse Associate Robert De Le Torre performs voice directed put-to-store tasks. Now that the systems are working effectively, with ELS numbers identified and accepted, and performance metrics captured and disseminated, Sport Chalet is about to kick off the incentive system. “The first question at our regular building meetings has been 'Are we still on schedule to get this thing going?’” says Belardi. “My answer has always been 'Yes, we are.’” The schedule calls for a six-week period in each department to allow staff to understand the metrics and the ELS. Temporary staff will not be eligible for the bonus pay, but their performance will affect their ability to be hired permanently under the terms of the “temp to hire” agreements with staffing firm, Citistaff Solutions, Inc. Importantly, the workers themselves now have visibility of, and trust in, quantitative data that shows how they are performing against the ELS and against their peers—and they too get weekly feedback from their supervisors. At the same time, Belardi has been working with Sport Chalet’s HR group to define criteria for disciplinary action. (The basic idea is a three-strikes-and-you’re-out model.) There is a separate policy for error discipline, with ample opportunity to wipe the slate clean of accumulated errors after an error-free period. While long-term results won’t become apparent for a year or two, the early indications are very positive. Steve Belardi is under no illusions about what it has taken to get to this point—beginning with a strong leadership stance, solid change management skills, and a wholesale change in the culture to focus on what matters most to the business. Says Belardi: “I learned a lesson years ago: you’ve got to run the numbers because otherwise you never know how you’re doing.” With the stopwatch studies leaving a deep layer of data and the LMS now tracking individual performance down to the merchandise item level, decisions at the DC are based on facts, not personal bias. Weekly feedback gives associates reliable input on how they’re doing—and the incentive system leverages the data to reward the best associates for all of their hard work.

Lean logistics: Moving into the House of Lean

By Robert Martichenko, President, LeanCor LLC -- 4/1/2007

Lean is not just about tools and tactics. It requires logistics professionals to modify cultural models and commit to fundamental change. Here are several strategic areas you’ll need to master before you move in. These five building blocks (stability, standardization, quality at the source, Pull-Just in Time, and customer focus) create a sturdy "House of Lean." Source:LeanCorLLC Many logistics and supply chain professionals are well on their way to understanding how lean principles will help in their drive toward supply chain excellence. In fact, many are moving out of the awareness stage and into the implementation stage, preparing to make the mental and cultural changes necessary for a smooth transition into the House of Lean. Moving into the House of Lean simply means you’re ready to apply lean knowledge and implement lean principles into your supply chain—a taller order than some think. To take this important step, be sure you can answer the following three questions: What exactly is “lean” and how does it specifically apply to my logistics and supply chain operations? What does it take to mentally and culturally prepare to successfully implement a lean supply chain? What is the benefit of doing all of the work involved to get lean? If you can answer these questions clearly and concisely, then your initial awareness has allowed you to understand the essence of lean. If these questions continue to leave doubt in your mind, then further education may be required. To help ease any uncertainies you may have, we’re going to first define the principles that build the House. Then we’ll take a deeper look into the fundamentals of lean thinking and offer insight into how you’ll need to change the way you view inventory, supply chain relationships, and incentive programs on your way to a seamless transition into lean. The House of Lean Let’s first review the five critical elements that construct the House of Lean and how they relate to you supplychain operations: Stability: Creating a supply chain that is visible, predictable, and capable. Standardization: Having disciplined supply chain processes and rigorously challenging SKU proliferation. Quality at the Source: Recognizing that errors cannot be allowed to enter the supply chain. Pull–Just in Time: Driving inventory reduction to expose organizational problems and focusing on the goal of one piece flow (make one/ ship one). Customer Focus (Based on Takt Time): Not only knowing what your customer expectations are, but also understanding and synchronizing supply chain processes to the rhythm of customer demand. While the elements of the House of Lean are critical to building a lean enterprise, it can be argued they simply represent tactics and tools that are used to drive lean operations. While tactics and tools may be the foundation of some lean initiatives, they aren’t the entire essence of lean. To be successful in moving into the House of Lean you must have vision, strategy, tactics, and specific reachablereachable goals established for a given period. Reaching these goals requires a change in how we drive strategy: For the logistics department, this will require a shift from looking at the business as a series of functional departments to viewing the business as an entire system. A3 Thinking: Organizing your goals on paper To make that shift, shippers will need to have a disciplined approach to strategy deployment based on the cascading of breakthrough goals to strategies and tactics with specific performance targets. This simply means that you need to know that the activities being performed will, in fact, help you achieve the common goals—and functional areas will stop working at cross purposes. This is accomplished through the use of A3 Thinking; in particular, the use of an A3X document to verify work on specific action items to help reach breakthrough goals. A3 simply refers to the use of an 11x17 piece of paper. The logic is that if you cannot get your thoughts down on one piece of 11x17 paper, then you have not thought through your goals clearly enough. A completed A3X shows how to cascade breakthrough goals to strategies, tactics, and performance targets. It also illustrates correlations between each to help identify the right focus. The A3X also helps give shippers a visual on who needs to be involved and at what levels each party needs to be engaged with each tactic. A3 Thinking is critical for the supply chain professional because supply chain initiatives will span functional areas of the organization. Without the use of strategy deployment, a lean supply chain initiative is at risk of not being supported at all levels of the organization and initiatives will not succeed when tough decisions need to be made. Once A3 thinking is embraced and performance targets are set, the lean shipper will begin to view inventory in an entirely different way. Reduce Inventory Implementing the lean supply chain will require a major change in the way logistics professionals view inventory and inventory management. To understand this, let’s review the essence of the lean enterprise. The lean enterprise is a learning culture: An organization becomes a learning culture by solving problems everyday and sharing those lessons learned across the company. However, the challenge with problem solving is that most of us can’t see the problems in our organization. What keeps those problems hidden? In a word: Inventory. So, in order to become lean, logistics managers need to have the courage to reduce inventories and expose all the problems and weaknesses that lie beneath. This requires a shift in perspective. The supply chain professional must change from using inventory to hide problems to reducing inventories to expose problems, and subsequently solve these problems at their root cause. This is not an easy change—but it is critical for a lean supply chain. Viewing inventory from this new perspective, the logistics professional will need to grow internal partnerships. Relationship Building To be successful in creating the learning culture, the supply chain professional will need to be a master of relationships. And in approaching this, it is critical to keep in mind that logistics and supply chain management aren’t simply functional areas of a business—the supply chain is the business. The logistics professional won’t be able to drive results without engaging all aspects of the business. From purchasing, to marketing, to human resources, and production, creating the lean supply chain requires complete collaboration. This means CEO-level support is vital because many of the required changes may be counterintuitive to some levels of the organization. For example: Will a CFO accept an increase in transportation cost if it means an increase in material velocity and reduction in lead time to the customer? Revolutionize Incentives Supply chain and logistics compensation and incentive programs in most organizations work at cross purposes to the business. Most incentive programs assume that if you micromanage and reduce costs in all functions of the business, you will, in turn, minimize overall organizational costs. Nothing is further from the truth. The reality is that by attempting to minimize all functions in the supply chain, you will be suboptimizing the whole—in other words, in your drive to reduce cost in each functional area you will actually drive total logistics cost up. The supply chain is a dynamic system and a change in one area may have reciprocal change in another. For example: Compensating a transportation manager solely on reducing transportation costs will only serve to reduce that manager’s eagerness to embrace system changes that may, inturn, impact transportation costs. This is very common when organizations begin to look at more frequent deliveries of smaller lot sizes. Organizations must develop a reasonable approach to articulate and calculate total logistics cost, and hold all functional leaders to creating efficiencies from total cost point of view. We have very rarely found anybody to disagree on this; however organizations, seemingly, do not act on this. The fact is that traditional financial accounting methods and compensation strategies are outdated and do not reflect the progression of lean or contemporary supply chain management disciplines. Supply chain management is about managing a system—and measures need to reflect its dynamic nature. Commit to hard work Successfully implementing the lean supply chain is no small task. It won’t happen overnight and it requires knowledge and discipline of process. The most important requirement, however, is commitment to hard work. Most supply chain issues result from a lack of internal and external collaboration, and an ignorance towards basic discipline of process. Years of bad data entering our systems, the propensity to force suppliers into cost reductions, and not recognizing the voice of the customer has resulted in supply chains that are invisible, unstable, and riddled with defects. Lean teaches us to get back to basics by building a foundation of stability and standardization, instituting rigorous discipline around process and quality at the source. This discipline is achieved by the reduction of inventories, which will serve to reveal organizational problems and reduce lead times, creating an environment where you can pull from the customers to implement flow. Embracing lean for all that it espouses in the supply chain can bring incredible results to organizations. But, remember: A strong and sturdy House of Lean requires every building block to be in place. Author Information Robert Martichenko is President of Lean-Cor LLC. LeanCor delivers Lean Supply Chain & Third Party Logistics services. He is co-author of the book Lean Six Sigma Logistics.

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