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.
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.
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:
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.
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.
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.
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
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.
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.
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.
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 MeasurementThe 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. Endless debate over metric definition. Constantly changing metrics. Old data.
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 MaturityIn 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:
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 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. 2) The Right Stuff. 3) Ingrained Inertia. 4) Analysis Paralysis. 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.
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. 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).
Metric Implementation Best Practices 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 DemandAMR 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:
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.) 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":
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:
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. 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. 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:
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 LeadersThe 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 LeadersWhat'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
|
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  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 Key S&OP Business Findings  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
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.
Implementing a Successful S&OP Strategy 1. People
2. Process
3. Technology 4. Strategy 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 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 Develop an “Outside-In” Sequence of S&OP Initiatives Focus on More Information, Less Data No Standing Still 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 Technology Enablers |
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.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.
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 CodingI 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 MindsetsIn 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:
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.
|
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.Warehouse and distribution center: Clocking performance
| By John Kerr, Contributing Editor -- 4/1/2007 | ||
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 blocksSport 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 courseGrowth 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.
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 playAccording 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
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. |
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.
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.
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:
The House of LeanLet’s first review the five critical elements that construct the House of Lean and how they relate to you supplychain operations:
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  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 InventoryImplementing 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 BuildingTo 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 IncentivesSupply 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 workSuccessfully 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.
|
No comments:
Post a Comment