Category Archives: Supply Chain

Maximum Results Come From Supply-Based Spend Management

Chief Executive recently ran an excellent article by Drew Morris on “Leading Your Business to Maximum Results” that noted that the best way to boost results is to first identify the best ways to boost results, and then to go and do them. It described the methodology of Insight-Based Management that takes the standpoint that a company that wants do do well should first identify the performance the owners and influential analysts expect, and then work towards achieving that goal. For a private company, this means sitting down with the owners and investors and having an open and honest dialogue. However, for a public company, it can be a bit trickier. A public company needs to analyze it’s stock price to figure out whether adding another percentage point to the revenue-growth rate is more valuable than another point of profit margin. According to the article, the answer is in RVG – Relative Value of Growth, which is determined by the following formula:

Increase in EV due to 1% higher revenue growth rate

Increase in EV due to 1% increase in operating profitablity

 = RVG

Once a business knows it’s RVG, it then has to identify potential actions that will increase RVG. Potential actions include:

  • Price optimization
  • Improved product/service design
  • A better marketing message
  • Cost cutting
  • Leverage of technological progress
  • A killer customer experience
  • High-value business models

All of these actions have one thing in common: supply-based spend management. Even though cost-cutting might be the only action entirely under the control of supply-based spend management, each of these actions is critically dependent on supply-based spend management for successful execution. You can’t have a killer-customer experience if you don’t get the product/service to the customer, and do so at the right place and right time. The supply chain organization is in the best position to leverage technological progress and help improve product/service design. Being able to meet an optimal price-point in a target market will depend on spend management being able to keep costs down enough to meet the target price, and a well-run supply chain organization is a high-value business model in itself, as well as a basis for a better marketing message.

Of course the key is to determine the best actions, or those that will give you the best results. This requires calculating the revenue and profit gains that will result from each potential action, based on the profit power values for a company (which define the % profit increase due to a 1% change in the primary profit drivers), as well as the up-front costs. Then the profit associated with each potential action can be compared and the best actions taken.

Since RVG is hard to calculate for a private-company, and thus hard to manage by, and since wealth creation will improve RVG, these actions can also be compared using EM – Economic Margin, a wealth creation metric that

  • allows wealth creation by an action to be accurately gauged
  • is easy for the “numbers people” to understand and calculate
  • makes intuitive sense
  • allows for comparisons
  • is applicable at all levels of a company
  • is equally suitable for public and private companies

It is calculated using the following formula:

Cash Flow from Operations – Cost of Capital

Invested Capital

 = EM

Furthermore, whereas RVG-based calculations tend to maximize the RVG-weighted profit and revenue growth of a company’s existing portfolio of businesses (where each could be based on a specific product or service offering), EM easily allows for changes in the portfolio to be considered.

Although the article is quite lengthy (about 15 pages), it’s a very good read and a must for any supply chain manager who wants to understand how the senior finance people determine which business unit’s proposal is the most valuable one to the business and, thus, which proposal they should allocate funds to. Being able to back up your proposals with these calculations relative to other actions the business can take will put a lot of weight behind your proposal and possibly smooth the way to getting that budget for a new system, warehouse, or team member approved faster.

MCA Solutions – A Strategic Service Parts Management Platform

MCA Solutions (acquired by Marlin Equity Partners, merged with Servigistics, acquired by PTC) a Philadelphia, PA company, is not only one of the few companies I know of that has an advanced strategic service parts management solution, but one of the very few that only does service parts management. Recognizing that many large manufacturing, semiconductor, high-tech, aerospace and defense companies often have tens of millions, if not hundreds of millions, of dollars tied up in inventory, and that an inventory planning and optimization solution that is off even by a few percentage points can cost these companies millions, if not tens of millions, of dollars annually, the founder of MCA Solutions, Dr. Morris Cohen, who has worked with IBM, Cisco, Applied Materials, Intel, GM, Saturn, Teradyne, and the U.S. Navy, decided to focus the company on this problem alone.

Why? Because the problem is a lot harder than you think. Just like a product has a life-cycle, so does a service part. Not only do you have to accurately forecast how many replacement parts you’re going to need in your network (as well as where they need to be), you have to manage the return, repair, and re-introduction of the repaired part into your inventory. (Remember, many parts are sub-assemblies because it can be too time consuming to replace an individual part — so it needs to be repaired once it is replaced; just like your IT department doesn’t throw out the desktop they just replaced when only the hard-drive needs to be replaced.)

To accurately solve the problem, MCA Solutions allows you to model your entire multi-echelon parts demand network. What does this mean? You can model all of your primary (warehouse) locations, forward locations, forward-forward locations, etc. to as many levels as you need; you can define all of the production lines, aircraft, or other equipment at each location; define the required replacement parts and desired availability and / or target stock levels for each part; define any and all (performance-based) contractual commitments if you are in the business of servicing lines, aircraft, or other commitments for your customer; define historical demand, service requirements, or maintenance plans; and specify the best type of statistical model for the part in question (poisson, normal, or negative binomial – as low volume, high-volume, and sporadic demand parts need to be modeled differently), as well as any location or usage-specific criteria that influences demand.

Furthermore, MCA Solutions’ platform not only allows you to strategically plan cost-optimal inventory levels for target stock and availability levels, but also takes into account current network stock levels and will give you an executable tactical implementation plan which will tell you what needs to be shifted between locations, what needs to be ordered – and when, and which parts should be repaired (and when) and which parts should be retired. In other words, not only does their solution understand product life-cycles, but it also allows understands the entire part life-cycle.

How well does it work? For their target industries, very well. It was chosen by the Navy, who spent almost a year exhaustively evaluating COTS (Commercial Off The Shelf) solutions against their own in-house solution, it’s used by KLA-Tencor and Cisco — who have some of the most extensive parts supply chains in the IT world, and their solution has been chosen by SAP as their preferred parts planning solution. Furthermore, it’s very well designed. You can work at the aggregate network, network (as it allows you to define different part networks if you have to meet different geographies, different environmental regulations, or just want to separate your internal service networks from those of your customers), forward location, location, equipment / contract, or part level, depending on your need; you can compare the current plan to various “what-if” plans that let you see how your altered stock levels / availability levels affect cost or how shifting forward locations (central warehouses) changes stock levels and affected costs; and you can do extensive reporting, graphing, and, if required, data export to Excel (and Power Point). Plus, you can export orders to your external procurement / ERP / MRP systems and import supplier response data. If the lead-times in the responses differ from what the plan expects, the system will automatically update and re-balance the plan.

If you’re in one of their target industries, it’s certainly worth an investigation. Not only is it designed well, but it appears to be very efficient. The average response time for an update even in a fairly sophisticated what-if network model (with hundreds of locations and thousands of parts) is under two seconds. That’s impressive where optimization is involved given the complexity of a multi-echelon network model.

Strategic Service Parts Management

Last year in my posts on Strategic Service Management and Tomorrow’s Strategic Service Management Today, I introduced you to service management, which is more than just outsourced services management. At a holistic level, it’s really a form of customer service management (where “customer” means your internal customers as well as your organization’s external customers) with the goals of making the customer efficient and satisfied while making a profit.

One possible definition of this, which I gave in my posts, was through a union of parts management, price management, and workforce management with the ultimate goal of optimizing the workforce to deliver the right part at the right time at the right price. If we analyze this closely, we see that the key is to first optimize the parts management. If the part is not there, it doesn’t matter what it costs, because either your customer is going to go to someone else, or you’re going to violate a performance contract, and whatever additional profit you might make through price optimization is going to disappear in lost sales or penalties. Furthermore, there’s no way to optimize a workforce if you don’t have the parts they need to do their jobs.

So what is service parts management? In my posts I originally defined it as the process of ensuring the right part is available at the right place at the right time. It is the alignment of planning, forecasting, and inventories to make sure you can respond to a customer need as it arises, without costly expedited shipping, unnecessary wait times, or financial losses (that can result from service level guarantees). And I think that’s still a good definition, but it doesn’t convey the complexity that is involved in certain industrial and medical equipment manufacturing, semiconductor, automotive, aerospace & defense operations. Nor does it convey the extremely high costs of doing parts planning poorly in these industries.

Consider aerospace. New commercial aircraft cost hundreds of millions of dollars, and it’s critical that a plane spend as many hours in the air as possible to recover that cost, and even more critical that it not miss a scheduled flight and that all maintenance and repairs are able to be completed during scheduled downtime. Without extremely good parts planning, a plane can be grounded for days and cost a company millions of dollars in losses.

Furthermore, not only are the planes expensive, but so are the parts. Many parts can cost thousands or tens of thousands of dollars. Therefore, you don’t want to be stocking more parts in inventory than you need to because, in a squadron of 15 fighter jets or a fleet of 25 commercial airliners, excess inventory can lock up sufficient funds to literally buy another plane!

Now consider automotive. Production lines cost hundreds of millions of dollars, if not billions of dollars, and an unscheduled line shutdown can easily cost a few million in lost labour, sales, and man-time required to get the line up again. More importantly, some of the equipment is very complicated and in order to get the line up again quickly when it does fail, you have to replace entire assemblies, which can cost hundreds of thousands of dollars. Therefore, it’s important that you not only carefully control your inventory levels, to avoid locking up tens of millions of dollars that could be part of the cash flow, but that you have a good process for servicing and repairing the replaced assembly so that it can be re-used next time the same type of sub-assembly, either in the same line or in a different line, breaks down.

In these industries, the importance of a solution that can model the expected need for each replacement part that may be required over the expected life of each major production line, vehicle, aircraft, or sophisticated high-tech system that has to be kept up and running, as well as the required inventory to statistically meet the target up-time requirements at any point in time, starts to become very clear. Furthermore, since you usually have multiple plants, and storage locations, some of which can quickly service other locations (and if you only expect to replace, on average, one instance of a $50,000 part each year, it’s much cheaper to spend $500 on an express delivery from a central warehouse than to stock the part at each location), you also need a solution that can look at these needs holistically, factor in lead times, and give you an optimal inventory level across your network. This is the only way to design a strategic service parts management plan that will give you a target up-time and / or part availability level at a minimum cost of ownership.

Tomorrow we’ll explore a solution that, depending on your industry, just might help you achieve this goal. Stay tuned.

Actions for Big Supply Chain Improvements

Supply Chain Digest recently ran their top 10 list of “the easiest actions for big supply chain improvement”. Leave off the “easy” and I’ll agree, since some of the actions they recommended weren’t that “easy” and they left off a couple that were.

Their list was the following:

  • Centralize Transportation Management
    (At least they admit this isn’t easy!) As the author notes, the potential freight and overhead savings are huge – and you can make better informed sourcing decisions.
  • Take Control of Inbound Freight
    There is money to be saved on both inbound and outbound freight and all freight should be looked at objectively. Although it’s true that sometimes a large supplier can get you the best deal, it’s often true that often they can’t. Remember, you can leverage freight across your suppliers. They can only leverage freight across the customers they handle freight for. This means that often you’ll have the leverage with the freight provider – so you should use it.
  • Enforce Routing Guide Compliance
    You only save money from a good plan that was carefully constructed from a detailed analysis if it is implemented. Make sure that your sourcing and logistics professionals understand that when it comes to approved plans, it’s the company’s way or the highway for them.
  • Use Labour Management in Distribution Centers
    It’s important you have the staff you need when you need them. Not enough staff when a truck arrives causes delays that could lead to lost sales – too much staff when there are no trucks to load or unload costs you money!
  • Profile SKUs and Orders to Reslot the DC
    A simple analysis of this data can lead to simple improvement opportunities in slotting and warehouse layout that can drive big productivity improvements. Be lean.
  • Revisit Safety Stock Levels and Policies
    Too much inventory leads to markdowns and losses – not enough leads to missed sales and even more losses. Monitor stock levels regularly and update levels and policies as needed.
  • Analyze Supplier Lead Time Variability
    Find the variability, develop corrective action plans to reduce it, and implement them.
  • Use E-Auctions
    Many companies are leaving huge amounts of money on the table by not utilizing this technology when it makes sense to do so.
  • Constantly Compare Actual Total Landed Costs with Forecasted Costs
    If you want to realize your savings, you have to insure you get the savings you negotiated.
  • Start a Lean or Six Sigma Initiative
    … but be smart about it! Don’t go overboard, especially at first, as all you’ll end up with is Sick Sigma, and that won’t help at all.

To that I’d add the following:

  • Invoice Analysis
    Get a real spend analysis tool, mine your invoices, and see if you’re paying what you’re supposed to be. SKU analysis is good, but in many categories, like office supplies, computers, and electronics, you’re probably overpaying – and it won’t take much effort to find savings. If you need help, there are a number of consultancies that specialize in these efforts.
  • Enforce Supplier Contracts
    Route adherence is important, but buying off the contract your sourcing team painstakingly researched and negotiated to get you the best buy is even more so. Many organizations have maverick spend of 40% or more. That’s 40% of your negotiated savings gone … before the product is even shipped!
  • Use Decision Optimization!
    Not only is this the best way to optimize your freight spend, but it’s the best way to optimize your total spend – especially if you select a solution that allows you to optimize all of the aspects of the buy at the same time. e-Auction is good … but it’s not always appropriate, and not always going to net you the best buy from a total value management perspective.

Basically, there’s a lot more to supply chain optimization than just Inventory, Warehouse, and Distribution optimization – which, with the exception of e-Auctions, this article focusses on. If you truly want to see a big improvement, you have to start at the time a need is first identified and analyze the sourcing, procurement, and distribution cycles from the time the first requisition is placed to the time the last unit is delivered to the customer. You don’t know where your largest inefficiencies are or which single improvement is going to have the greatest impact – and often the largest impact comes from aligning your processes to insure the optimized award is received and delivered at the right time and at the right price. There’s no silver bullet – but a continual process of analysis and improvement will do wonders.

The Seven Deadly Supply Chain Sins

Over on the World Future Society, there’s a great piece in the President’s Web Log where he recounts a creative interpretation of the sins of the future. What really got my attention is how each of them have their supply chain equivalents, and how the first five in particular require very little modification. So, without further ado, here are the seven deadly supply chain sins.

  • Earthism
    Holding humans superior over all other life-forms, and putting our needs over the needs of the other species we share the planet with. This can take the form of plotting a sea-lane through areas wales like to call home or of a new highway through areas of woodland where animals on the precipice of the endangered species list live.
  • Harmful Technology Replication
    The reproduction of environmentally dangerous means of production, power, and transport when greener, friendlier methods have been identified.
  • Innovation Theft
    Stealing your competitors innovation and calling it your own.
  • Online Misbehavior
    Misrepresenting yourself and your capabilities on your website, in electronic negotiations, in electronic marketplaces, and anywhere else in the virtual world created by the internet.
  • Transportation Recklessness
    Use of highly expensive, environmentally damaging, and resource-intensive fuels to ship functionless trinkets and knick-knacks halfway around the globe or to travel halfway around the world to play golf with your counterpart at a supplier.
  • FTZ and STZ exploitation
    Regularly shifting your base of operations to take advantage of Free Trade Zones and Secure Trade Zones to avoid paying taxes and your debt to society.
  • Bribery
    Bribing public officials to change the laws to your corporate advantage … be it a reduction in environmental regulations, a reduction in safety regulations, or a reduction in social welfare and employment regulations to increase corporate profits at society’s expense.