Category Archives: Product Management

Stacking the Supply Chain

Industry Week recently ran an article that asked the question “How does your supply chain stack up?” Written by the Director of Corporate Partnerships from the University of Tennessee, the article summarized the main lesson learned by the Department of Marketing and Logistics since they started offering supply chain assessments in 2006.

To date, the department has performed eight supply chain audits for companies across a diverse range of industries that ranged from 100M in annual sales to 30B. Although the firms were very diverse, they found that, to their surprise (but not mine), that all of the firms faced exactly the same supply chain problems.

Specifically, they found the seven following commonalities:

  • Too much product complexity
    Too many models and lack of a good process to eliminate underperforming products.
  • Too much slow-moving and obsolete inventory
    Sales doesn’t want to reduce price because they’re measured on margin – but products lose value over time while incurring inventory holding costs.
  • Supply chain considerations not part of the product design process
    Design teams rarely consider inventory, transportation, or warehousing issues – just to name a few.
  • No supply chain strategy
    Many supply chain organizations are so consumed with the daily battles of cost control, inventory management, and customer service that they don’t plan for the future – sometimes with disastrous results.
  • Ineffective matching of supply with demand
    In most companies, sales is driven by revenue generation while operations strives to cut costs.
  • Physical network problems
    Many organizations do not have an optimal network design. Warehouses need to be appropriately placed and transportation optimized.
  • Global issues and outsourcing problems
    Outsourcing decisions are made everyday, but few firms consider the total cost of an outsourcing decision.

Addressing just one of these problems can lead to millions in savings. For example, a hard goods manufacturer achieved 600M in cash-flow improvements through inventory and asset optimization and another manufacturer found 5M to 10M in savings simply by restructuring its distribution network.

So what can you do? Lots. And even though the article stopped short of specifying what you can do, this blog entry is not. If you have these problems, you can start by looking into these potential solutions:

  • Product Line Consideration
    Look to today’s modern auto-companies. Instead of giving you 30 different options, and letting you choose from 2^30 or 1B different configurations, some only sell three or four standard configurations of a car: the base model, the value model, the extended model, or the luxury model. Assembly is efficient and product complexity is minimized.
  • Pre-Launch Price Reduction Planning
    Model the inventory holding cost up-front, analyze historical price trends, and pre-determine dates where remaining inventory will be reduced, marked down, and cleared. If the product happens to be composed largely of raw materials that are increasing in price (i.e. steel) and has a scrap value that increases over time, you can take this into account as well and determine a formula that is to be run on predefined dates to determine the appropriate price decreases. This is very important if you are in electronics, where you can predict that in 6 months the product will have lost 20% of its value – that tells you that a 10% reduction in 3 months might be better than having to fire-sale the product in 7 months.
  • Include supply chain in product design
    When different options have dramatically different material, inventory, warehousing, or transportation costs – supply chain can point this out.
  • Sync the Plans
    Every time the business plan is updated, update the supply chain plan as well to meet the goals of the business plan. Don’t have a supply chain plan? Get one!
  • Forecast with Foresight
    Make sure forecasting is done by an integrated Sales & Operations Planning team that includes the head of sales, the head of marketing, and the head of supply chain – and that every department works off of the same forecast.
  • Network Modeling
    Model your current network, and re-run the network flow model at least once, if not twice, a year to optimize flow – and do a complete network re-design exercise every three years to determine the optimal network design and if any changes need to be made.
  • Outsource Intelligently
    Don’t outsource anything you haven’t optimized internally first – displacing a problem doesn’t solve it, it just makes it worse. If you need help getting your house in order, bring in an expert to help you.

Forecast with Foresight

A short while ago, Supply & Demand Chain Executive ran an article by Romit Dey and Joy Prakash Somani summarizing the results of an Electronics Supply Chain Association and Infosys Technologies Limited study on “re-thinking demand management”.

The study, which was designed to assess the impact of consumerization on major sub-segments within the high-tech industry, understand issues and challenges, and identify industry leading practices, found that 87% of respondents stated that consumerization had significantly impacted product proliferation and customer experience. The demand for new products at an increased product refresh frequency has put increased pressure on design and supply cycles and customer expectations on product customization and error-free operating performance have heightened considerably.

The study found that performance was still as critical as ever, but that 70% of the respondents did not consider their performance in forecasting to be satisfactory. The challenges identified included:

  • Poor Data Quality
    There is often a lack of synchronization on product numbers between manufacturers, distributors, retailers, and customers; a mismatch in the granularity of the expected demand data provided by retailers and customers; over-forecasting by optimistic partners; and POS data is not always available, especially in global distribution networks. Furthermore, raw data is often not adequate enough for many tools to provide a robust estimate.
  • Lack of Formal Processes
    There’s a lack of process for measuring forecast performance and generating feedback on current performance to future estimates.
  • Forecasting Tools are Not Fully Leveraged
    Sometimes this is because of a lack of integration into data sources, sometimes it’s because the available data is not considered adequate, sometimes it’s because data exchange is still paper-based, and sometimes it is because users resist switching to new and improved processes and tools.

As a result, the authors recommend a shift from passive/reactive demand management to a more active/predictive form of demand management that:

  • senses the demands of customers early & correctly,
  • influences the demands to favorably align to capability,
  • budgets for variability in demand during fulfillment, and
  • focusses on innovation to realize a first mover advantage.

Furthermore, they indicate that organizations should:

  • streamline information gathering and analysis,
  • formalize forecasting processes,
  • leverage demand shaping opportunities, and
  • collaborate within and beyond the organizational boundary.

The latter is a good start, but the article fails to point out that it is essentially impossible to correctly sense the demand of your target market before production begins – which is when it is most important. Nor does it provide you strategies to account for the unpredictable variability that is going to be incurred as a result of this inability to accurately sense demand early.

Why can’t you accurately sense demand early? Sure you can measure excitement about a new product announcement or highly anticipated feature, but this can change overnight when a competitor announces a new capability or rolls out a new stealth product that you had no knowledge of. As a whole, leveraging demand shaping opportunities, polling the market, and connecting with retailers to get a better sense of actual demand will greatly increase your forecasting performance across the board, and increase the chance of a big win, but, on a project basis, there is still the opportunity for a big miss, and it will still happen occasionally.

That’s why I’d recommend including the following two steps in the process checklist:

  • utilize advanced demand & price point prediction technology based on optimization and simulation (such as that employed by Rapt, which was recently acquired by Microsoft) to make sure you get a reliable demand prediction at a target price point and
  • focus on contracting capacity, not specific products.

What do I mean by capacity contracting? Your statistical chances of predicting the total number of cell phones, laptops, etc. that you will sell are much better than your chances of predicting the number of units of each specific cell phone, laptop, etc. that you will sell. If you’ve properly rationalized your supply base, you probably only have a couple of manufacturers making cell phones, and each is probably making multiple models. Instead of guaranteeing them 100,000 units of M1, 50,000 units of M2, and 50,000 units of M3, because you have a high statistical confidence that you’re going to sell at least 250,000 total units this year, guarantee them 200,000 units and allow yourself the ability to specify the actual order quantities at the latest date possible required to meet your turnaround time. Your suppliers win because they are guaranteed business. You win, because you don’t get stuck with a heap of unmovable inventory, which can happen if you incorrectly forecast which model will be your best seller. Furthermore, contract for a quarter or a year, not a month. Demand varies month by month, but is much more predictable quarter by quarter and year by year.

The 10 Worst Innovation Mistakes In A Recession

Are we in a recession? Unknown. However, you do know whether or not you believe we are in one, and if you do believe we are in one, you’re likely to go overboard on belt-tightening and cost-cutting. That’s why I want to point out a great article that appeared on Business Week last month on the “10 Worst Innovation Mistakes In A Recession” because, if you make these mistakes, you will be creating a self-fulfilling prophecy.

  1. Fire Talent
    Talent is the single most important variable in innovation. And innovation is the single largest lever you have to increase productivity and decrease costs.
  2. Cut Back on Technology
    The rise of social networking and consumer power means that companies have to be part of a larger conversation with their customers. This requires technology. Furthermore, the best way to insure you are getting the best price is to tackle the right categories, as identified by spend analysis, with strategic sourcing decision optimization to make sure you are making the award with the lowest total cost of ownership. It’s also important to make sure that all of your invoices are submitted in an electronic format that can be automatically matched against contracted rates to make sure you are being overcharged. This requires leading-edge technology.
  3. Reduce Risk
    Innovation requires taking chances and dealing with failure. Although it’s important to control risk, trying to eliminate it entirely will just end up eliminating any chance for innovation at your company.
  4. Stop New Product Development
    This hurts companies when growth returns and they have fewer offerings in the marketplace to attract consumers. And with today’s rapid pace of technological change, you could even lose customers in a recession to a competitor who keeps innovating while you stand still.
  5. Replace a Growth-Oriented CEO with a Cost-Cutting CEO
    Most recessions only last two or three quarters and, these days, are relatively shallow. Penny-pinching CEOs don’t have the skills to grow when growth returns. Plus, a penny-pinching CEO is the most likely individual to fire your top talent.
  6. Retreat from Globalization
    Emerging markets are sources of new revenue, business models, and talent. And, like it or not, emerging economies like India and China are soon going to have more buyers for your product than the countries you’re currently selling to.
  7. Replace Innovation as Key Strategy
    … With Systems Management and Cost-Cutting. Once focus shifts away from innovation, it can be very hard to get the focus shifted back.
  8. Change Performance Metrics
    Shifting employee evaluations away from rewarding riskier new projects toward sustaining safer, older goals. This leads to risk-averse behavior and stifles innovation.
  9. Re-inforce Hierarchy over Collaboration
    A return to command-and-control management. This alienates creative-class employees, young Gen Y and X-ers, and stops the evolution of the corporation. In today’s world, companies that don’t evolve die – and they do it quickly. The average life-span of a Fortune 500 company is shrinking every year.
  10. Retreat into Moated Castles
    Cutting back on outside consultancies is seen as a quick way to save money. Yet, one of the key ways of introducing change into business culture is to bring in outside innovation and design consultants.

Remember that winners always emerge out of recessions and they always win on the basis of something new. If you don’t always have something new in your pocket, you’re not going to win. And if it is a recession, and you don’t have something brand spanking new to pull out of your pocket when the recession is over, you could literally be toast. Furthermore, even a recession provides growth opportunities. People still spend money. They still need to eat, maintain their homes, and their life-styles. The difference is that they don’t spend as much money and look considerably harder for the best deal. This means that they’re much more likely to waver on brand loyalty if you can provide them a better product on a better price – and this means that you can still grow by taking market share away from your competition.

So don’t make the innovation mistakes. If it is a recession, then whether you come out of it a winner or a loser is up to you.

Furthermore, if it is a recession, and your company supplies sourcing and procurement technology and services, then this should be a major growth period for you! After all, how else is your average blind-in-one-eye company going to save money? This means that not only do you have to make sure that you don’t make any of the top 10 innovation mistakes, but that you invest for a growth period because, if you play your cards right, it will be. (And if you need a little help, remember what the doctor does.)

Supply Management in the Decade Ahead III: The Eight Major Forces – Part II

In Part I of our review of “Succeeding in a Dynamic World: Supply Management in the Decade Ahead”, we overviewed the various external forces that will impact a company’s supply chain as identified by CAPs, AT Kearney, and the survey respondents. We then concluded with the eight major forces that were identified specifically by supply managers who took part in the study. In Part II, we dove into the details of the first four of the eight major forces. Today, we dive into the last four of the eight major forces and explain not only why they are important, but what can be done about them.

Customer & Channel Dynamics

The downstream supply chain will change rapidly due to economics and government policies in some industries. In other industries, supply chain dynamics will be influenced by the poor financial condition of major trading partners in the chain. The impact of private equity firms will also be significant, who will continue to take public companies private, slash costs, raise prices, and change business relationships.

In other words, the only difference between conducting business today and conducting business in the next ten years with respect to channel dynamics is that these changes will continue to come at an accelerating pace and you will have to adapt faster than you do today. This means that the winners will be those companies that have good visibility into their supply chains – the ones that can identify when an impending regulation or buy out will affect them before it happens and have a contingency plan ready to go the instant it happens.

Increased Product Variety & Shorter Life Cycles

Variety will continue to mean more models, brands, and products tailored to different geographies and price points. Consumer tastes in emerging economies will be new and different from traditional markets. Traditional lines of competition will blur as companies try new products and markets.

True, but eventually someone will realize that you don’t want to browse the web on the screen the size of a credit card, you don’t want your fridge to tell your local grocery store that you consumed six litres of rocky road this week, and that you don’t want the ability to cut yourself seven times in a jagged fashion simultaneously while shaving. Amongst the big winners will be the companies that realize sometimes you just want a phone, a fridge, and a straight razor – and not all the garbage hallucinators are trying to shove into these products today. And, oh yeah, there comes a point where it doesn’t matter how many fractions of an ounce less it is than the previous product, how many extra cubic inches you squeezed into the door, or how fast it vibrates (at least in the case of the razor).

Social Responsibilities

Companies in developed economies will continue to be held to high standards wherever they do business in the world. Companies will have to monitor working conditions in their supply chains all the way back to basic extractive and farming practices. Supply management will have to ensure that the supply base meets environment standards. Commitments to a diversified supply-base will become more important in developed economies.

This is true, but it misses the point that it won’t be Green Peace and PETA that you worry about in the years to come – it will be your customers, who, greater informed about your supply chain practices than ever before, will start to boycott your products even before Green Peace and PETA gets their campaigns against you off the ground. Industry self-regulation will require you to exceed government standards, or be barred from cooperative partnerships and organizations that could help you survive in the dynamically changing marketplace to come. And, oh yeah, today’s “social networks” will have nothing to do with the solutions.

Environmental Responsibilities

Continuing the social responsibility theme, customers, consumers, shareholders, non-govermental organizations, and governmental bodies will all increase their scrutiny of corporate environmental practices in all regions of the world and demand that companies take environmentally friendly actions. Companies will be forced to meet the environmental expectations of the general populace. Environmental issues will become brand-related issues and influence how companies are viewed in the marketplace. To meet environmental commitments, companies will put together cross-functional teams with executive leadership to monitor environmental concerns in the extended supply base.

All this is great, but I believe that sometime in the next decade, carbon offsets will start to peak out in the developed nations as consumers smarten up and realize that some of the larger companies with the deepest pockets are using them as an out to avoid every doing anything to decrease their environmental footprint. When their only other options are to make the hard choice of investing hundreds of millions, if not billions, to upgrade your factories or re-invent yourself around less harmful products, most executives are just going to take the easy out and buy the carbon credits. These are the same companies that today are content with buying innovation whenever they need it, as they are pseudo-monopolies due to the high cost of market entrance and / or the time it takes to build up the sizable customer base they’ve acquired. Fortunately, when the impending commoditization is combined with consumer revolt, there’s a good chance that their currently unchallenged position at the top will not remain unchallenged for much longer.

“Demand Shaping” or “Demand Sensing”?

The EE Times ran a great article by Romit Dey and Manoj K. Singh last month on “Demand Shaping” and how it aligns customer trends with supply. But I have to ask, is it really “demand shaping” or is it more “demand sensing”. Is not “demand shaping” what marketing and advertising does? It’s true that supply chain has a supporting role, in terms of letting marketing know how much a product can be produced for, how many units can be produced, and how fast the units can be in consumers hands. However, what supply chain really does, in a company that runs like a well-oiled machine, is sense the demand that has been created, and the demand that is in flux, and adapts to the situation.

So what is “demand sensing”? According to the article, which calls it “demand shaping”, it is a demand-driven, supply-constraining customer-centric approach to planning and execution that aligns process with customer demand at strategic and tactical levels and with an organization’s capabilities which helps optimize use of resources, reducing excess inventory and improving inventory turns. More specifically, at the strategic level, the emphasis is on aligning customers’ long-term demand patterns to long-term resource and capacity constraints and at he tactical level, the focus is on understanding demand patterns and then influencing customers’ demand toward available supply, using the levers of price, promotion and products/services bundling.

How do you sense demand? As the article points out, you need three key capabilities:

  • demand pattern recognition
    who is buying what, when, and in what quantity
  • supply supportability analysis
    how much can be made, when, and how fast can it be delivered
  • optimal demand steering
    if demand patterns suddenly change, and you do not have enough of product A, can product B be used as a substitute and can customers be steered to that product instead

The first skill is obvious – you need to manage inventory appropriately so you aren’t holding too much, and generating excessive inventory carrying charges, or holding too little, and selling out before supply can be replenished. The second skill is less obvious, but easily understood – you need to know how much you can make, and how fast it can be made, to appropriately plan your inventory level.

The third skill is what takes “demand sensing” to a whole new level, to the point that it is almost “demand shaping”, but not quite, and hence the source of confusion. It is, as it’s called, “demand steering”. The Dell example the authors use is the best. By maintaining real-time visibility into its supply chains, Dell knows its inventory levels now and in the immediate future on an hourly basis. If a customer configures an order for a 60GB drive on their web-site, and Dell knows they don’t have enough stock to configure the system immediately, then Dell informs the user of a delayed ship date and presents the customer with an opportunity to replace it with an 80GB drive at a discount – steering the customer towards another product that can meet their needs, even if it is more expensive, but Dell takes a discount on margin to make the sale and keep the customer.

The key to success, as the article points out, is to make sure that all three processes are part of a single, integrated loop. A supply supportability analysis is run on a regular, automated, basis; inventory is updated on a near real-time basis; and short-term forecasts are updated at least daily. Each of these numbers is compared on an automated basis, and as soon as forecasts exceed inventory and obtainable supply, an alert is sent to a planner who determines whether there are alternative products that can be used to meet the need or if marketing and sales needs to be informed that they need to take actions to steer demand on their end. Then, customers are steered towards the alternative products through the appropriate channels – in real-time.

The article also does a good job at overviewing what is required for a demand sensing framework. The elements it outlines are:

  • inter and intra organizational connectivity
  • the ability to capture, structure, and comprehend data from customers and channels
  • advanced business intelligence to identify demand patterns
  • optimization
  • common processes
  • a common data model
  • common performance metrics
  • available-to-process capabilities
  • exception management
  • electronic negotiation and collaboration

The best thing about the framework is that these are basic capabilities and processes a good organization should already have in place. It’s just a matter of tying them together and using them wisely!