Supply Chain Transformation: Don’t Look for Perfection

Stephen DeAngelis

March 29, 2013

Back in the fall of 2011, Trevor Miles wrote, “What fascinates me is that [a] duality of ‘simplicity’ and ‘complexity’ plays itself out in supply chain management between those [who] believe if we could only create the perfect plan all would be OK, and those, like me, who believe the perfect plan is not achievable so you had best focus on what Hau Lee calls the ‘Triple-A‘ supply chain – Agile, Aligned, Adaptable.” [“Embrace Complexity,” The 21st Century Supply Chain, 11 October 2011] Although Miles believes that the perfect supply chain management plan is unachievable, he stresses that he still believes in planning. He just believes that plans change as events occur and that not enough effort is being placed on building organizational capacity to deal with change. “If we accept that we all have limited budgets,” he writes, “too much of that budget is focused on creating the perfect plan and too little of the budget is focused on developing the skills and capabilities to respond very quickly to real demand.”

Pieter Nagel, a supply chain strategy consultant, believes that the very term “supply chain” has contributed to the perception that a perfect one-size-fits-all strategy can be achieved. He told Dustin Mattison, “I think the word supply chain should never have been coined. No company has a single supply chain that covers the whole business environment. It is just too simple.” [“The Future of Supply Chain Strategy,” Dustin Mattison’s Blog, 10 October 2012] Like Miles, Nagel believes that companies should embrace complexity. “I see supply and demand structures and that [are] derived from much bigger things,” he told Mattison. “I call these collaborative value networks. These are networks that are more appropriate to our dynamic global business environment as we function right now.” People understand that networks are more complex (and less linear and sequential) than chains. Thinking about value networks instead of supply chains puts one in a different mindset as he or she approaches a challenge. For that reason, Nagel told Mattison, “Supply chains as such don’t really have a future. By that I don’t mean they won’t be there. I just think it is too simple of a concept to meet the challenges we are currently facing in global business. Supply chain in my view exists within complex networks.”

Richard J. Sherman, president of Gold & Domas Research and author of a book entitled Supply Chain Transformation: A Practical Roadmap to Supply Chain Transformation, believes that change is another commonality that organizations must address when transforming their supply chains. “The greatest challenge to taking the first step in that journey is internal resistance to change,” Sherman told the staff at SupplyChainBrain. “The status quo is very comfortable and so we develop cultures or rules that inhibit us from taking innovative steps. That’s why I say ‘change is inevitable, but growth is optional.'” [“A Practical Road Map to Supply Chain Transformation,” SupplyChainBrain, 26 December 2012] The article concludes:

SWOT template“Sherman also emphasizes the importance of doing a ‘swot’ analysis, a process that evaluates strengths, weaknesses, opportunities and threats. ‘The culture of a company drives company behavior and strategy and part of that culture is an understanding of your strengths, weaknesses, opportunities and threats,’ he says. World-class leaders constantly are looking for opportunities in a changing marketplace and also are looking at the strengths and weaknesses of their organization to see where they are most able to capitalize on opportunities and where they are most vulnerable to threats, he says. ‘If you understand the dynamics between these four factors, you can start building a culture based on maturity.’ In Sherman’s view, the highest level of cultural maturity is self actualization, which corresponds to the Learning Organization described by Peter Senge. ‘If you have created a Learning Organization and a culture of transformation and change, you will be able to adapt to threats and maintain your leadership in the marketplace,’ he says.”

Gordon Colborn, a partner with PwC Consulting, claims that his company has ” identified six factors that set the leaders apart from the laggards.” [“Six factors that separate supply chain leaders from laggards,” Supply Chain Standard, 7 January 2013] Those six factors are:

* “Supply chain leaders deliver both better than average financial results and customer responsiveness. Leaders enjoy a 2X profitability advantage as compared to laggards, and a 17-point on-time delivery percentage advantage. It starts with recognition of the supply chain as a strategic asset, but less than half of survey respondents say their companies view the supply chain as a strategic asset.

* “83 per cent of leaders tailor their supply chains to meet the needs of different customer segments. Laggards are more apt to take a ‘one-size-fits-all’ approach with fewer supply chain configurations.

* “Leaders often outsource production and delivery, but retain global control over core strategic functions such as new product development, sales and operations planning (S&OP) and procurement.

* “Interest in next-generation technologies and sustainability is growing. More than half of survey respondents said they are implementing or plan to implement new tools for process automation or transparency. More than two-thirds think sustainability will play a more prominent role in supply chains in the future.

* “Supply chain leaders in both mature and emerging markets invest heavily in advanced capabilities that differentiate them from their competitors.

* “Leaders focus on best-in-class delivery, cost and flexibility to meet increasingly demanding customer requirements. The two factors that create the highest value are maximising delivery performance and minimizing supply chain cost.”

In other words, the leaders do pretty much what Trevor Miles thought they should do — that is, embrace complexity and create organizations that are agile, aligned, and adaptable. Jeffrey J. Karrenbauer, President of Insight Inc., offers ten steps that companies can follow that will help them create a plan of action for transforming their supply chains (or value networks). [“Ten Steps to Transforming the Supply Chain,” SupplyChainBrain, 8 March 21013] The first step is to get a handle on what you want to accomplish.

Step 1: Establish Project Scope. Consider a representative list of issues which may be addressed by a contemporary supply chain design tool, such as: System Structure Issues, Facility Ownership Issues, Facility Mission Issues, ‘What If’ Issues (i.e., Sourcing, S&OP, Sustainability, Flexibility, Capacity Planning, etc.). It is clear that the breadth of issues noted here is a far cry from the old ‘warehouse locations models.'”

Karrenbauer, like the other thought leaders cited above, recognizes that complexity has become a permanent feature of the business landscape and must be embraced and addressed. Although it’s important to take a holistic view of your value networks, you don’t necessarily have address every issue simultaneously. Prioritization should be part of scoping your project. The next step explicitly recognizes the fact that supply chains are not “chains” at all — they are networks.

Step 2: Describe the Network. Network description consists of developing lists for the commodities, locations, channels and time periods … the building blocks of the model.”

A number of thought leaders agree that it is important to map (or model) your supply chains. This activity not only helps you understand how your network can be improved it can help you understand your vulnerabilities as well. The third step is to get a handle on demand.

Step 3: Obtain Customer Demand Data. Customer demands, measured in units of weight, cube or units must be obtained for each customer region/channel/finished product/time period.”

Obviously, that is easier said than done. If obtaining demand data were easy, there wouldn’t so much written about how difficult it is to do Sales & Operations Planning. The fourth step is getting a handle on costs.

Step 4: Obtain Freight Costs. Possible sources include the firm’s own rates, distance-based equations, and sophisticated simulations of proposed traffic management policies. Commercially available databases are available for less-than-truckload (LTL), truckload (TL), and parcel rates for most North American locations … but not elsewhere.”

One of the reasons that many companies are now reshoring or near-shoring their manufacturing is because freight costs are continuing to rise. The face of transportation is constantly changing. For example, analysts predict that the U.S. could face a serious shortage of truck capacity and shortage of drivers in the future. That could force some companies to change how they get their products to market. Maersk recently announced that it was halting services that transported goods from Asia to the U.S. east coast using the Panama Canal. Shipping containers are now going to take a longer route through the Suez Canal. That could force some companies to keep more inventory in the pipeline. The fifth step involves facility infrastructure.

Step 5: Obtain Facility Data. Facility data consist of procurement, manufacturing, distribution center, cross-dock, port, etc., costs and capacities, as well as bills of material at manufacturing locations.”

All of the previous steps help provide information that is necessary to model supply networks with an acceptable robustness. You don’t really know if you’ve achieved what you desired until you test it. That’s the next step in Karrenbauer’s 10-step process.

Step 6: Validate the Model. At this point, the model structure and database are essentially complete. But before succumbing to the temptation to turn the optimization engine loose, it is essential that the database be validated by means of an historical cost/flow baseline. The model is ‘locked down’ to reflect historical facilities and flows and the results are compared with accounting data.”

A good validated model will allow you to conduct “what if” experimentation. This kind of testing not only helps you find efficiencies it also, as noted above, can help you test vulnerabilities to risks.

Step 7: Prepare Scenario Generation Data. Key to the success of a strategic supply chain design study is the rapid generation and solution of a wide range of scenarios. Real learning takes place as the team works its way through a well-structured series of ‘what if’ questions.”

I like the fact that Karrenbauer stressed the importance “well-structured” questions. As I have routinely pointed out, good solutions always start with good questions.

Step 8: Run Optimization Exercises. Each scenario defined in step 7 is done in conjunction with running a solver engine, a computer-based algorithm that takes a given set of data and finds the best (optimal) network configuration.”

Today’s technology permits organizations to run thousands of scenarios very cost effectively. The challenge, of course, is deciding what to do with results.

Step 9: Analyze Solver Results. Contemporary supply chain design packages come with an extensive repertoire of results interpretation/presentation aids, including maps, business graphics, canned reports, and links to powerful graphics packages.”

My one concern with Karrenbauer’s approach is that he seems to stress “optimal” solutions. There is certainly nothing wrong with optimizing a network; however, the spate of supply chain disruptions that have occurred over the past several years makes it clear that networks can get too lean making companies less resilient. Finding the right balance between too lean and too resilient isn’t an easy task.

Step 10: Develop the Plan of Action. The desired result of a supply chain design study should be a plan of action, not simply a recommendation for more study.”

Every business person can appreciate that last bit of advice. Studies don’t provide any return on investment unless they lead to plan of action that can be implemented and measured. Just remember, the plan doesn’t have to be perfect, but it does have to be responsive.