Category Archives: Supply Chain

Can The Five Attributes of Enduring Family Business Strengthen Your Supply Chain?

A recent article in the McKinsey Quarterly on “the five attributes of enduring family businesses” got me thinking about whether some of the finer points could be translated to supply chains. According to the article, the five dimensions of enduring family businesses are:

  • Foundations,
  • Ownership,
  • Wealth Management,
  • Business & Portfolio Governance, and
  • Family.

Basically, four dimensions of any good business plus the family dimension. But what got my attention was some of the points elaborated upon in the article. Specifically:

  • Long-term survivors usually share a meritocratic approach to management.They recognize and reward talent. This is a trait that is common to all winners.
  • Enduring family businesses regulate ownership issues — for example, how shares can (and cannot) be traded inside and outside the family — through carefully designed shareholders’ agreements that usually last for 15 to 20 years.They structure the business for long term stability. Supply chains need to be designed to stand the test of time as well if the business is going to survive.
  • Strong boards and a long-term view coupled with a prudent but dynamic portfolio strategy.Where supply chains are involved, there are no quick fixes that will generate long term gains and, in fact, most quick fixes will actually generate long term problems if a holistic view isn’t taken. Consider the case of the chemical manufacturer chronicled in the Strategy + Business article on Virtuous Connections that successively made matters worse with each quick fix they tried to make. However, when a more holistic view was taken with the eye to the long term, significant, rapid improvements materialized.
  • By diversifying risk and providing a source of cash to the family in conjunction with liquidity events, successful wealth management helps preserve harmony.Stable supply chains manage risk and diversify their supply base to prevent significant disruptions should one source of supply fail. They focus on cost avoidance, not savings, and reward their top performers for their success, sharing the wealth that is generated.
  • Charity is an important element in keeping families committed to the business that promotes family values as the generations come and go. The best Supply Management organizations are socially responsible and in addition to only supporting sustainable businesses, also support sustainable charities because they are good corporate citizens.

In other words, they plan for the future in everything they do. They don’t think about what is best today, they think about what is best tomorrow as they want to pass a successful company on to the next generation. And if you start thinking about passing a successful Supply Management organization on to your successor, whomever that happens to be, and think about the long term, I think you’ll find that you’ll build a stronger organization in the process that reduces emissions, avoids costs, and adds value in everything it does.

Share This on Linked In

Algorhythm: Still Pounding Out the Optimization Rhythm on the Tabla (Part II)

In Part I, we re-introduced you to Algorhythm, purveyors of a supply chain optimization rhythm solution platform out of Pune. In the day before yesterday’s post, we discussed their new Inventory Planning Module, inventrhythm, and indicated how it allows you to take your entire distribution network design into account, which is necessary if you truly want to minimize your inventory costs. Then we told you that if you were truly serious about getting the most bang for you inventory dollar, you had to go beyond inventory and also consider your underlying distribution network design, as it ultimately dictates how much your inventory is going to cost you. Just like a bad product design will lock in expensive commodity and engineering costs before it is sourced, a bad network design will mandate higher safety stocks and sub-optimal transportation methods, which will in turn lead to higher carrying and transportation costs. Thus, to truly optimize your inventory, you also have to simultaneously optimize your distribution network to the extent that you are able to do so.

With Algorhythm’s new Strategic Distribution Network Optimizer, which seamlessly integrates their netrhythm supply chain network design module with their new inventrhythm multi-echelon inventory optimization solution, you can simultaneously optimize your facility location, transportation methods, and inventory levels to achieve your end-customer service levels while minimizing your overall inventory-related supply chain costs.

Algorhythm’s netrhythm solution allows you to define the warehouses that are available to you at each level of your network (and to define the warehouses that must be used, or must not be used, in the solution) in addition to source factors and end customer locations; the transportation methods available; the transportation providers available (as well as any that must be used, or must be used, and minimum or maximum business levels); fixed, minimum and/or maximum lot sizes; available lanes, forecasted demand; target inventory levels; and network constraints (with respect to linkages, warehouses, product mix, mode, etc.) and produces a lowest cost distribution network design subject to your constraints that will achieve your target service levels at each location. In other words, it’s a very powerful network design model that lets you take all of the relevant components in your physical network.

But the integrated solution is even more powerful. In addition to the many layers of your distribution network, transportation modes, and logistics providers, you can specify detailed service targets by location, SKU, and period. You don’t have to use average demand levels — you can take into account your detailed forecasts by month, week, and even day. You can model all of your inventory related costs at different demand levels; segment inventory by SKU subgroup, group, and category; and analyze by cluster and channel. You can look at your various cycle times, load factors, and flow options and do so with respect to all of your network and inventory constraints (such as capacity and existing agreements) and cost components (fixed and variable). For example, you can take into account fixed truckload and variable less than truckload rates from a third party and compare that with fixed and variable costs of operating your own fleet (lease, maintenance, etc.). And when you’re done, you get the network design that minimizes your inventory levels and associated costs while ensuring that your service levels are met. The reports detail what inventory levels are needed where, when, and the replenishment cycles as well as what providers move the product, when, using what modes, and at what load factor. It’s a complete supply chain plan. Furthermore, it’s easy to work with because all the reports can be output to Excel — which allows you to drill and pivot to your heart’s content until you see the data in a form that’s most convenient for you to internalize. (And while spreadsheets are not supply chain solutions — especially where optimization and analysis is concerned, they are good for report manipulation, and everyone is already comfortable with them.)

And the results are beyond what you would get with either tool on its own because not only does your distribution network dictate your inventory costs, but changes in inventory requirements over time will dictate your network costs. (If a warehouse becomes unnecessary because customer locations move and new lanes open up, that’s a considerable fixed cost that is unnecessary.) It’s a viscous cycle, and unless you look at both in unison on a regular basis, you’re missing cost reduction opportunities. Consider the case study of a major (FM)CG company in India that typically maintained about 115 tonnes of inventory in its network in an attempt to meet service levels. Not only did every tonne of inventory, depending on the SKUs in question, represent anywhere between roughly ten thousand and a few million dollars of working capital tied up in inventory, but every tonne represented additional inventory costs that chipped away at margin and profit. When Algorhythm applied their basic SKU inventory model, they were able to present the CG company with a solution that trimmed 25 tonnes of inventory out of the system without affecting service levels. (In fact, the average service level was increased!) When they moved to a multi-echelon inventory model, which balanced inventory not just at each level, but across levels (and allowed inter-level shipments as well), they were able to trim an additional 26 tonnes of inventory. But when they applied the full Strategic Distribution Network Optimization model, they were able to shave an additional 5 million tonnes. In the end, they more than halved the required amount of inventory to meet the service levels, and halved the network related costs. That’s a very considerable chunk of change that went straight to the bottom line!

Share This on Linked In

Algorhythm: Still Pounding Out the Optimization Rhythm on the Tabla (Part I)

Since I last covered Algorhythm and their supply chain optimization rhythm, they’ve been pounding out a steady beat and extending the breadth and power of their unique supply chain optimization platform. Not only do they have extensive optimization capabilities in production planning, network planning, and logistics planning — with specialized solutions for oil, steel, and packaging, but they now have a best of breed multi-echelon inventory optimization capabilities and a best of breed distribution network design optimization platform that can take multi-echelon inventory requirements into account and allow you to optimize your distribution network around your detailed inventory requirements, which can be specified at daily demand levels if you desire. This is a very powerful capability that sets their platform apart from the other solutions on the market, as most of the other supply chain optimization platforms focus on inventory, or network design, but not both simultaneously.

To understand just how powerful their new solution is, we have to start by discussing how hard it is just to optimize inventory. There’s a lot more to inventory than just the carrying cost that is recorded on the books. There’s the cost of replenishment, the cost of a stock-out, and the cost of missed service levels, for starters. If your planning is poor and you’re always having to rush inventory, or if you’re not maximizing truckload volume, you’re spending a lot more on inventory replenishment than you should be. If a stock-out results in lost sales, that’s missed revenue opportunities which go straight to the bottom line. And if you keep missing your service level targets, your customers might just find a new source of supply at contract renewal time. (And on the flip side, if you are constantly carrying too much inventory to make sure you don’t miss service levels, your carrying costs will go through the roof.)

To optimize inventory, you have to take into account the many layers of your distribution network: factories, (first tier) national warehouses, (second tier) regional / provincial warehouses, and (third tier) local warehouses; storage space at each location; valid flows from one tier to another, as well as valid flows between nearby warehouses at the same tier; transportation options available; stores or end-use facilities that require the SKUs; the individual SKU demand patterns (and [expected] forecast accuracies); lead times (and variabilities); service levels; and costs associated with storage, transportation, and stock-outs at various inventory levels. (Transportation costs in particular will vary.)

This is because you don’t need the same service level at every node in the network to achieve that service level at an end customer location, especially if a customer location can be serviced by multiple distribution centres. For example, if an end customer location can be serviced by three different distribution centres, you can achieve a 98% service level (defined in terms of SKU availability) as long as each individual distribution centre has a 75% service level (as the chance of all three distribution centres being simultaneously out of stock and unable to service the customer location is 0.25 * 0.25 * 0.25 or 1.5625%). Furthermore, as the lead time from each DC to each customer location will vary depending upon distance, transportation options, and local routes, and so on, the inventory levels at each DC can vary and still allow you to meet your target service levels, which can in fact vary by location (as you’ll want a higher service level at a high-profit location than you will at a low-profit location as service levels drive inventory which drive costs). In fact, the deeper you dive into inventory, the more complex the cost equation becomes and you see that you really do need to take into account all of the elements supported in the Algorhythm Xtra Sensory Inventory Optimizer, inventrhythm, if you truly want to optimize your inventory costs.

But this is just the beginning. Since your distribution network design will ultimately dictate your inventory costs, to truly optimize your inventory costs, you have to simultaneously optimize your network (to the extent that you are able). Algorhythm’s platform can do this, and we’ll discuss what’s involved in Part II.

Share This on Linked In

The Probability of Supply Chain ROI Must Be Considered

As per this recent editorial by Dan Gilmore over on Supply Chain Digest, you can’t overlook the probability of success when considering the ROI of a supply chain project. A 10X ROI isn’t a 10X ROI until the returns and identified and realized. If the new system doesn’t work, or the assessment doesn’t turn up the expected savings, then there is no ROI. And the chances of this happening are dependent upon the probability of success.

Therefore, before you give a project a green light, you need to understand the probability of success. Because a 10X ROI probably isn’t worth pursuing if there’s only a 20% chance of success, especially when you’re sitting on a 5X ROI project that has a 90% chance of success. If you have a lot of options, a good rule of thumb for zeroing in the ones that should be given the most consideration is to multiply the probability of success by the expected ROI and focus on those with the modified ROI. For example, given the above two scenarios, the first one has a modified ROI of 2X (since only one in five similar efforts would succeed) and the second has a modified ROI of 4.5X ROI (since nine in ten similar efforts are expected to succeed).

The reality is that there are probably a dozen high-probability ROI projects you can do right now, no use expending your resources on the wrong one.

Share This on Linked In

How To Slow Your Supply Chain Transformation to a Crawl

In my last post, we discussed how transformation is necessary for high procurement performance and gave you some advice on how to get started. But transformation is not easy, and there are many pitfalls you can encounter along the way. In this post, we’ll addres some of those.

As a supply chain leader, you are probably in the midst of a process to redesign your supply chain to be more fault tolerant, more secure, and more safe to avoid the fiascos that your brethren (Huntington Meat Packing, Mattel, Toyota) have recently faced in the media. If you want the transformation to go smoothly, and be effective, you better avoid these “six mistakes that can derail your company’s attempts to change” its supply chain, as described in a recent HBR article on Accelerating Corporate Transformations. (Subscription Required)

  1. Cautious Management Culture
    There’s a time and a place for incremental improvement. That time and place is not during a supply chain transformation project. During times of “incremental improvement”, executives tend to be too preoccupied with daily operations and too busy to get involved in redesigning the entire business. During a transformation, the entire management team needs to be charged, focussed on the goal, and involved in making it happen as a team.
  2. Business-as-Usual Management Process
    A transformation can’t be pigeon-holed into established systems and processes and meeting times. It has to be its own system, it’s own process, and its own, all-hands-on-deck, meeting — run alongside the existing systems, processes, and meetings until you’re ready for a transition. People may feel that they don’t have quite enough time, but that’s normal, and often good. Put a little pressure on and stick to the schedule, otherwise a three-month initial phase can quickly become a six-month, nine-month, or longer phase as people keep delaying it because they’re too busy with current processes, systems, and meetings, which aren’t working and need to be replaced as soon as possible.
  3. Initiative Gridlock
    Sometimes you have to kill an old initiative for a new one to fly. As the article points out, executive leaders may lack the insight and courage to discard efforts that have come up short and, to avoid admitting failure, pile new initiatives on top of the ones that are struggling — and the result is gridlock. Success is best achieved when action agendas are restricted to only three or four companywide initiatives, each targeted to two or three carefully selected areas of focus and tied to clear outcome metrics. That way workers aren’t overloaded and can focus on achieving clear, non-conflicting, goals.
  4. Recalcitrant Executives
    Many executives … choose to avoid conflict and hope that the “clarity” and “efficacy” of their grand plan will quickly win people over. Problem is, what’s clear to them isn’t always clear to their counterparts or their direct reports. And if you don’t take the time to win over a “deep denier”, resentment, and a need to undermine your efforts, can build and eventually bring your project to a dead stop. You have to be willing to confront, debate, and fight-for your project. You might not be able to change everyone’s views, but if you can convince them you’re serious and that your initiative is well researched and thought out, and earn their respect, you greatly improve the chances that the dissenters don’t stand in your way.
  5. Disengaged Employees
    Employees, who do most of the actual work, are the key to your transformation. It’s critically important to involve them in the transformation process as early as possible. This should include sessions that inform them of the upcoming transformation before it starts as well as training and Q&A sessions as early as possible in project launch. Roll-out to the entire organization should be as rapid as possible.
  6. Loss of Focus During Execution
    If you don’t continually champion the transformation initiative as the day-to-day grind again takes centre stage, you might find that old habits gradually sneak back in, that leaders switch back to command-and-control mode, or that attention is turned to other “important” activities. As a leader, you have to follow the project through to the end to ensure success.

Basically, as the article points out, transformation launches must be bold and rapid to succeed. Even if the project can’t be done in less than a year or two, it still needs to get into gear quickly, and hit its early milestones as soon as possible, so that the team can see the early indicators of the improvements that will come their way. This will get their full support early on. And as the byline points out, to be successful, don’t lose your nerve!

I highly recommend you check out the full article. It has some great advice on avoiding each of these speed brakes that can bring your transformation to a grinding halt.

Share This on Linked In