Category Archives: Best Practices

Seven Deadly Supply Chain Wastes

Having posted about the Seven Deadly Sales Suppressors and the Seven Deadly Supply Chain Sins, it should be no surprise that the Supply Chain Management Review’s recent article on the “Seven Deadly Supply Chain Wastes” caught my attention. According to the article, the resources consumed in the process of delivering a product or service that do not add value — be they people, time, or equipment — should be eliminated.

The article, about the Toyota Production System (TPS), or Lean, went into detail on the seven wastes that keep supply chain management from achieving its full business potential and how TPS principles can be used to eliminate the wastes. TPS does this by applying five core ideas that lead to better processes and performance.

The five core ideas that underly TPS are:

  • Muda
    That which is wasteful and doesn’t add value (should be eliminated).
  • Process Focus
    Work cross-organizationally to develop and sustain robust business processes.
  • Genchi Genbutsu
    Collect facts and data at the actual site of the work or problem.
  • Kaizen
    Continuous and Incremental Process Improvement
  • Mutual Respect
    There should be a strong relationship between management, employees, and business partners.
  1. Overproduction (Build first, wait for orders)
    Don’t deliver products before they are needed and avoid “created demand” where a quantity greater than what is needed is requested. This typically adds 40% to supply chain volume fluctuation at the part number level, which is very wasteful. Move to a “sell one, buy one” method with minimal lead times to prevent this waste.
  2. Delay / Waiting (between activities)
    Any delay between the end of one activity and the start of the next activity, such as the time between the arrival of a truck for a pick-up and the loading of the trailer, and the delay between receiving the customer’s order information and beginning to work on fulfilling the order is wasteful. Coordinate production and shipping operations with cutoff times to maximize throughput and efficiency.
  3. Transportation / Conveyance (that is unnecessary)
    Any kind of unnecessary transport. Out-of-route stops, excessive backhaul, locating fast-moving inventory to the back of the warehouse and other transport wastes cause unnecessary material handling distances to be incurred. This can be addressed by applying genchi genbutsu techniques to methodically identify specific lanes and the deadhead miles that are travelled within each account network. Then work collaboratively with other account teams to systematically combine multiple shipper networks into a single network.
  4. (Unnecessary) Motion
    Any kind of unnecessary movement by people, such as walking, reaching and stretching. Motion waste also includes extra travel or reaching due to poor storage arrangement or poor ergonomic design of packaging work areas. Use lean storage, small batch processing, and kaizen to minimize the work required to produce the product.
  5. Inventory (Mismanagement)
    Any logistics activity that results in more inventory being positioned than needed or in a location other than where needed. Examples include early deliveries, receipt of order for a quantity greater than needed, and inventory in the wrong distribution center (DC).
  6. Space (Mismanagement)
    Use of space that is less than optimal, such as less than full/optimal trailer loads, cartons that are not filled to capacity, inefficient use of warehouse space, and even loads in excess of capacity. Figure out why the space is being misused, and then find better ways to package, store, and stack the product.
  7. Errors
    Any activity that causes rework, unnecessary adjustments or returns, such as billing errors, inventory discrepancies and adjustments, and damaged/defective/wrong/mislabeled product. One way to address this is to develop a comprehensive set of performance metrics that align overall execution with strategy and eliminate conflicting performance objectives by department.

Asian Lessons in Managing Capital Projects

A recent article in the McKinsey Quarterly on “Managing Capital Projects: Lessons from Asia” (registration required) about how some Asian companies are better at managing capital projects than rivals elsewhere caught my attention because many companies are still buying traditional, on-premise, behind-the-firewall enterprise application software (despite the proliferation of good SaaS alternatives) — and these are always intensive capital projects. While not all of the lessons learned in a traditional capital project that revolves around physical assets will be directly applicable to such a project, the fact of the matter remains that, as a supply & spend management professional, you will have to manage these projects from time to time — and any free advice you can find is definitely worth a quick read. Furthermore, since resources required for new capital projects are becoming scarce around the world, now, more than ever, you cannot afford to screw up.

Lessons from Asia are particularly relevant now as more than 50% of the world’s capital investment is projected to take place in Asia over the next seven years. Furthermore, there have already been some major successes in China and India, including a recent oil refinery and petrochemical complex in Jamnagar built by India’s largest private-sector enterprise for 20% less capital than was required by similar plants elsewhere.

After weeding out local Asian conditions that were neither common nor transferable elsewhere (such as land costs, taxes, and regulations), as well as current global best practices, the study described in the article identified five innovative practices that break with the conventional wisdom of western companies and set the recent Asian successes apart. These five strategies are:

  • Set Aggressive Goals
    While safe and realistic targets for cost, quality, and execution time adds assurance that goals will be met on time, it increases costs and creates expectations of tolerance for delays. In contrast, best-in-class Asian CEOs typically set high, even unrealistic, targets and make explicit trade-offs between time and cost — which usually results in an over investment in the equipment and labor that generally form a relatively small part (< 5%) of a large capital project. This allows companies to work on a number of projects simultaneously, preventing downtime.
  • Invest Broadly
    Asia’s best companies regard project management as a core competence. While they may outsource various parts of a project, they retain an active role as overall integrator and manager. Generally, they will manage all critical aspects in-house and only outsource standard equipment / project work on a turnkey basis.
  • Reconsider Low Cost Suppliers
    Asia’s leading capital project managers obtain lower costs and faster service by aggressively sourcing even critical equipment from promising vendors that have developed strong capabilities and reputations in their home countries but that may lack extensive experience in global markets.
  • Avoid Gold Plating
    Leading Asian companies believe in challenging all assumptions and in understanding the reasons for designs and specifications by subjecting them to rigorous value-engineering tests. This often allows them to drive out 10% more cost than a Western organization would believe possible.
  • Flatten the Organization
    Leading Asian companies realize that the fast-paced nature of capital projects makes a flat organizational structure essential and typically only have two layers between line staff and project managers, who report directly to the CEO or another board member. Furthermore, while the CEO will be involved in all critical decisions, project managers are given full authority to supervise support functions and manage resources and can make decisions themselves if the budget is not threatened.

What really interested me is how these have their equivalents in capital-intensive software projects:

  • Set Aggressive Goals
    Especially if you bring in a third party to do the implementation. Furthermore, agree on reasonable SLAs and hold the third party to the SLAs when it is realistic to do so.
  • Invest Broadly
    Make sure your people and the third party integrators and consultants have the tools they need to work effectively. If middle-ware exists that already performs the ETL tasks that are required, don’t pay your team to reinvent the data wheel.
  • Reconsider Low Cost Suppliers
    You don’t always need IBM Global Data Services. With the right tools, the crack developer at the local IT shop might be able to do the job just as well.
  • Avoid Gold Plating
    Thoroughly investigate the requirements before assuming an implementation will take a certain amount of time or require a (large) number of third party consultants.
  • Flatten the Organization
    The implementation team should be flat. Leave the politics to the politicians.

Start with Sourcing

Sourcing … lies at the nexus of a number of functions and business units, and is therefore in a position to influence action across an organization; it can be a strong leverage point for starting a green initiative. By working with senior leaders in other functions, sourcing executives enable a successful, holistic, multifunctional strategy for reducing environmental impact while cutting costs and building better relationships with suppliers and communities.
  Martha Turner & Pat Houston, Strategy & Business

This is a great quote … and why this blog is about Sourcing Innovation. Successful sourcing is the only way to simultaneously make a significant impact on the balance sheet and on the environment while improving operations and supplier relationships. As the article points out, green sourcing is not a departure from the way sourcing is currently practiced, it’s an augmentation. The goal of sourcing is to find the best possible deal for the company from a Total Value Management perspective – which takes into account all costs from the initial extraction and acquisition of raw materials and services to the final disposal of the product. And green sourcing, contrary to popular opinion, usually saves money, if not lots of money, from a total life-cycle analysis. (3M has saved over $1 Billion by going green. To date, Kaiser Permanente has achieved a recurring annual savings of 9 Million across 30 initiatives, and not one required a cost increase.)

Consider energy-saving virtualization technology. It might cost a little more up front, but it will save bundles in energy costs. Or consider investing in renewable power plants based on solar, wind, or hydro power. They might cost more to build than another coal furnace – but you don’t have to buy fuel year after year after year. And, most of all, consider using easily reclaimable and recyclable materials in your products. Then you get to reuse the materials again and again and again – and if you set up an end-of-life program where customers can return the products to you free of charge, you could save a bundle down the road. And consider the example of soy-based lubricants given in the article. At first glance, petroleum seems the cheaper choice, at $1,500 for an annual purchase of 300 gallons, compared to $3,195 for soy. But petroleum has costs that are not immediately obvious: $300 per year in waste costs, $2,400 in costs for spill administration, $1,000 in fees to minimize the waste from spills. When these factors are taken into account, the monetary cost of using petroleum-based lubricant for a year is $5,200–and that’s not considering the less-quantifiable environmental cost of using a nonrenewable resource. With no such add-ons, soy is clearly the more cost-effective choice in addition to being more environmentally friendly.

A well thought-out sourcing plan that takes into account the environment and green initiatives does more than just allow a company to reduce and control costs. It allows companies to capitalize on the growing awareness of green issues, helping them attract customers, motivate current employees, and recruit new employees. It enables companies to respond more effectively to regulation, or even to anticipate it. Finally, green sourcing allows companies to deliver on the promises made in corporate social responsibility (CSR) reports.

In addition, green sourcing encourages the same kind of in-depth, widespread awareness of practices and processes that companies have gained from adopting Lean Six Sigma, process optimization, collaborative decision-making, and other quality-oriented methods. If you think back twenty-five years to when these initiatives were just starting out, you might recall that the common “wisdom” was that better products cost more, when, in fact, we later found out that they didn’t — they costed less as they lasted longer, had lower defect rates, reduced warranty and return costs, and made for a better brand image, which allowed a company to attract and retain more customers.

The Advantages of Decentralization

Many companies like to be centralized, even when center-led models tend to be much better. However, as a recent article in Knowledge @ Wharton, that contained a transcript of an interview with Johnson & Johnson CEO William Weldon pointed out, there can be many advantages to decentralization too, if done right.

Johnson & Johnson is a lot bigger than the band-aids and baby shampoo they are known for – much bigger. They are, in fact, a company with a market capitalization of $180 Billion to $200 Billion, with over $60 Billion in annual revenue, and over 200 operating companies which collectively have over 120,000 employees across the CPG, Pharmaceutical, and Medical Device Manufacturing sectors. Furthermore, unlike some multinationals, they are very decentralized with many of the operating companies operating more-or-less independently from the others. So, more than most, they’re in a position to understand what the advantages of decentralization can be.

The first benefit, which is often unspoken, is that you’re forced to seek out and hire people who are true leaders and capable of managing their businesses on their own. This makes sure that you have talent spread out across the organization, and not centered in one tiny division, which makes for a much more productive and robust company.

The second benefit, as pointed out by Weldon, is that you have local management running the company. This is very important in the CPG sector. Local management will know what sells, what consumers want, and how to grab the biggest share of the local market. In comparison, a remote manager, who doesn’t speak the language or understand the culture, might pick a name for a mp3 player that means “crappy sound” in the local language and then, like Chevy, wonder why the Spanish aren’t buying the Nova.

In addition, having a wide variety of local managers in different cultures gives you a large amount of diversity in your organization – and the more people who think different, the better off you are when it comes time to innovate.

The third benefit is that, because control is decentralized, the chance of one person’s mistake crippling the organization is extremely low. In centralized control, if the CEO, CFO, or COO makes a big snafu, like focussing the whole company on a single, poorly thought out, marketing campaign, it can topple the whole company. In a decentralized company, if the local manager makes a big snafu, that’s just one little unit with one little mess in the grand scheme of things, and its likely to be easily recoverable if a few senior managers from other units step in to help.

The fourth benefit is that it forces you to be innovative when it comes to innovating. With people all over the world, you have to be innovative to get them together. That means adopting, implementing, and developing innovation networks that allow people to come together across companies, geographies, and fields of expertise to work on new product development.

And once you have these innovation networks in place, you begin to see the value of open innovation, and realize, as Johnson and Johnson has, that you can extend the innovation network outside your four walls and instead of having 120,000 minds to draw on, you can include your partners, customers, suppliers, and third party innovators and have a network of over 2 Million minds to draw on – which is 20 times the number of minds you’d have at your disposal if you insisted on trying to keep innovation within your four walls.

It’s a great model, when done right, and lends further validation to my belief that center-led, or more appropriately, center-guided models are often the best models for operations across the board. Experts in a Center of Excellence (COE) support and guide the organization on common strategic issues while leaving the local issues to the local experts.

Negotiation Pitfalls

Negotiations. Some people love them. I don’t. My strategy is to go in more informed than the person I’m dealing with, with hard data to back me up, force a short circuit to the bottom line, and figure out if it’s worth talking for any more than 15 minutes. But still, it’s part of the job description, so it’s worth, at the very least, knowing what not to do, especially since one could always debate as to what one should do in a particular situation. (Don’t know where to start at all? You might consider checking out “Powerful Negotiation for Successful Buying”, a course from Next Level Purchasing (now the Certitrek NLPA). You might also consider boning up on your leverage points.)

Supply Chain Digest recently ran a brief summary of what not to do in their article on “15 Negotiation Pitfalls – and How to Avoid Them” that serves as a good cheat sheet on what not do do. (For a longer guide, check out the guide to “UK SuperMarket Negotiating Tactics” in the UK Telegraph.) Although all 15 are good tips, my favorite 5 were

  • Confusing Contention for Problem Solving
    If negotiations demand contention, because the other side won’t have a negotiation without it, have two parties represent each side, one party to bicker, and one party to actually solve problems.
  • Confusing Superior Force with a Better Bargaining Position
    “We are a $10 Billion company – we can buy and sell your sorry butt 20 times over …” is not a very useful threat if the other company is not for sale and has a specific piece of IP you need to take your product to the next level.
  • Confusing Negotiations with Psychological Warfare
    In addition to preventing problem solving, there’s always a chance the other party could be carrying a concealed weapon and just snap. (Its a fact that some negotiations have ended in physical violence.)
  • Going for broke when you’ve already won
    Once your pre-established conditions are met, especially if your targets were aggressive, pushing forward just in case you might have “left something on the table” or because you might be able to “squeeze more blood out of the stone” is not a good idea. The other party might think you’re totally unreasonable to work with, get up, walk away, and take their goods and services to your direct competitor instead.
  • Focussing on the other party, and not on what the other party is representing.
    It’s not personal, it’s business.

Also, if you want a larger, more detailed list of Negotiation No-Nos, you might consider the Next Level Purchasing course of the same name.

P.S. You might also be interested in the recent Spend Matters post (“Another Top 15 List”) on this topic, which went live after I originally drafted this post.