Category Archives: Supply Chain

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.

Supply Chain IT Assessments

Warning! This post contains shameless plugs.

SourcingMag.com recently ran a good piece by Dian Schaffhauser on “How To Do IT Assessments (8 Practices for SMBs)” in Sourcing Mag that is also appropriate for any organization looking to gauge the effectiveness of its Supply Chain IT systems.

  • Develop a Ratings System and Apply it Consistently
    For each area — data management, process support, compliance, etc. — develop a simple rating system, such as a numeric system from one to five or one to ten, that lets you see how good you are doing at a glance compared to best-of-breed. Then you can quickly see what systems need to be upgraded the most. Consider doing the same for each supply chain employee — logistics, sourcing, contract management, etc. — against a standard set of modern job descriptions. Look to the local professional society (ISM, CIPS, SCL, etc.) for these, since you shouldn’t waste time “reinventing the wheel”.
  • Bring in an Outside Evaluator
    If you really want an accurate assessment of where you are, you need to bring in an outside expert (such as the doctor) who is familiar with best of breed systems and processes to help you. This expert can also help advise you as to what system or process updates will be the most beneficial to your organization.
  • Select a Framework and Use It
    Frameworks really do work when it comes to managing, measuring, and improving the delivery of services. Any industry standard framework — such as Lean, Six Sigma, or CMM — will do, as long as you are comfortable using it.
  • Take a Holistic View of Time Measurement
    Where are your employees spending their time? And where shouldn’t they be spending their time? If they are routinely spending time on tasks that are not value-add to your business, then you should be focussing on automating or outsourcing those tasks. Note that it’s not the amount of time that matters. It’s whether the task has value. Some tasks, such as pre-sourcing project research, will take a long time, and that’s okay, because, done by an internal expert, they will result in considerable value. So don’t sit down with a stopwatch and blindly focus on the most time consuming tasks, it’s not productive. Identify those tasks that your people should not be doing, automate or outsource them, and watch the process improvements and savings roll in.
  • Be Upfront About Your Intentions
    If your intention is to outsource, be clear, especially if the intention is not to eliminate jobs, but to make your people more productive at their jobs. If you need to improve operations because the company isn’t doing well financially, explained properly, your people will understand and buy-in. After all, most people grudgingly prefer change over losing their jobs (which will happen if you don’t plug the leak in the ship and it sinks). If you are honest with your people, they’ll be honest with you — and give you an honest effort.
  • Technical People Need To Be Evaluated By Technical People
    … and experts need to be evaluated by experts. (Which is yet another reason to enlist outside help, like the doctor, when trying to evaluate the state of your supply chain organization and it’s supporting systems and processes.) Otherwise, it will not be a fair evaluation, and you could trigger unnecessary animosity within your organization.
  • End With Recommendations and Move On to the Next Project
    The assessment should have a goal — specifically, the goal should be to determine the appropriate improvement project(s) that you are going to move forward on.
  • Outsource or use SaaS Where it Makes Sense
    Do the strategic and outsource the tactical. System implementation? If you’re not good at it, let a third party do it. New trade rules? Let a SaaS GTM provider keep your system up to date. Office supplies? Use a third-party e-procurement provider that integrates 4+ providers and spot-buy as needed.

Is Your Supply Chain Reversible?

The last few years have been very challenging for supply chains with the rapid rate of globalization, but I believe that the greatest challenges are yet to come. Specifically, I believe that the challenges of Centralized Purchasing, Low Cost Country Sourcing, and Risk and Disaster Management will look like child’s play compared to the supply chain challenges that you will face in the next five years.

When you consider the fact that the price of oil has skyrocketed over the past year, that skyrocketing demands in India and China have not only doubled and tripled the price of many raw materials but significantly restricted their supply as well, that the Euro has risen substantially while the US Dollar has fallen substantially, and that global food supplies are restricted and at a fifty year — if not a hundred year — low (thanks, in part, to the bio-fuel blunder), it should be fairly obvious that unprepared supply chains are in for a bit of a shock.

However, this is just the beginning of the changes that lie ahead. And companies that aren’t accurately predicting, and planning for, what comes next are going to be in for a bigger shock. Especially since the shift is already beginning. So far this shift has three main elements:

  • Global Shifting of Manufacturing Bases
    With respect to the European market, the US is now a Low Cost Country for Sourcing of sophisticated manufactured goods like construction or scientific research equipment.
  • Global Redistribution of Food Supply Chains
    With transportation costs skyrocketing, food distributors and supermarket chains are scrambling to source as close to the same marketplace as possible. For North America, this will mean more sourcing from South America than Africa or Asia whenever possible, as foreign producers are now no longer the lowest price.
  • Shifting Market Dynamics towards the Developing World
    In the next two decades, India is predicted to advance from the world’s 12th largest consumer market to the 5th while it’s middle class increases at least tenfold. In the same time, China will grow to the world’s third largest consumer market. Globally, the size of the middle class is expected to almost triple by 2030 — and where you buy your raw materials and components and products today is where you will need to sell them tomorrow.

In my view, this all points to one inescapable conclusion – that if you want to survive, your supply chain must be reversible. Raw materials, components, and products must be able to flow both ways and your supply chain needs to be capable of turning on a dime if supply becomes unavailable in one part of the world due to a natural disaster or inhospitable political or economic climate. An optimized inbound supply chain from China is useless if it now costs you more to bring a product to market than you can sell it for, and even more so if you can’t ship product that the emerging middle class in Asia wants from the US back to China, because that’s where a significant portion of your global revenues will be coming from in ten to twenty years, assuming you want to remain a global player.

So if you haven’t asked yourself this question yet, I think it’s time you should. And before you say I’m a crackpot, remember, I was among the first to not only predict that low cost country sourcing was going away and that best cost country sourcing was still not going to be good enough when I said the key to success was home cost country sourcing — and now that the US is a low cost country source for (Western) Europe, those manufacturers ready to take advantage of this situation are going to lead the turnaround in US manufacturing.

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.

Supply Chain Finance Slowly Takes Hold

It was nice to see the recent article by Henry Ijams of PayStream Advisors, Inc in Supply & Demand Chain Executive on “emerging payment and discount paradigms in the supply chain” and the benefits of working capital optimization, which include:

  • paper reduction
  • liquidity injection into the supply chain
  • supply chain risk reduction
  • purchase-to-pay automation financing

The point of the article is that supply chain finance is finally starting to take hold, which is good, even if most people are still confusing “discounts” with “finance”. Not that discounts are bad because, appropriately used, they’re quite good. Appropriately defined early payment discounts save the buyer money, as they pay a lower price, and save the supplier money, as they don’t have to borrow financing at a higher rate. It’s a win-win.

They key to supply chain finance, as correctly noted in the article, is end-to-end e-Procurement with full automation when there is no discrepancy in the m-way match (between purchase order, goods receipt, invoice, and, if available, contract) and quick discovery and alerts when something doesn’t match (to allow for the error to be corrected and payment approved before the discount window expires).

However, supply chain finance is more than just discounts. It’s better forecasting. Better inventory optimization. Better financing options. A full suite of capital and cash management tools. Collaborative problem solving. And more importantly, it’s not shifting inventory to suppliers or increasing days payable outstanding (DPO). For a detailed discussion of supply chain finance, I would suggest that you check out the wiki-paper on the e-Sourcing Wiki [WayBackMachine]. I think it would be worth your time.