Monthly Archives: March 2008

It’s Time for a Power Shift

Industry Week recently ran an interesting article on “How to Produce More for Less” that noted that not only is overall manufacturing the largest end user of energy in the United States, but process manufacturers are the top five industrial energy consumers with chemical manufacturing (3.769 Trillion BTUs), petroleum refining (3.086 Trillion BTUs), pulp and paper (2.361 Trillion BTUs), iron and steel (1.455 Trillion BTUs), and food manufacturing (1.116 Trillion BTUs) leading the pack. With energy prices skyrocketing across the board, process manufacturers are feeling the burn more than ever. For example, for every dollar that natural gas increases per mmBTU, Wise Alloys, a producer of aluminum sheet coils, pays an additional $4 Million per year in energy costs.

With power costs soaring, manufacturers now have to explore every avenue they can to cut energy costs. Some are even going beyond the traditional avenues of wind power, solar power, and water power. For example, some food and beverage manufacturers have purchased fuel cells, some of which run on feed-stock, to meet some of their energy needs. Others are implementing energy saving measures by using alternate energy sources (such as solar) during peak periods, streamlining energy needs, and even diverting energy consuming processes to off-peak hours when dynamic rates are lower.

Anheuser-Busch has expanded its beer-to-waste energy program, known as its Bio-Energy Recovery System (BERS), that turns wastewater into fuel. It transports liquid waste to holding tanks where the liquid is treated using anaerobic organisms that eat the material and produce bio-gas, which is then used to fire boilers, that create steam – which is another form of power that can be easily created in any process that produces heat. Not only does the process create energy and lower energy costs, but it also saves the company between 6M and 8M annually in sewer charges since output is reduced and the water that is output is purified.

Another option, which is also being investigated by Anheuser-Busch, is alternative renewable fuels such as wood, spent grain, and landfill gas. And companies that user boilers can often reduce energy needs simply by using water softeners. Wise alloys noticed that the regional water supply to one of its plants had high levels of iron and salt. Simply adding water softeners reduced energy needs by 10%.

Manufacturing industries are ten of the eleven largest energy consumers in the US, with the top 10 industries consuming over 13.566 Quadrillion BTUs of energy annually – a rate unsustainable with current petroleum and gas reserves and current prices. It’s time for a shift – to renewable energy sources and more efficient processes that reuse waste – and waste energy.

Integrating Demand and Supply

It was nice to stumble upon an article in Industry Week that was published near the end of 2007 that tackled the subject of “Demand and Supply Integration”. It noted that companies are trapped in a pattern of reacting to the whims of the marketplace without developing a proactively designed supply capacity and that companies are often the victims of their own success — marketing programs that are not integrated with supply plans end up creating more demand than the company can fulfill. Thus, to create a more efficient and effective business model, companies must acknowledge that they need to integrate demand and supply systems.

The article notes that through close relationships that facilitate information sharing at the system level, demand and supply integration allows companies to serve end users better. What’s interesting is that it also goes so far as to note that managers cannot just focus on their own goals, but must focus on the goals of the larger organization as a whole. Furthermore, these goals should be derived within an integrated sales and operations planning (S&OP) process to facilitate systemic information sharing.

It also notes that companies with demand and supply integration are better prepared to respond to unforeseen supply chain events and gives the example of how Dell was able to quickly adapt to the 2003 California dock workers’ strike as an example. Since Dell operates lean, it only had a few days of product on hand. Airlifting goods is expensive, but it was their only option. In order to reduce transportation costs, it offered customers the opportunity to upgrade to flat screen monitors for “free” when they ordered a system with a standard CRT monitor. The individual sales weren’t as profitable for Dell as they were before (with the lost profit and added shipping cost), but they changed the market overnight – a move that their competitors weren’t prepared for, and they ended up taking some of their competitors’ business away.

It also notes that, for a company not on the path, moving to demand and supply integration can be a challenge. A company must shift its focus from product and supply to customer, market, and supply chain as this is required for strong customer integration.

the doctor has to admit, considering it was written by your ivory tower academics, that it was a rather good article. Plus, the doctor likes their acronym more than AMR’s. DSI has more prestige to it than DDSN. Maybe it’s because when the doctor thinks DDS, he thinks Data Dictionary System, but DSI also stands for Defense Security Intelligence. And what would you rather have – data, or intelligence? (Of course, you can have a lot of fun with DDSN, as the doctor did in this post.)

Do We Really Need a New Supply Chain?

A recent article in the Supply Chain Management Review outlined “A Plan for Building a New Supply Chain” because, according to the author, supply chains need to be redesigned from the ground up to remain competitive. Now, I wholeheartedly agree that the average supply chain lacks efficiency and needs to be improved – in some cases drastically – but I’m not sure that supply chains need to be redesigned from the ground up.

Most successful companies understand the basics of their supply chains – and have those basics in place. After all, the entire point of a supply chain is to move products from the manufacturing plants to the retail outlets where anxious consumers will buy the goods. And since your average reasonably successful company knows where the goods should come from, where the goods need to go to, and the means it has at its disposal to move those goods, it’s quite clear that not only are the fundamentals of a supply chain reasonably well understood – but that, at a high level, a more efficient supply chain will look similar to the current supply chain. And even though I’m all for supply chain streamlining, I don’t know if a new supply chain is necessary, at least not in the average case.

However, the article did have some strong points. First of all, the five S model appears to present a valid approach to reaching a good end-state as the five S’s appear to cover most of the key points. Once you’ve addressed Structure (physical and operating model), Scope (depth and breadth), Span (supply chain extent), Scale (degree of verticalization vs. virtualization), and Skills (both availability and impact), about the only thing missing is the sixth S: Shift – how innovative is the new supply chain?

The article also had a good short list of key people, process, technology, and global success factors that is worth repeating:

Process Success Factors

  1. Lean, but flexible, processes
    Don’t optimize to the point where it becomes tough to change and adapt to future demand, design, or technology shifts.
  2. 80-20 rule adherence
    Get the 80% right, and the process will adapt to the remaining 20% over time.
  3. “Adopt and Go” philosophy
    Don’t over-plan the implementation to the point where it takes forever to achieve the benefits.
  4. Design for Global Commonality
    Fewer distinct products means fewer distinct supply chains.

People Success Factors

  1. The right mix of strategic, tactical, and executional skills
    Successful supply chains require all three skill sets.
  2. Train and re-train regularly
    It’s all about sustainability – and that applies to people as well as processes. You can’t run a 21st century supply chain with 20th century skills.
  3. Focus on distributed process management and optimization
    The world is still round – but supply chains are flattening by the day.

Technology Success Factors

  1. Distributed Applications
    Monolithic applications are a thing of the past and must be avoided at all costs.
  2. Global Accessibility and Scalability
    The future calls for consolidation and global distribution across processes and functions.
  3. Repeatable, Limited Deployments
    Every iteration should reduce cost and cycle time.
  4. Discipline
    Minimize customization as to minimize total cost of ownership.

Global Success Factors

  • MEASURE, MEASURE, AND MEASURE
    You need visibility and accountability to remain at the forefront. This is the only way to ensure that it does.

A Vote for Huckabee is a Vote for …

A vote for Huckabee is a vote for a:
(a) leader
(b) manager
(c) leader and manager
(d) neither a leader nor a manager
— or —
(e) a God-fearing anti-evolutionist who, despite his goal to take us all back to the scientific dark ages, might be the best candidate running with a chance, although slim, of getting elected …

Think you know the answer? Then be sure to take part in Robert A. Rudzki’s (upcoming) poll over on “Transformation Leadership” on the SCMR blogs.

Don’t care about Huckabee? That’s okay. Apparently, Robert is happy to hear your opinion on any of the other leading candidates as well (whom I presume to be Obama, Clinton, and McCain).

So, if you’re into U.S. politics and leadership, and how they may affect the supply and spend management space in the years to come, check out Robert’s blog this week. If not … my regular post goes live in another minute.

A Quick Start to e-Sourcing

Having trouble getting approval for that brand new e-Sourcing system you want to buy? Even though you know the return is there, if your CFO has not yet seen the light, then you’ll need to start small and get some quick wins. How do you do that? Eric Strovink of BIQ has an answer.

The one eternal constant in the world is that nothing stays the same. That’s true of e-Sourcing as well. If you’re innovative, significant progress can often be made without much support at all. Sometimes all it takes is a few successes to get the attention of senior management.

What budget do I need?

It used to be the case that a huge budget was required to start using an e-sourcing solution. With modern, on-demand and desktop e-sourcing software, this is no longer the case. Spend analysis software can be leased inexpensively by the month, with no up-front commitment. e-RFx and e-Auction software can be purchased on a per-event basis, if you run the event yourself — and basic software is even free from WhyAbe, if your needs are (quite) modest. You can live without contract management software early on; and if you aren’t running a lot of projects, then project management isn’t an issue either.

Optimization software is typically expensive, but Excel-based model solvers are relatively inexpensive when purchased for single users. Although constraint support is extremely limited, you can partially work around this limitation by creating multiple “scenarios” with different subsets of suppliers and products. You might not get the best solution, but with some ingenuity, you can get a better solution than what you would produce otherwise.

You should be able to short term lease an analytics tool to build and analyze a spend cube for under $10K, run several one-off e-RFX or e-Auction events for about $10K as well, and, with a lot of elbow-grease, analyze the results with Excel and an Excel solver for under $5K. In other words, for less than $25K, you should be able to run a few small, primitive, e-Sourcing projects.

What resources do I need?

You will probably only need one dedicated resource to learn the above software well enough to use it. Both modern Spend Analysis and e-RFX/e-Auction software packages are very easy to learn and use. If you want to jump-start the process, vendors and/or third-party services organizations can step in to offer walk-along training. There’s no need to commit to huge blocks of time and money against a promise of amorphous results; instead, ask your services provider to train your resources in a phased manner, such that their resources disengage frequently and allow your team to do the time-intensive work (of which there will be a lot if you’re using e-Sourcing tools with limited functionality). The price tag can be under $10K for a jump-start on spend analysis, the e-RFX/e-Auction process, or model building and solution.

What should I do first?

Spend analysis, if it hasn’t already been done, is a real eye-opener for the rest of the company. Once you’ve built the first A/P level cube, you’ll find opportunities everywhere. Sometimes this is enough, alone, to get a commitment from senior management for the e-Sourcing software you so desire and more resources. (And sometimes you’ll have to do a few more analyses and sourcing projects to prove it’s not a one-time fluke.)

Another way to gain management’s attention is to load invoice level data (price/quantity data, or PxQ data) into the spend analysis system, instead of A/P transactions. For commodities like PC purchases, office supplies, and contingent labor, it’s almost always the case that there are peculiar outliers and charges that shouldn’t have been assessed. One consultancy estimates that 3-5% is there for the taking. The good news about invoice analysis is that the result isn’t some “promise” of future savings based on radical behavior change, but instead a refund check or credits. It’s awfully hard to ignore someone walking down the hall waving a check.

Furthermore, once you get that check, you’ll be able to use it to pay for that new system that will greatly increase your efficiency, and savings, and allow you to go from running a few projects (that could require an almost painful amount of time and effort because – where e-RFX, e-Auction, and optimization are concerned – you get what you pay for) to running a few dozen or more! And that’s when the real savings will begin.