What are the critical elements to a world class supply chain network?

In today’s demand driven world, Supply Chain Management has become one of the crucial focus areas in many businesses. It is easy to underestimate the complexity of global supply chains. Yet the growth of global markets, increasing customer expectations, rising costs, and more intense and diverse competitive pressures are driving the development of new supply chain strategies and intricate network designs.

The increasing complexity is exactly why supply chain networks need to be frequently re-evaluated. It encompasses planning and management of all activities involved in sourcing, production, warehousing and distribution of products. A world class supply chain network is essential for product to consistently flow from the point of manufacture to the end user. A well-designed supply chain network can significantly improve margins, support expansion into new markets, enhance the customer experience, and reduce operating costs.

Three critical elements to a world class supply chain network are:

1. Strategy Before Network - With complex and competing business goals—such as minimizing capital, improving operating margins, lowering the carbon footprint, and enhancing the customer experience—a clear and concise supply chain strategy must be fully aligned with your business strategy. Surprisingly, many companies begin reducing network costs before they define how the network can be fully leveraged to support the business strategy. Uncertainty in product mix and volumes, expanding markets, margin goals, dynamic customer service strategies, value-added opportunities, and product returns and obsolescence are just some of the considerations that are often given minimal consideration or overlooked entirely.
2. Focus on Total Profit Optimization - An increasing number of companies are asking the question: “How can my supply chain be used to maximize profits?” This is a different objective than traditional network optimization projects, which define the objective as reducing costs and maintaining customer service levels. Currently, a combination of operating scenarios are required that drive alternative network models. Then sensitivity analysis is performed to evaluate impacts on how a company is working to improve the parameters it uses to drive shareholder value. Some examples include: EBIDTA, capital employed, working capital, operating expenses, tax effectiveness, margins, and cash-to-cash conversion.
3. Project Versus Ongoing Process - World class supply chain networks evolve as sourcing adapts to market changes, product line performance varies, and companies integrate. A world class network incorporates an ongoing process that focuses on the flexibility of the supply chain and ensures that objectives are met consistently and over a range of market conditions while enhancing the key drivers of shareholder value.

Companies have realized the importance of supply chain network design exercises but are still unable to make the best use of it. The challenge typically lies in selecting the right approach. Internal factors driving supply chain network design are focused on driving service delivery and working capital optimization across existing networks. As an example, inventory optimization exercises across the supply chain network focus on getting the inventory strategy right at each node of the supply chain using a customer-centric approach.

Companies have invested in processes, tools and resources to achieve efficiency and effectiveness through their supply chains. Many of them have migrated to an integrated planning approach with the objective of increased service level, responsiveness and on-time full delivery while judiciously balancing working capital needs. However such integrated planning often starts with an assumption that supply chain networks are static and tend towards driving optimization around the same. Since supply chains themselves are dynamic, supply chain network design exercises attempt to make supply chains agile enough to address current changes and future uncertainties.

Supply chain decisions typically are taken at three levels: strategic, tactical and operational. At the strategic level, decisions typically link to business strategy and involve high investments, high change-over lead times and longer horizons. At the tactical level companies focus on adopting measures that focus on competitive needs, such as moving to a target cost structure for servicing certain markets. At the operational level the major focus is operational efficiency. Decisions are typically made on a day-to-day basis under the framework defined at strategic and tactical levels.

Supply chain network design is a powerful modeling approach proven to deliver significant reduction in supply chain costs and improvements in service levels by better aligning supply chain strategies. It incorporates end-to-end supply chain cost, including purchase, production, warehousing, inventory and transportation. While this is considered a strategic supply chain planning initiative, organizations can gain competitive advantage by running supply chain network scenarios, evaluating and proactively implementing changes in response to dynamic business scenarios like new product introduction, changes in demand pattern, and new supply sources.

When kicking off a network analysis, team members often forget that one of the most important tasks is communication. Without communication, a plunge into the retrieval of information and direction to perform a network analysis will surely experience gaps and intensive rework. The second task is to re-establish the scope of the project, taking into account any changes that have occurred to that scope. A third is to establish an executive strategies workshop. This should be a formal meeting in which the business leaders agree to the primary drivers and direction of the company.

Next, the team must document the existing network. It is critical to collect information from all sites being considered because the study could result in recommendations for closing, moving, or expanding them. Visiting those sites can be insightful. The following information needs to be collected for each site:

• Space utilization,
• Layout and equipment,
• Warehouse operating procedures,
• Staffing levels,
• Receiving and shipping volumes,
• Building characteristics,
• Access to location,
• Annual operating cost,
• Inventory, and
• Performance reporting.

In addition to facility information, the following information should be collected for the transportation system:

• Freight classes and discounts,
• Transportation operating procedures,
• Delivery requirements, and
• Replenishment weight/cube.

Most business units within an organization are impacted by a network optimization. Therefore, senior leadership must understand and support which direction the project will take in order for it to be successful. This is where a clear definition of project scope becomes critical. Prior to the project, the leadership team agrees to an overall business direction for the following categories:

• Sales – What direction is the company taking to increase sales? (Global expansion, acquisition, e-commerce, same store sales, etc.)  Is marketing willing to reduce inventory to see the impact to customer service levels?
• Timeline – What is the desired recommendation date? This is tricky since it can result in a push to meet a date versus providing the best overall recommendations.
• Marketing – Are there changes in the business that will create a metamorphosis of product distribution, such as Internet daily promotions vs. bi-weekly store level promotions?  Is marketing willing to reduce inventory if there is an impact to customer service levels?
• Production – Does production understand the impact of optimal manufacturing batches to inventory to locations?
• Finance – How critical is cash flow and the impacts to major investment?
• IT – Are there systems in place to give the necessary information for the analysis to be conducted properly?  If not, agree to understanding the recommended approach from the support teams.
• Sensitivity Metrics – This is a great time for the leadership team to identify metrics that should be considered for sensitivity analysis.  This can include but not be limited to fuel costs, service time, planning horizon, and capital investment.
• Internal vs. External – Who should perform this analysis? Senior leadership must decide if it makes sense to perform the project in-house or to use an outside resource.

At the end of the data collection, a project team meeting is held to summarize the data collected and assess each site. This assessment will give the team insight into the operation and costs of the existing network. In addition, it will reveal information unknown to management that will be useful in developing alternatives. It is important to analyze and validate baseline information against information available from alternate and independent sources within the company. It is not uncommon for databases or database inquiries to yield incomplete results that would potentially skew the analysis.

Once the leadership team understands the components of its network, and has defined the scope of a project, and elects to do a network evaluation, the team responsible for the execution of the plan should begin the primary data collection for the modeling effort. It is not necessary to have everything prior to solicitations, but generally most reputable consultants will need the following information:

• Growth by organizational tier–formularized
• Sourcing locations and flow by SKU
• Outbound Flow by SKU to customer
• Trans-shipment movements between facilities
• DC cost metrics
• Outbound distribution\\fulfillment costs (fixed vs. variable)
• Facility characteristics (size, staff, lease/own, drawings, equipment within, capacities
• Fleet characteristics(Internal vs. external)
• Published costs metrics (case/cube/lb)
• General Ledger accounts for the businesses units involved
• SKU listing
• Inventory by SKU location
• Expected start date and requested completion no later than date (three or four required alternatives)

Many times, this becomes a very challenging step.  An organization must understand that evaluations require significant resources that recognize a sense of urgency but also a need to ensure that the information collected is accurate. There are costs and impacts to the accuracy of the network analysis if the beginning information is in poor condition.

Regardless of which modeling method is used, the overall approach should closely resemble the following steps:

• Validate the existing network. Run a computer model to simulate the existing cost. Compare this cost with actual cost.
• Run alternative networks. Once the model is validated, run alternative networks for present volumes and forecasted volumes.
• Summarize runs and rank. Create a table to summarize costs by alternative. The table should list individual distribution center costs.
• Summarize all annual costs and service factors. Create a table that shows, by alternative, all cost and service factors.
• Perform a sensitivity analysis. This is based on the idea of setting up runs that fluctuate some components of the data. One might be a cost that is uncertain or has potential to change. By modifying this one parameter, the effect on the run can be determined.
• Determine all investment costs associated with each alternative. Look, for instance, at the costs of new warehouse equipment required to save space, expansion, and construction costs, or at any building modifications such as adding dock doors.

A good supply chain network plan relies on a defined set of requirements. It should not be composed simply of ideas, thoughts, or possibilities. Possible requirements should be defined, analyzed, evaluated, and validated. They should result in the development of a specific set of strategic requirements. Normally, the planning horizon for such a plan is stated in years, with a five year plan being the most typical. An effective network plan is also action-oriented and time-phased. Where possible, the plan should set forth very specific actions needed to meet requirements, rather than simply state the alternative actions available.  Future sales volumes, inventory levels, transportation costs, and warehousing costs all come into play.

To get company leadership’s support for the plan, a detailed written document and maps should accompany the recommended action to describe and illustrate how the network will be implemented and how it will operate. The result should illustrate which strategy is best for the company because it maximizes profits to stakeholders.

Source: Victor Coronado, Director of Warehouse Distribution and Logistics Operations

Hello Team,

The few Basic Rules of a Successful Supply Chain. is

·         Supply Chain-A Definition:  The Supply Chain is the process through which a company creates and distributes its products and services to the end user. It includes a number of specific elements; production planning, material sourcing, transportation management, warehouse management and demand management. These functions are tightly integrated to provide the products and services to the end user in an efficient, timely and profitable manner. In addition to internal functions, the supply chain also encompasses the activities of external entities, including materials and parts suppliers, manufacturers, distributors, and transportation providers. The supply chain comprises not only the movement of goods between supply chain participants, but also the flow of information and funds. Supply Chain execution begins at the point a demand is created and is about the efficiency and efficacy with which that demand is fulfilled.

·         The Scope of this Document Anyone who has spent any time working with and around any supply chain should have a good idea of the underlying principles. Most supply chains are built with the standard supply chain principles in mind and, in their infancy, typically function to a satisfactorily level. However, the problems arise when supply chains mature and are asked to meet an ever-increasing list of tasks and strategies. The business, the suppliers, the processes and even the people change. The actual supply chain can also change as the Supply Chiang Management (SCM) process is evolutionary by nature.

·         The Basic Rules of a Successful Supply Chain: Demand triggers must be identified as quickly as possible. Speed is often the primary concern of anyone who manages a supply chain. The faster stock moves, the better the chain is perceived to be. There is no doubt that getting the right part to the right place at the right time – as quickly as possible – is the #1 priority of a supply chain.

·         Make sure the person who is supposed to take action acknowledges and confirms this requirement. Information about demand changes and the requested actions should always be targeted directly to the person who can use it and is expected to take the appropriate action. Optimally, this should be the same person. As importantly, these details should be translated into a format that is easy for that person to understand and use. To assure that the request has made its way to the responsible person, there need to be checks in the system that avoid information being lost. Verification checks and read receipts are one way of doing this. Visibility of the response status to other people in the supply chain can then be used as backup if the primary response process fails. Our goal here is as follows: Everyone in the direct line from supply to usage should know that the triggered event has a) taken place and b) been acknowledged by the person responsible for making sure that any next steps are set in motion. Let’s look at a real-life example: When you send someone a critical e-mail or order a product online, you expect to receive, nearly instantaneously, a return e-mail indicating that your submission was received and that the transaction has been, at least, logged. While you might not expect any action to take place quite yet, this acknowledgement allows you to rest assured that any necessary wheels are set in motion. Rule #3: Everything needs to remain in context. Each time a trigger occurs – or data is collected – your supply chain should include a mechanism for answering the following question: Is this a ‘normal’ event, an ‘extraordinary’ one, or something in between? To do this we must first define ‘Normal’ for that part and supply process. For example: Say you order a monthly magazine to be mailed to your house. First, you receive a ‘thank you’ note from the publication. Then you expect to start receiving the publication itself. You will view it as ‘normal’ if, at the beginning of the next month, you receive the publication in your mailbox. You will also view it as normal if you do not receive the publication that first month. You might be disappointed, but you understand that sometimes the publication does not arrive that first month. What would make you surprised? If on that first month you received two copies of the publication. Or, if after having received the publication every month for seven months, it does not arrive on the eighth month. This is because our past experience of events also contributes to our view of normal. A forecast that has been confirmed consistently by actual usage, or has been compared to usages of similar parts, is much more powerful than either piece of information alone.

·         The Basic Rules of a Successful Supply Chain: It is this normality and previously validated future prediction that allows us to detect when an event is out of the ordinary and is important. It is this that triggers us to seek a context

·         Has demand increased or decreased? Is this a single event in one area or are we about to see dramatically abnormal demand throughout the chain? This is the context a supply chain needs to be able to see and provide in order to lessen the likelihood of overstocks and shortages. In other words, the supply chain reporting system should provide more than data, it should also provide information. It needs to show not simply numbers, but changes. But before we move to the next rule, there is another real-life example that comes into play: asking for directions. If you ask two people for directions and both of them independently agree on the correct path, you are both more confident and more certain that you have received good instructions. Imagine being able to ask someone at both the departure point and the arrival point about the best route to pursue. If they match, you are even more confident in the directions. Bing able to compare forecast models against usage data can provide this perspective … and increased confidence.

Mechanisms for clarification are critical. Let us assume we have seen an extraordinary trigger that is, for sake of this example, fifteen days earlier than expected. That is, fifteen days earlier than both the forecast and the historical data have led us to believe is ‘normal.’ The supplier has seen this, sent their recognition of the trigger, and understood that this was abnormally early. 

Regards,

Saiyid

Hello Team,

The few Basic Rules of a Successful Supply Chain. is

·         Supply Chain-A Definition:  The Supply Chain is the process through which a company creates and distributes its products and services to the end user. It includes a number of specific elements; production planning, material sourcing, transportation management, warehouse management and demand management. These functions are tightly integrated to provide the products and services to the end user in an efficient, timely and profitable manner. In addition to internal functions, the supply chain also encompasses the activities of external entities, including materials and parts suppliers, manufacturers, distributors, and transportation providers. The supply chain comprises not only the movement of goods between supply chain participants, but also the flow of information and funds. Supply Chain execution begins at the point a demand is created and is about the efficiency and efficacy with which that demand is fulfilled.

·         The Scope of this Document Anyone who has spent any time working with and around any supply chain should have a good idea of the underlying principles. Most supply chains are built with the standard supply chain principles in mind and, in their infancy, typically function to a satisfactorily level. However, the problems arise when supply chains mature and are asked to meet an ever-increasing list of tasks and strategies. The business, the suppliers, the processes and even the people change. The actual supply chain can also change as the Supply Chiang Management (SCM) process is evolutionary by nature.

·         The Basic Rules of a Successful Supply Chain: Demand triggers must be identified as quickly as possible. Speed is often the primary concern of anyone who manages a supply chain. The faster stock moves, the better the chain is perceived to be. There is no doubt that getting the right part to the right place at the right time – as quickly as possible – is the #1 priority of a supply chain.

·         Make sure the person who is supposed to take action acknowledges and confirms this requirement. Information about demand changes and the requested actions should always be targeted directly to the person who can use it and is expected to take the appropriate action. Optimally, this should be the same person. As importantly, these details should be translated into a format that is easy for that person to understand and use. To assure that the request has made its way to the responsible person, there need to be checks in the system that avoid information being lost. Verification checks and read receipts are one way of doing this. Visibility of the response status to other people in the supply chain can then be used as backup if the primary response process fails. Our goal here is as follows: Everyone in the direct line from supply to usage should know that the triggered event has a) taken place and b) been acknowledged by the person responsible for making sure that any next steps are set in motion. Let’s look at a real-life example: When you send someone a critical e-mail or order a product online, you expect to receive, nearly instantaneously, a return e-mail indicating that your submission was received and that the transaction has been, at least, logged. While you might not expect any action to take place quite yet, this acknowledgement allows you to rest assured that any necessary wheels are set in motion. Rule #3: Everything needs to remain in context. Each time a trigger occurs – or data is collected – your supply chain should include a mechanism for answering the following question: Is this a ‘normal’ event, an ‘extraordinary’ one, or something in between? To do this we must first define ‘Normal’ for that part and supply process. For example: Say you order a monthly magazine to be mailed to your house. First, you receive a ‘thank you’ note from the publication. Then you expect to start receiving the publication itself. You will view it as ‘normal’ if, at the beginning of the next month, you receive the publication in your mailbox. You will also view it as normal if you do not receive the publication that first month. You might be disappointed, but you understand that sometimes the publication does not arrive that first month. What would make you surprised? If on that first month you received two copies of the publication. Or, if after having received the publication every month for seven months, it does not arrive on the eighth month. This is because our past experience of events also contributes to our view of normal. A forecast that has been confirmed consistently by actual usage, or has been compared to usages of similar parts, is much more powerful than either piece of information alone.

·         The Basic Rules of a Successful Supply Chain: It is this normality and previously validated future prediction that allows us to detect when an event is out of the ordinary and is important. It is this that triggers us to seek a context

·         Has demand increased or decreased? Is this a single event in one area or are we about to see dramatically abnormal demand throughout the chain? This is the context a supply chain needs to be able to see and provide in order to lessen the likelihood of overstocks and shortages. In other words, the supply chain reporting system should provide more than data, it should also provide information. It needs to show not simply numbers, but changes. But before we move to the next rule, there is another real-life example that comes into play: asking for directions. If you ask two people for directions and both of them independently agree on the correct path, you are both more confident and more certain that you have received good instructions. Imagine being able to ask someone at both the departure point and the arrival point about the best route to pursue. If they match, you are even more confident in the directions. Bing able to compare forecast models against usage data can provide this perspective … and increased confidence.

Mechanisms for clarification are critical. Let us assume we have seen an extraordinary trigger that is, for sake of this example, fifteen days earlier than expected. That is, fifteen days earlier than both the forecast and the historical data have led us to believe is ‘normal.’ The supplier has seen this, sent their recognition of the trigger, and understood that this was abnormally early. 

Regards,

Saiyid

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