Building Tomorrow’s Supply Chain, Part 2

Stephen DeAngelis

April 25, 2012

Yesterday, I discussed the views of three supply chain professionals who believe that many of the supply chains currently operated by companies need to transform. Those professionals were: Mark Pearson, managing director at Accenture; Kelly Thomas, Senior Vice President of Manufacturing at JDA Software; and Lora Cecere, Founder of Supply Chain Insights. Generally, the three analysts were in agreement about the factors they believe make supply chain transformation necessary and, for the most part, about the direction that supply chains must take. I continue that discussion in this post. In my mind, data integration is the key capability necessary to achieve their goals. Thomas believes that planning processes in six core areas must be aligned to achieve a dynamic (or market-driven) supply chain. They are: sales and operations planning (S&OP); demand planning; inventory planning; master planning; factory planning and scheduling; and collaborative supply planning. [“Building the Supply Chain of the Future,” SupplyChainBrain, 29 march 2012] He discusses each in turn beginning with S&OP.

Sales and operations planning (S&OP). The S&OP process should be a continuous process in which short-term demand predictions are reconciled with long-term organizational goals. S&OP must occur at both the operational and the executive levels, bringing both views together in a closed-loop planning process focused on consensus. Across every part of the organization, the S&OP process provides a disciplined cadence for monitoring and synchronizing demand, production, supply, inventory and financial plans via a rigorous Plan-Do-Check-Act process. The entire supply chain can share a common perspective on any issue and agree on an appropriate path for resolution.”

The only way for the entire supply chain to share a common perspective is to achieve some level of data sharing and integration. That is why cloud computing is becoming so important in the business world. Cecere believes that S&OP is just one of processes that must be built horizontally to achieve the desired results. She writes:

“We are just beginning to build horizontal supply chain processes that allow us to span the end to end supply chain. While we have talked for a decade about the building of the end to end supply chain, we now know that it is about MUCH more than the connection of your ERP to my ERP like a Lego set. The processes of demand sensing and shaping, demand orchestration, revenue management, supplier development and Sales & Operations Planning (S&OP) are the start of the building of horizontal processes. The winning supply chains of the future will turn the supply chain on its ear.” [“My Take: Supply Chain Future,” Supply Chain Shaman, 4 October 2011]

Thomas next discusses demand planning. He writes:

Demand planning. Advanced statistical modeling, supported by multiple algorithms tailored to unique item characteristics, must be applied to ensure that sourcing, production, inventory, transportation and distribution functions are optimized based on a shared forecast. Advanced demand planning tools should account for the impact of promotional and external events that will have repercussions across the global supply chain.”

Since my company is involved in providing Big Data analytic services, I obviously agree with Thomas on this point! Cecere also believes that Big Data analytics will characterize future supply chains, she writes:

Big Data Supply Chains. Traditional Supply Chain Management (SCM) focuses on transactional efficiency: order to cash and procure to pay. eCommerce spawned catalog and shopping cart technologies. This is not sufficient. These early versions of technologies drive an efficient, but most often a STUPID response. Lean practices can make stupid happen with less waste. These processes are inside-out (enterprise to trading partner or market) not outside-in (market to enterprise systems). They focus on vertical silo efficiency not on supply chain trade-offs and alignment. We have a new world of opportunity. As we enter the world of big data supply chains, we have the opportunity to combine the internet of things – where physical objects like inventory, machines and documents have presence and transmit a signal– with the omnipresence of mobility (anytime and anywhere) with awareness of location and the sensing of true customer wants and needs through the open and interest graph. New capabilities in analytics – in process memory and new techniques for predictive analytics – enable convergence of these technologies. It is up to supply chain professionals to reskill and think about more than speeds, feeds and cases in the warehouse to redefine supply chain processes to take advantage of new technologies.”

Thomas next discusses inventory planning.

Inventory planning. ‘One-size-fits-all’ inventory plans fail to recognize the differences among products. Instead, leading manufacturers are using advanced tools to create highly customized ‘designer’ inventory strategies based on key product attributes. Products are segmented based on their critical characteristics and managed accordingly. Wherever possible, inventory decisions are postponed to minimize financial risk and inventory levels are managed by exception to maximize time and cost efficiency.”

I find it interesting that Thomas talks about segmenting products based on their critical characteristics. Most supply chain analysts talk about segmentation as it applies to multi-channel order fulfillment. Both discussions of segmentation are appropriate and I believe this is what Pearson means when he talks about the importance of maintaining a portfolio of supply chains (see Part 1 of this discussion). Thomas next discusses master planning.

Master planning. Leading manufacturers are reviewing, analyzing and updating supply plans daily, instead of monthly or quarterly, to maximize customer satisfaction, while also protecting their profits. Through a problem-oriented design, their planners are intuitively guided to monitor performance issues and exceptions in the global supply network. In addition, a layered planning approach allows planners to rank their business objectives and make informed trade-offs. With clear visibility into the root causes or constraints to problems, planners can interactively adjust constraints and business rules to make continuous performance improvements.”

Thomas touches on two important points: speed and visibility. Things move fast in today’s business climate and decision-makers must have tools that permit them to make decisions within the industry’s decision cycle if those decisions are going to have a positive impact. The late concept military strategist and USAF Colonel, John Boyd, called this decision cycle the OODA loop — OODA standing for observe, orient, decide, and act. You can’t act effectively if you don’t have good data sharing that provides the required visibility (i.e., the proper orientation). Thomas next discusses factory planning and scheduling.

Factory planning and scheduling. Optimized production plans should be defined for plants by scheduling backward from the requirement date, while material and capacity constraints are simultaneously considered to create feasible plans. Advanced solutions should streamline and align the activities of production control, manufacturing, and procurement planning teams by automating mundane tasks and shifting the focus to more important functions. These tools should also provide time-phased reporting on key factory performance metrics, enabling planners to take corrective measures for both short- and long-term planning. By applying a management-by-exception approach, planners can eliminate unnecessary work, minimize planning fatigue and assess a variety of scenarios when the unexpected occurs.”

What Thomas just described can’t be achieved with some level of integration, synchronization, and/or alignment. I agree with Thomas that a management-by-exception approach is critical for ensuring that decision-makers aren’t wasting time monitoring routine operations. Their skills are best used managing the exceptions that can’t (or shouldn’t) be handled by automated processes. Thomas’ final discussion is about collaborative supply planning.

Collaborative supply planning. Most manufacturers purchase parts from a range of diverse and global suppliers, and these parts have different lead times, demand profiles and inventory strategies. Advanced tools enable manufacturers to manage this diversity through customized business rules that track performance exceptions. Dashboards, exception-based reporting and early warning systems allow supply issues to be identified and resolved before they impact the global network. Planners can also track the entire life cycle of procured parts, for example, to adjust forecasts, production schedules and transportation plans when late deliveries impact the manufacturing flow.”

I’m pleased that Thomas stressed the importance of getting the right information to the right decision maker in the right format at the right time. Analyzed data is of no value if it’s not used and it won’t be used if the systems providing it are not user-friendly. On this point Thomas, Pearson, and Cecere appear to be in complete agreement. Pearson called for systems that “Sense, Shape and Respond.” Cecere calls for learning systems that “Listen, Test and Act.” She continues:

“Supply chains do not listen and they also do not play by fixed rules. Yet, technologies like Business Process Monitoring (BPM) and linear optimization try to force this outcome. Advanced pattern recognition and the use of rule-based ontologies are fueling the first generation of supply chain systems that can learn. It was great to see Progress Software showcasing a supply chain event monitoring application built on pattern recognition of streaming data for a supply chain control tower application. (Progress has traditionally focused on financial data. It is good to see them with a new focus.) Enterra Solutions, IBM, and Transbase are also focusing on learning systems. We are very early in the building of learning systems, but I find it VERY EXCITING.”

I’m pleased that Cecere recognized Enterra’s efforts in this field. Thomas concludes:

“Manufacturing businesses of all types can realize substantial improvements across their global supply chains by transforming from a ‘push’ mindset to a more nimble ‘pull’ stance. They can realize diverse improvements, including revenue increases, inventory reductions, better asset utilization, lower materials costs and service enhancements such as fewer stock-outs. Overall, the average manufacturer is expected to realize a 15- to 25-percent operating margin improvement by synchronizing all supply chain planning activities with the pull of actual market demand. Looking toward the future, there is only one real certainty: that uncertainty will continue to prevail. Consumers will continue to shift in their confidence and spending habits. Materials and transportation costs will keep fluctuating. Channel preferences will evolve. The only way to manage your worldwide supply chain profitably in this uncertain environment is to understand true market demand at the earliest possible stage — then synchronize all your planning processes and make the right decisions based on that insight. The ability to create a synchronized, agile, pull-based supply chain will separate the leaders from the followers as economic uncertainty continues.”

I believe that all of the analysts whose views have been discussed in this two-part series arrive at the same conclusion. Pearson puts it this way:

“By converting to a dynamic supply chain model, companies can create and sustain multiple supply chains with a level of agility that allows them to respond to both opportunities and threats. As a result, businesses that make this transition will be positioned to readily embrace the unpredictable.” [“The Dynamic Supply Chain,” Industry Week, 8 March 2012

Thomas, Pearson, and Cecere insist that “agility” or “flexibility” is going to be an important characteristic of future supply chains. Cecere concludes, “New technology capabilities allow us to raise the bar to reduce fat AND improve flexibility. But, this can only happen if we adapt practices and adopt new technologies.” In a previous post [entitled Supply Chain Agility: Does it Matter?], I highlighted a discussion about agility that you might find interesting. The bottom line is that the future always begins with today and today is a good day to start building the supply chain of the future.