Category Archives: Supply Chain

The Value of Visibility: It’s More Than You Think

When someone mentions supply chain visibility, the first thought that probably jumps into your head is a foundation for resiliency, which it is, as we discussed in our last post on the value of visibility in your supply chain. The potential to prevent a major supply chain disruption that could cost an organization an average of 10% against potential revenue on the affected product lines for two years running and reduce that loss to 2%, or less, is huge. But it’s not the only savings enabled by good supply chain visibility.

In addition to per-event savings associated with disruption avoidance and crisis containment, there are ongoing savings associated with spend under management. Even if your organization employs advanced sourcing methodologies that include spend analysis and decision optimization, the value of multi-tier visibility goes well beyond what traditional advanced sourcing models can deliver.

For example, a 2012 FERMA4 study found that the majority of firms with advanced risk management practices, built on good end-to-end supply chain visibility, had EBITDA growth over 10% and revenue growth over 10%. The EBITDA growth came from lower costs. The lower costs resulted from better sourcing decisions enabled by better multi-tier supply chain visibility and total cost-of-ownership models. That’s a double digit savings! Up until this point, only spend analysis and decision optimization could consistently deliver that level of savings.

The observant among you might be thinking that this study is just one data point and maybe these savings aren’t obtainable by everyone because it’s statistical, but the proof doesn’t end there. In 2011, Haitao Li and Mehdi Amini undertook a comprehensive computational study on a five-tier multi-echelon supply chain for PC assembly that analyzed over 2,000 scenario variations and found that multi-tier visibility drives cost savings of 15% on average. This study, which built in the impacts of potential, and likely, supply chain disruptions at various levels of the supply chain, demonstrated that most optimal awards that only consider the first tier are highly dependent on the input assumptions and extremely susceptible to disruptions, which can increase the cost by up to 60%! Even the tiniest of perturbations was found to increase the total cost by over 5%. But when multiple tiers were considered and awards were made that were disruption resistant, the average cost savings came out to 15%! This is huge! (Especially given that, according to research conducted by IBM referenced in our last post, emergency re-sourcing efforts often increase costs by up to 30% over the optimum solution.)

This means that, even if your organization is lucky enough to be among the 14% that don’t experience a major disruption within the next year, the ROI from better sourcing decisions alone will pay for a supply chain visibility solution many times over. How much will you save? Up to 1.7% of revenue every year. (An average manufacturer will spend 59% of revenue on direct materials and services and 89% of this spend under management. Assuming that at least 1/3rd is sourced annually, and that the savings are only 10%, as per the FERMA4 study, that’s savings opportunity of 0.10 * 0.33 * 0.89 * 0.59 = 0.017 = 1.7%) So, if your organization does 1 B in revenue, it can expect a savings opportunity of up to 17 M a year from disruption-resistant awards to the supply base (which will, by their very nature, minimize the number of small disruptions the organization experiences).

And this is only one aspect of the year-over-year recurring savings that Supply Chain Visibility can bring your organization! For a deeper insight into the other ways in which Supply Chain Visibility can bring your organization recurring year-over-year savings, download SI’s latest white-paper on The ROI of Supply Chain Resiliency: It’s More Than You Think (Registration Required), sponsored by Resilinc. You might be surprised at just how much hidden value you can extract from your Supply Management operations with good visibility and resiliency.

Do You Know the Value of Visibility In Your Supply Chain?

A recent manufacturing study found that 86% of organizations experienced significant supply chain disruptions in the last 12 months. In addition, a number of studies have proven that the rate of supply chain disruptions are increasing. This means at this point in time, the chances of your organization not experiencing a significant disruption in the next 24 months is 2% and dropping — fast!

It is true that certain disruptions, like those caused by natural disasters, cannot be prevented and others, like supplier failures that result from financial implosions as a result of undetected fraud or the unexpected loss of a major customer, cannot be predicted. But that doesn’t mean that there isn’t value in knowing about them as soon as they occur, because they can be mitigated, or at least minimized, with enough time to take appropriate action.

However, if your first indication of a disruption that happened months ago is when an expected shipment from a tier 1 supplier is 3 days late, it’s too late! If the disruption was the result of a natural disaster that wiped out multiple industrial parks in a region, and those parks produced over half of the world’s supply of the raw material or critical component that your goods require (such as storage drives for custom-built computer systems*), then by the time the shipment doesn’t show up, any excess supply has already been locked up by the competition.

There is a big value to visibility. How big? A recent IBM study, found that the average supply chain disruption is 6 weeks and that as a result of a disruption, sales decrease an average of 7% in the following year. If demand for your product was roughly constant over a year, that’s 1/8th or 12.5% of your sales wiped out overnight, plus additional losses of 7% in the following year as a result of customer defection, because it’s not likely that your customers are going to wait months for a product if your competitor has a similar product at a similar price point. In other words, kiss an average of 10% of your revenue on the affected product lines good-bye for the next two years.

However, if you can prevent the disruption, even if it means acquiring replacement inventory from a higher-cost supplier and using expedited shipping, you can prevent the vast majority of these losses. And even if your organization has to pay a 30% premium to prevent the supply chain disruption, given that the average organization spends 58% of revenue on sourced products and services, this means that the premium would be capped at 17% of affected revenue, or 2% of overall revenue vs the 10% of revenue that would be lost otherwise.

And if the only way to prevent the disruption is with enough advance warning, that says that the value of visibility in this example is 8% of the revenue at risk from a supply chain disruption. This is huge!

However, that’s just a small part of the value that Supply Chain Visibility can bring you. For deeper insight into the value of visibility, download SI’s latest white-paper on “The ROI of Supply Chain Resiliency: It’s More Than You Think” (Registration Required), sponsored by Resilinc. You might be surprised at how much hidden value you can extract from your Supply Management operations.

* As you might recall, the Thailand floods seriously damaged the factories that produced a significant number of the world’s hard drives, as Thailand is the world’s second largest producer of hard drives.

8 Key Design Considerations for Optimizing Your Demand Planning Process: Part I


Today’s guest post is from Josh Peacher, a Senior Consultant in the Operations Practice of Archstone Consulting, A Hackett Group Company.

Demand Planning was once an overlooked element of supply chain management. However, more and more companies are beginning to understand how essential this component is to overall operational well-being. After all, a demand forecast is the genesis of the supply chain process. If poor demand signals are being sent through the system, it becomes extremely difficult to manage raw material and finished goods inventories, execute an efficient manufacturing process, effectively service customers, and ultimately drive an accurate financial forecast. So if your organization hasn’t already taken a long, hard look at improving its demand planning process, it’s time to begin. As a starting point for your journey, let’s take a look at the 8 key design considerations for optimizing your demand planning process. In this first installment, we’ll focus on the 4 most basic design considerations and then move to more advanced principals in the second installment.

1. Start with Statistical Forecasting and Exception Management

  • Statistical forecasting should always drive the original forecast. A simple set of formulas such as exponential smoothing, weighted moving average, and Holt-Winters can deliver more accurate, reliable, and efficient forecasts across the entire sku base than manual forecasts. This can often be a change management challenge for many organizations as demand planners feel a pride of ownership over their forecast and have trouble with relinquishing control to a set of arithmetic functions. This is where exception reporting comes into play.
  • Exception reporting utilizes a set of pre-defined criteria to identify skus that are not ideal candidates for statistical forecasting. Since the strength of statistical forecasting comes from identifying patterns in demand history, highly erratic and/or variable skus are not good candidates and require manual intervention of the forecast. While exception criteria are customizable, common filters include frequent zero demand periods, high variance between last 6 months history and next 6 months forecast, high variance in month-over-month demand history, and frequent shortages. Exception reporting is also an excellent way for demand planners to prioritize their time across the sku set and focus their efforts on the skus that truly require attention.

2. Select the Right Software Tool

In today’s environment of sku proliferation and real time information, it’s become a necessity to utilize a demand planning tool to assist with the demand planning process. Software solutions such as Manugistics, SAP APO, and Logility all have their strengths and weaknesses. Key criteria to evaluate when selecting a solution include:

     
  • Customer service reputation of the provider
  • The tool’s ability to handle forecasting nuances (i.e., 5-4-4 calendar recognition and promotional forecasts)
  • Transparency and reliability of the generated statistical forecast
  • Forecast performance reporting and exception reporting capabilities
  • Flexibility to forecast at multiple levels (e.g., sku, customer, category, business unit)

3. Track the Right Metrics

Demand planning metrics should serve two purposes:

  1. Identify improvement opportunities and
  2. Drive accountability.

The appropriate metrics will vary based on the characteristics of the industry and company in question. However, a few core, agnostic metrics are routinely found in leading organizations. These include:

     
  • WAPE (Weighted Absolute Percent Error) – In my opinion, WAPE is the most balanced and telling measure of forecast error. Some professionals will advocate for MAPE. However, MAPE doesn’t effectively account for volume as the forecast error % for each period is treated equally.
  • BIAS – Bias is similar to forecast error. However, bias provides a measurement of whether your forecast tends to be above or below actual demand thus signaling a forecasting over/under “bias”.
  • Period-over-Period Error Trend – You’ll want to understand whether your demand planning process is improving or digressing. Measuring the forecast accuracy over time will also help to identify meaningful changes occurring in the business.

4. Leverage the Correct Data

Statistical forecasting and exception management will help to get a reasonably accurate forecast. However , to drive forecast error down to best-in-class levels, demand planners must leverage external information.

As the graphic above shows, there is an abundance of information that demand planners could call upon to help them adjust their forecast. The real art of demand planning is knowing which of these data sources to use and when. Over time, your organization will get a sense for which information streams are most relevant and can begin to build a rules-based process around the use of external information.

Thanks, Josh! We look forward to Part II.

While You’re Celebrating Your Thanksgiving in the U.S.

Think about what you can do to make the rest of the world, including the 870 Million people in the world who are chronically under-nourished, thankful as well.

As Procurement Pros, you have a lot of control over the global food supply whether you realize it or not. Money does talk, and with enough pressure, the supply chain will walk to your marching orders. And if those orders are appropriate, maybe we can prevent half of the food being produced going to waste.

According to The Food and Agriculture Organization (FAO) of the United Nations, roughly 1/3rd of the food produced in the world for human consumption every year, approximately 1.3 Billion Tons, gets lost or wasted — due to losses during harvesting, storage, transport, and processing. This loss is almost four times what would be needed to feed all of the chronically under-nourished people in the world, and part of the reason food reserves are at an all time low.

And to make matters worse, the growth, and partial harvesting, storage, transport and / or processing produces 3.3 Billion tons of CO2 emissions and wastes precious water and energy resources. So, not only are people starving when there should be enough food, but we’re wasting limited fresh water and energy in the production of the food that is being wasted.

In developing countries, 40% of this loss is occurring at post-harvest and processing levels due to financial, managerial, and technical constraints in harvesting techniques as well as storage and cooling facilities. Additional infrastructure investments would solve the financial and technical issues, and getting smart people on the ground would solve the managerial issues. If a large grocery chain decided to invest on the ground, and reduce loss from an average of 35% to 10%, it would effectively increase production by almost 40% and lower the cost per unit by almost 30%. (Production levels go from 65% to 90%. 40% of 90% is 36%. 30% of 90% is 27%.) This is not a hard problem to solve. And it wouldn’t take too long before the grocery chain saw ROI.

In developed countries, more than than 40% of losses happen at retail and consumer levels. Faster transport, better storage, and better inventory planning could have a big impact at the retail level. The only thing a Procurement Pro can’t really control is consumer waste.

So think about what changes you can make in your organization to minimize food waste and encourage investments on the ground in the regions, and on the farms, you depend on. And when costs go down, your organization will have something to be thankful for too!

Can Six Drucker Questions Simplify a Complex Supply Chain? Part II

A recent post on the HBR Blog Network on Six Drucker Questions that Simplify a Complex Age poses us with a interesting inquiry — can they simplify a complex supply chain? After all, these are questions out of Drucker’s writing handpicked by Rick Wartzman (Executive Director of the Drucker Institute at Claremont Graduate University), not out of Drucker’s mouth (as Drucker died 8 years ago), and given the recent turmoil in the economy, Drucker might choose different questions to lead us back to the road to recovery (and he might not).

Getting straight to the point, as an existential discussion on what Drucker may or may not ask today doesn’t help us much in the real-world of real-time supply chains, we will skip the philosophical debate and jump right into a discussion of the last three questions, continuing in the same vein as yesterday’s post.

  1. What Are Our Ideas to Try to Do New Things, Develop New Products, Design New Ways of Reaching the Market?
      SI agrees that this would be near the top of Drucker’s list as innovation is becoming more imperative for an organization to survive every year. It’s often the difference between success and bankruptcy, even for a Fortune 500, as today’s fickle consumer can often change the course of a global corporation in just a few years.
      This question is especially imperative for Supply Management that needs to get involved as early as possible in the NPD cycle to not only help identify lower cost suppliers or materials, but the most lucrative markets that will enable to organization to take advantage of economies of scale. Furthermore, supply management technology is considerably ahead of where it was a decade ago, even though most Supply Management organizations are still running on the same ERP they were running on a decade ago, and Supply Management needs to ask not only how it can catch up, but get ahead of the curve and become best-in-class sooner rather than later. Even the most laggard of the Global 3000 can become best in class in as little as five years with the right vision, plan, and change management methodology — but without the right vision, plan and change management methodology, that same organization is likely to be even further behind in five years (if it is still solvent).
  2. Who In This Organization Depends on Us for What Information?
      SI agrees that Drucker would definitely ask this question in a detailed assessment of corporate performance, but SI believes it would be in the context of who in the organization should depend on us for what information. Everyone has a role to play, but in your average organization, not everyone is playing the right role, or even understands what the roles should be!
      For example, Finance typically depends on Procurement for visibility into cash commitments, but does not depend on Procurement for Working Capital Management (WCM) guidance. Finance should be depending on Procurement for WCM guidance as only Procurement has the visibility into the supplier’s cost, financial viability, and expected cost of capital given their financial stability and local market conditions. Thus, if cashflow is limited and AP can’t take advantage of all of the early payment discounts / dynamic discounts at its disposal, only Procurement is in the position to truly determine which discounts are best for the organization in the long-term. For example, sometimes it’s better to take a lower discount if it means paying a supplier that would otherwise have to borrow at 20% per annum, as this could allow the supplier to reduce its operational costs and pass those savings back to the supplier through lower prices at contract renewal time. In comparison, paying a supplier with a cost of capital of 6% per annum early is not going to help that supplier much, which means that the one-time discount is all the value the organization gets.
  3. What Would Happen If This Specific Task Were Not Done At All?
      SI agrees that this is another inquiry Drucker would ask when doing an operational review, but doubts that it would be top of the list. SI believes that the first question would be along the lines of what would happen if we did not supply this product or service, from a market perspective and from an organizational perspective, and then when that understanding is gained, and a commitment to the product or service is confirmed, the individual tasks that are currently involved in the production and/or delivery would be questioned.
      Of course, from a Supply Management perspective, the first question is pretty easy. Either other units would absorb the minimal necessary functions, and probably do them poorly, or the company would return to the age of end-to-end siloed production where it did everything from mining the raw material to delivering the final product to the store shelves.
      The question posed by Rick is the critical question and needs to be asked of each project and task undertaken by Supply Management. If the answer is “not much”, the task or project is not value-add and probably should be dropped in favor of a task that is (more) value-add. For example, let’s take a buyer who notices that an evergreen contract for widgets, which has been in effect for five years, is coming due, which states the organization gets a 10% wholesale discount off of list price. Let’s also say that the average price increase has been about 3% per year, even though market indexes have only been going up about 2%. At a first glance, there might be a savings opportunity of 5% through re-negotiation or re-sourcing, but let’s also say that demand for the widgets has fallen 50% over the past five years, and that the total annual spend is only 2 Million of the 500 Million of Spend Under Management (SUM). Let’s also say that the organization only has the resources to tackle about 30% of the spend categories each year. In this case, if the buyer were to ignore this 0.02% savings opportunity on SUM and instead focus on sprockets, which has tripled in demand since the last contract was cut and which represents a 20 Million category where current prices are estimated to be at 3% above best price, she might be able to obtain a 0.12% savings on SUM instead. In other words, if the task of sourcing the widgets was not done at all, the organization would be better off (by a factor of 6)! Successful Supply Management always focusses on the most strategic opportunity first!

In summary, SI believes that these questions can help a Supply Manager tame the complexity of today’s Supply Chain by focussing on what matters and ignoring what doesn’t. They’re not a cure-all by any means, but insight never hurts!