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S&OPManaging supply chain is increasingly a demanding task of satisfying the customer and the shareholders. Supply chain professionals worldwide have a daunting challenge of managing a global supply chain aligning with the business needs and financial downturn adds another dimension to the complex challenge structure. All agree that supply chain manager’s primary task should be apart from keeping customers or stores properly stocked and deliver the perfect order every time, they must balance the need for low costs, proper inventory levels and maximum service levels. They must ensure that supply chain management is an integral component of the company’s strategic direction and plan to create and maintain competitive advantage.

Apart from the above mentioned challenges and tasks of a supply chain manager, we have few more issues to tackle in the modern world and they are: Globalisation; Terrorism; Product Proliferation; Scrambled Merchandizing and Customer Retention.  In order to balance all tasks and counter all challenges, we need a process and that is called Sales and Operations Planning.

Sales and operations planning (S&OP) is an integrated business management process developed in the 1980s by Oliver Wight through which the executive/leadership team continually achieves focus, alignment and synchronization among all functions of the organization. The S&OP planning includes an updated forecast that leads to a sales plan, production plan, inventory plan, customer lead time (backlog) plan, new product development plan, strategic initiative plan and resulting financial plan. Plan frequency and planning horizon depend on the specifics of the industry. Short product life cycles and high demand volatility require a tighter S&OP planning than steadily consumed products. Done well, the S&OP process also enables effective supply chain management (source: WIKIPEDIA). S&OP is critical for any company that is targeting strong performance.

Let us understand global challenges faced by many organisations in different regions in order to understand how S&OP can help us to counter them.S&OP 1

As explained above more or less all regions in the world face the some unique challenges such as demand for velocity improvement, faster and accurate order fulfilment, global supply chains, pressure to reduce costs, and last but not least is to improve top line revenues.

Planning can be classified as two different methods, the first one deal with unconstrained planning.  This means typical material requirement planning, which answers the question of what is required to meet the demand without any constraints.  The second method is constrained demand planning.  This method with the help of a tool measures what can be produced with a given constraints and available resources.  Let us see who is good at unconstrained planning? EMEA and all other regions are doing very well both in responding to the unplanned event and also in unconstrained environment. In my opinion, the most disappointing factor of the survey is that the best in class results in case of responding to unplanned event or demand and conducting gap analysis and initiating corrective actions, indicate there is lot of work on hand.

Constrained planning and the ability to respond to the unplanned demand in a timely manner indicate the S&OP 2level of supply chain flexibility and supplier collaboration, apart from manufacturing nimbleness.  Living with a problem and addressing the problem through gap analysis distinguishes the supply chain.  The world is the true classroom. The most rewarding and important type of learning is through experience,  there is only one thing more painful than learning from experience and that is not learning from experience.

But how many organisations are involved in going through the S&OP Process?  EMEA seems to be heading the group at a Macro level.  The S&OP success largely depends upon the SKU level measurement, all other regions are better compared to EMEA.  What is disappointing is that no other region is close to the best in class.  S&OP process is driven by the people and it is very critical that they understand the importance of the process and implement it effectively in order to drive the organisation in the right direction.  It is heartening to note that all other regions have done better than best in class in understanding the business systems and utilising them effectively.  Individual or functional (departmental) goals and objectives sometime derail the S&OP process and that could result in heavy inventory and disappointed customers and shareholders.S&OP 3

It is needless to add that technology is very critical for the S&OP Planning and execution.  What is sad to know is that many organisations do not invest in specialised IT tools to drive the S&OP/Demand planning, they rely on ERP tools.  This was very clearly established by the survey undertaken by Aberdeen group. Demand forecasting in a retail and FMCG markets and within PUSH supply chain area is challenging due to product proliferation.  You need a specialised tool that could provide variety of options and models with regard to your future demand.

North America organisations are heavily wedded to legacy systems compared to other regions.  It is sad that a matured market such as North America depends on the legacy and old systems and lacks the emerging markets capability.  Further, NA does not boast an integrated ERP solution in place. It is clearly evident that emerging markets are more adventurous in investing in technology which could lead to better planning, less inventory, improved customer service and increasing top line revenue with attractive bottom line.

S&OP 4We have made an attempt to understand how the world is managing S&OP business process.  Before I sign off, let me spend few minutes to explain the current challenges of S&OP process globally.  The first challenge is to align the process to the business strategy; we have often seen both heading in the opposite direction. The business ownership for the process, it is quite common to see S&OP as a sub function of Supply Chain with more emphasis on managing supply than the demand.  In my opinion the biggest challenge is managing the change (fear of failure).  This is very commonly seen in constrained planning situations.  Many people believe that S&OP process is all about the forecasting the demand but very few understand that it is a process to align the operational excellence with business needs in the form of customer demand.  Many do not see the value of S&OP in containing the inventory carrying thus resulting in cost reductions.  In order to address this issue what we need is executive governance.  The executive team should understand the importance of S&OP process and drive it effectively.  It is quite common to see Management team is involved in approving the outcomes and not driving the outcomes.  It would be effective if executive management drive this process aligning with organisational goals.  Another commonly noticed challenge is the new product launch.  Any product launch should go through product lifecycle management (PLM) process and all elements of PLM process should be thoroughly reviewed before the launch, if not the S&OP process will not help in achieving the product success.  The last but not least is connecting the planning to the execution.  Many organisations are good at planning, when it comes to execution, to great extent many are not successful.  S&OP is only a business process, in order to make it successful, business discipline is critical and governance is paramount.


The Story of Three Arrows

three arrows

As we all know that the Global Economy is not heading in the right direction.  One of the best indicators of global growth is oil prices.  Oil prices (Brent) are assumed to average about $105 per barrel (pb) in 2013-2014, compared to $110 pb in 2012.  Unemployment remains elevated in many developed economies, with the situation in Europe being the most challenging. A double-dip recession in several European economies has taken a heavy toll on labor markets. The unemployment rate continued to climb to a record high in the euro area during 2012, up by more than one percentage point from one year ago. Conditions are worse in Spain and Greece, where more than a quarter of the working population is without a job and more than half of the youth is unemployed.

Christine Lagarde, Managing Director, International Monetary Fund (IMF), described the global economy recovery in 2013 as “fragile and timid” because the Eurozone is prone to political crisis and slow decision-making processes.

Some believe that China is the engine that propels global economy growth in the right direction.  There is a belief that China is recovering and that signals global recovery.  However, the statistics reveal a mixed result according transport intelligence.com.  The February figures from Container Trade Statistics (CTS) show that, if anything, container trades are heading downwards. Overall, Asian exports – including on intra-Asian trades – fell by 26.4% as compared to January and by 8% as compared to February last year. In addition, import activity for Asia fell by 10% compared to January 2012, whilst on a year-on-year it was down by 12%. The export traffic indicates a twelve month low.  This is confusing and one thing is certain and that is economic downturn is here to stay some more time.  When we look at the major air cargo carrier performance during the first quarter, the results are no different.  Lufthansa Cargo has reported a 1% increase in its aircraft utilisation in the first quarter of 2013. In a difficult market environment, the cargo carrier scaled back capacity by 7.4%. Due to a smaller decline in sales, by 5.9%, the company was able to increase its load factor to 71.4%.  Overall, Lufthansa Cargo carried approximately 400,000 tonnes of freight and mail in the first quarter of the year – a decline of 7.2% compared with the same period in 2012.

Keeping in view of the global financial trend, business houses have to develop strategies that will take them through the tough financial conditions.  Any organisation will target three different improvements and they are, top line revenue growth, bottom-line improvement and increase satisfied customer base.  In order to meet the above, organisations will develop number of objectives, each describing a desired future condition toward which efforts are directed. An objective is a statement that clearly explains actions to be taken or tasks to be achieved by an organisation. If the objectives are accomplished, then the business should be a success.

Research reveals that most of the business organisation will have two types of business objectives and they are Economic and Socio-human objectives.  However, the organisation can focus on socio-human objective only when they are financially successful.  Hence, the focus is on economic objectives and they are mainly three objectives targeted by most of the entrepreneurs.  They are (1) Business prosperity through improved margins and increased sales volume (the upward arrow); (2) Speed to the market place to maximise product availability (the side way arrow) and (3) Cost reduction/optimization to make the product competitive to sustain in the market place (the downward arrow).  In fact all three objectives are inter-related and driven by cost trade-off decisions within supply chain.

The purposes of objective setting are, to establish a standard for evaluating the success of the business and set priorities for its management and staff. Objectives help keep management and staff focused on achieving set targets and keep them away from distractive activities that drain business resources.  The appropriate organisational goals will also to address the challenges of global economy.

The risks of doing business and competing in a global economy seemingly change by the day. At the same time, risk management and cost seem to go hand in hand, leaving many executives to wonder: Is it possible to reduce risks and still grow the top line? The answer is yes, and there are stories to prove it. A key ingredient is a “conscious” approach to managing risks in your organization’s supply chain. Every business that depends on goods and services in a global supply chain is at risk for various supply chain disruptions, or worse: contamination or product failure.

It is evident that the key to the success of any organisation lies in Supply Chain efficiency.  The industry has realised that if one manages the supply chain efficiently aligns it to the business dynamics; the success of the organisation is assured.  The optimisation of Supply Chain was handled by different section of experts in different ways.  Some think that technology is the solution to the supply chain efficiency some believe that the strategy is the key to the success. And some believe that people (the right team) are responsible for supply chain innovation through thought leadership.

Supply chain performance has never been as critical as it is today. In today’s dynamic world what is good today can turn into ugly tomorrow in market place.  At some stage buffer inventory was recommended to meet the demand fluctuations (JIC) and now carrying inventory more than required levels is undesirable and JIT is the favoured option. Under these ever changing circumstances, supply chain efficiency plays a very vital role in keeping the organisations alive. In order to achieve maximum benefit from a supply chain and creating competitive advantage in the supply chain wars, a supply chain must be performing at its best and continue to perform that way.  We have seen organisations flourishing through the product innovation and we are today witnessing organisational superiority in the market place through innovative supply chains.

If we take a hard look at the IT hardware industry, most of the big brands and your local assembler provide more or less same product.  However, there is huge price variation which is possible due to supply chain innovations.  When we look at the retailers, the product range is the same, origin of supply is the same and the quality of the product is almost the same.  However, there is huge price variation.  The reason is supply chain efficiency.  The procurement strategy, the distribution strategy and the organisational objectives make the difference.

Supply Chain efficiencies cannot be ignored by any industry in today’s economic downturn.  However, the truth is that some of the organisations do not recognise what is appropriate for their supply chain and pursue inappropriate policies and concepts.  Fortunately, we have only two supply chain processes and they are known as Pull and Push. The failure and success of the business model mainly depends upon selecting the appropriate process.  If a retailer who predominantly follows push process decides to use pull process, the end result would be a catastrophe.  At the same time if an IT hardware manufacturer decides to use push process, will end up with high inventories and obsolete stock in the warehouse.  If one can align the supply chain with the business dynamics, it is truly possible to register revenue growth and improve velocity and also reduce costs.

In today’s world what is critical to the business success is the right supply chain strategy that could meet customer expectations and the last but not least is the right team with the ability to think outside the box and innovate with thought leadership.

save costs

Image credit: San Francisco Sentinel

2012 in review


The WordPress.com stats helper monkeys prepared a 2012 annual report for this blog.

Here’s an excerpt:

4,329 films were submitted to the 2012 Cannes Film Festival. This blog had 42,000 views in 2012. If each view were a film, this blog would power 10 Film Festivals

Click here to see the complete report.


In general supply chain innovations or improvements focussing on inventory optimization target either lead time reduction or cost savings and in some cases both.  The bottom-line for these concepts is to reduce or eliminate inventory and minimize the impact of inventory carrying costs on the P&L and to reduce the lead time.

If I were an entrepreneur involved in manufacturing, I would love to own inventory that is just required for that day’s production needs.  If I am big reseller I would like to buy material that is just required to meet day’s demand.  If I am a big buyer, I would prefer suppliers to carry inventory that is required by me.  The reason for all these demands is that Inventory costs money and its money to carry the same.  And that is the reason everyone would like to differ the inventory carrying.  Do we have solutions to meet this requirement within Supply Chain?  And that is the reason we are here to find out the solutions.

Some of the solutions that could answer the questions raised above include the following:

  1. Vendor Managed Inventory
  2. Consignment Inventory
  3. Inventory Financing
  4. Cross-Docking

Vendor Managed Inventory (VMI):

This is a very popular concept in Asia and majority of High Tech/IT manufacturers use this solution.  What is VMI?  The title indicates the meaning and objective of the solution.  The inventory that is required by the manufacturer is managed and maintained by the supplier at the back yard of the manufacturer. The objective of VMI is that by pushing the decision making responsibility further up the supply chain, the manufacturer will be in a better position to support the objectives of the entire integrated supply chain resulting in a sustainable competitive advantage.  This solution creates a transparent supply chain enabling supplier and buyer to avoid uncertainties in supply.  Centralizing and automating the replenishment decision also helps reduce the distortions in ordering introduced when there are several intermediaries that place orders in a supply chain.  The big change to supply chain is that VMI transforms push supply chain to pull supply chain thus avoiding wastages and uncertainties.

As you can see from the above graphical presentation, in a VMI environment three parties are involved.  The first one is the Vendor, the second one is the manufacturer or the buyer and the third one is the 3PL appointed by the buyer to store, manage and supply vendor material to the production line as and when required.  The buyer provides indicative yearly consumptions and allows the vendor to develop safety stocks and reorder points to ensure that the VMI hub never runs out of inventory.  One can notice the responsibility of inventory planning is shifting to the vendor instead of buyer.  This model also provides the certainty to the Vendor with regard to demand for their product.  This model is very popular in raw material supply environment.  However, this model can be customised to a finished goods environment.

Some of the benefits of VMI:

  1. At K-mart, customer service measures have gone form the high 80s to the high 90s.  Inventory turns on seasonal items have gone from 3 to between 10 and 11, and for the non-seasonal items form 12-15 to 17-20.
  2. ACE Hardware, the large hardware cooperative, has seen fill rates rise 4% to 96% in the past few years.
  3. Fred Meyer, the 131-unit chain of super-centres in the Pacific Northwest, reduced inventories 30% to 40%, while sales rose and service levels increased to 98%.  This was due to a VMI program implemented with two key food vendors.
  4. Grand Union, a New Jersey-based grocery retailer with more than 100 stores and three DCs, improved inventory turns by close to 80% and achieved 99% service levels.

Source: Fernando del Cid, Roger Gordon Brian Kearns, Paul Lennick, and Andreas Sattleberger.

The Consignment Inventory:

This is something similar to VMI with subtle difference.  In this case there are only three parties involved, that is the buyer and the seller.  Under this model, Inventory owned by the supplier is held by the buyer and the ownership of goods transfer to the buyer only at the point of consumption.  Consignment stock arrangements are usually put in place to assure continuity of supply to the customer or to reduce the customer’s working capital or both. While much of the benefit is to the customer, the supplier also benefits because the customer is tied to his product, he does not have to hold stock, and has more freedom in choosing when to manufacture or procure additional supplies to replenish the consignment stock.

Having worked in mining industry, I have seen many suppliers dealing with mining products enter into an consignment inventory agreement with the mining companies to supply inventory to the mining companies on consignment basis and generally billed at the end of the month when consumption is accounted.  This allows suppliers to tie the buyer to their product and the buyer is assured of continuous supply without investing in the inventory carrying and avoids the cost of inventory carrying which could be up to 25% per annum.

Some of the risks associated with consignment inventory model includes,

  1. Increase in overall inventory carrying with in supply chain.
  2. The pressure to reduce inventory is indirect.
  3. Due to lack of inventory planning by the buyer could lead to obsolete inventory for the supplier.
  4. Suppliers are likely to incur extra costs by carrying out stock audits on customer’s premises.
  5. A very high quality of stock rotation and record accuracy is required to be maintained by the customer’s employees when dealing with the suppliers’ inventory.

Inventory Financing:

 In short, finance provided to the borrower against the inventory as collateral. Inventory Financing companies are willing to finance against the inventory/purchases up to 70% to 90% of their value with a repayment period of 120 days. This allows the buyers to choose their suppliers based on their products, prices and service, rather than on the credit availability they offer.

In the present e-commerce environment where “cash to cash” cycle is shrinking for the big players, it is also imposing a financial stress on the smaller players who happened to be suppliers.  In order to understand the cash to cash term well, let me quote the definition provided by SCOR, “Cash-to-Cash Cycle Time is a continuous measure that is defined by adding the number of days of inventory to the number of days of receivables outstanding and then subtracting the number of days of payables outstanding. The result is the number of days of working capital your organization has tied up in managing your supply chain.”

More and more organizations are looking for solutions to differ inventory ownership.  The vendor managed inventory, JIT delivery are the examples of operating without carrying inventory.  These solutions may work well for the buyer but what about the seller who may be a small player.  This means that the suppliers are made to wait long to convert inventory into cash.  In case of JIT delivery solution, the supplier has to carry inventory at his facility which results in increasing storage and operational expenses and in case of VMI the suppliers are expected to pay the 3PL charges.  This kind of challenging expectations makes the suppliers non-competitive. This could only lead to ill-will among the suppliers and result in high cost of material, poor quality or even could lead to bankruptcies.

In an attempt to lessen this cash burden on the smaller suppliers, some of the service providers and Bankers are providing several trade-financing alternatives.  These alternatives could be driven at the behest of the major client of the 3PL, in which case the credit rating of this entity is used to compute the cost of money to the smaller suppliers – thus providing a win-win situation for all concerned.  Alternatively, these deals can be structured independently for either the large corporations or the smaller suppliers.  In either case, the cost and benefits would depend on each individual case.  However, it will prove a definite win for all concerned.

3PL would pay suppliers (finished goods supplied): In this case, if a supplier gets paid by the buyer in 60 days as per the commercial terms negotiated, 3PL can step in and pay the supplier in7 days’ time (imaginary).  The supplier gets the money fast and hence would offer a cash discount to 3PL.  On the 60th day, the buyer would pay 3PL the full value of the invoice, as they do currently.  In this scenario, this is transparent to all in the process. The supplier gets paid faster and therefore can afford to give a cash discount from 1 to 3%.  This enables the buyers to use their credit limits to handle their core requirements.  The discount rate would be less than the supplier’s cost of capital as 3PL would most probably be charging an interest rate that applies to buyer’s credit rating.  The savings for the buyer; would be that they can minimize their back office activities such as account payable to some extent.  They can afford to do this as the rates and quantities are already checked and vouched for by 3PL.

Finished Goods Inventory Financing: In another instance where 3PL may buy the finished goods inventory from their clients.  The clients would then be able to recognize revenues immediately and also get these assets off their balance sheet.  At the same time, their customers would be able to buy these products and thus put them on their balance sheet only when they absolutely have to do.  This would help clients in a “Vendor Managed Hub” situation and clients who need to get sales revenue recognized at the end of a quarter to meet their financial goals.  The risk of obsolescence would be borne by the client (would be treated as sales returns) and any shrinkage or losses would be borne by 3PL and/or client.  The benefits for the clients are phenomenal as can be imagined.  As part of this package, 3PL would also be willing to purchase up all the inventories of a client and “park” these assets on their balance sheet.  The immediate impact on cash flow and lines of credit for a client is immense.

Raw Materials Purchase: 3PL would also, as part of these activities, help finance the raw materials or finished goods (trading) for a client directly from the suppliers.  In this instance, 3PL would pay cash for the raw materials and put these assets on 3PL balance sheet.  The advantage for the client would be that the client can negotiate a bulk/cash rate from their suppliers and take advantage of the lower cost.  The client will then pay 3PL for the materials as and when they draw from this inventory.  Here again, the cash flow is a significant impact for the client as well as opening up the lines of credit for other core activities.  It is needless to add that the obsolescence is borne by the client and warehousing charges for holding the inventory will be paid by the client.

Best of the breed:  In this model they use a financial institution and 3PL act as a custodian of the inventory.  The material purchased by the 3PL client will be paid by the financial institution as per agreed commercial terms.  This helps the suppliers to get their payments quickly and is willing to offer cash discounts to the buyer (in this case 3PLs client).  3PL will release inventory to their client based on the amount of payments cleared and on the instructions of the financier.  However, the buyer (3PL client) will own the inventory and be accountable for the obsolescence.  This will help the buyer to have additional line of credit on top of working capital already borrowed based inventory held by them.

The main objective of inventory financing is to reduce burden on supplier and at the same time differ the inventory ownership for the buyer.  In the process, buyer end with low finance costs and 3PL add value to the business by owning inventory.  The author worked with major corporates who hates to own inventory at any part of the business process.

Cross-Docking

Four major functions of warehousing include, receiving, storage, pick-n-pack, and shipping, it is estimated that 70% of warehouse costs are incurred for the storage and pick-n-pack activity, storage because of inventory holding costs, and order picking because it is labour intensive.

Cross-docking is a logistics technique that eliminates the storage and order picking functions of a warehouse while still allowing it to serve its receiving and shipping functions. The idea is to transfer shipments directly from incoming to outgoing trailers without storage in between. Shipments typically spend less than 24 hours in a cross-dock, sometimes less than an hour.

Different types of Cross – Docking:

  1. Manufacturing cross-docking – the main function of this activity is to receiving and consolidating inbound supplies to support Just-In-Time manufacturing.
  2. Distributor cross-docking – consolidating inbound products from different vendors into a multi-SKU pallet, which is delivered as soon as the last product is received
  3. Transportation cross-docking – consolidating shipments from different shippers in the LTL and small package industries to gain economies of scale
  4. Retail cross-docking – receiving product from multiple vendors and sorting onto outbound trucks for different stores

 Success Story:

“The “warehouse concept” made famous by Costco is all about reducing logistics costs, and cross-docking is at the centre of the strategy. Because the outlet (itself a warehouse) displays pallet quantities, cross-docks in the Costco system receive and ship pallet quantities. At one distribution centre in California, 85% of all pallets move across the dock in tact; the remaining pallets are broken down and sorted by case in a lay down area. By not breaking most pallets at the distribution centre, Costco saves labour costs that other retailers have to pay for order picking, packing, and shipping.

Costco currently uses a post-distribution system, meaning that they attach labels to pallets after receiving them. In the future, they hope to have their vendors attaching those labels for them, so they can avoid all touch labour in the warehouse.”

The urge to produce and sell goods at a very competitive price is on top of the agenda for the organizations due to global competition, dynamic market conditions, product proliferation and scrambled merchandizing.  There is no end to this drive.  Someone in some corner of the world is always exploring the ways and means of bringing down the cost of the product by implementing supply chain improvements to meet the customers’ expectations.  Some ideas take a shape and get experimented and implemented and some go into cold storage.  However, the quest for innovation never ends and thus makes Supply Chain Management a challenging and intelligent task. I strongly believe that all supply chain professionals are part of that elite group of individuals who strive every day to produce that magic called innovation to bring down the cost of the goods and the cycle time to deliver.

 

 


Planning is critical first step in developing an efficient supply chain and effective supply chain leads towards organizational excellence.  Right inventory availability at the right place is crucial to success of any business.  Probably that is the reason the logistics is defined as “time related positioning of resources.”  Inventory is a resource and time related positioning of the inventory in the required location makes supply chain a success.  We often hear about “sales loss.”  Sales loss is a hypothetical situation where the organization would have sold goods,  had they carried the right inventory at the defined location.  We all know that having appropriate inventory is not only the main reason to convince the customer to buy but without even having inventory the organization has no hope of even attracting the customer’s attention.  In order to carry the appropriate inventory at the required location, planning is the management process that helps organizations in carrying inventory that is appropriate for that location and when required, there is no point carrying rain coats inventory during the summer.

Management of inventory is a powerful driver of financial performance. In response to slowing growth and pressures on profitability, many companies today are exploring new ways to manage inventory effectively. Effective inventory management is only possible when tight planning is in place. Improved inventory management frees up cash to be invested elsewhere, allows products to be sold at lower prices, facilitates entrance into new markets, and delivers other benefits that improve financial performance and create competitive advantage.

Keeping in view of the importance of Planning, many organizations globally follow a business process called S&OP (sales and operations planning).

What is S&OP?

Sales and operations planning (S&OP) is an integrated business management process through which the executive/leadership team continually achieves focus, alignment and synchronization among all functions of the organization. The S&OP plan includes an updated sales plan, production plan, inventory plan, customer lead time (backlog) plan, new product development plan, strategic initiative plan and resulting financial plan. Plan frequency and planning horizon depend on the specifics of the industry. Short product life cycles and high demand volatility require a tighter S&OP planning as steadily consumed products. Done well, the S&OP process also enables effective supply chain management.”

The key objective of S&OP is to integrate all business functions and make them focus towards common goal. In order to make it happen we need three key elements, effective planning business process, ERP (software tool) and people to create a plan using the tool to deliver a management vision which will enables supply chain to function effectively.

In brief supply chain function is to source the right product at the right price, manufacture a product that is the core strength of the organization and deliver the product to the buyer to make profit and grow business.

The S&OP process starts with an annual business process of finding answers to critical questions such as product mix, make or buy, what to sell and where to sell etc. Once the clarity is established with regard to the goal/vision of the organization, the monthly, weekly and daily planning kicks-in as S&OP business process.

The S&OP process start with data gathering and review/cleansing the same.  The data gathering exercise includes both backward looking (past sales) and forward looking (forecast).  At this stage the S&OP manager plays a very critical role of suggesting any abnormality in the forecasted product taking into consideration various factors such as product availability, NPI (new product introduction), EOL (end of life), components constraint, product strategy etc.

The second step involves collaboration with the sales force to understand the demand forecast in an unconstrained environment.  The S&OP team reviews the numbers and constraints if any and agree to the plan which is Demand Forecast/Plan.

The third step is planning supplies to match the forecast.  In my opinion this is the critical step and many organizations have failed in translating the demand into a supply plan.  Further, due to software limitations the forecast never gets converted unless true demand in the form of sales orders is loaded in the system.  As the prime objective of planning is to optimize the inventory levels, every care is taken to order what is required.  However, business dynamics do not follow a plan resulting in artificially created shortages.  Sometimes these shortages may not be true shortages.  Product could be available in a wrong place.  In any distribution network, inventory is carried in multiple levels, such as manufacturing locations, central distribution facilities, country distribution facilities, etc.  It would be highly challenging to predict the sales/demand by SKU and by location.  And that could be the reason for forecast inaccuracies still exists causing product supply disruption.

The fourth step is very critical and again collaborative in nature.  There is a tendency to forecast higher numbers keeping in view of shortages in the past or there could be true increase in demand.  The increase in numbers raises questions on production capacities and infrastructure challenges.  A consensus is needed to agree to a plan which is optimal taking into consideration various business constraints.

The fifth and final step is to obtain executive buy-in.  This step ensures that all forces driving organizational growth are aligned working towards common goal with agreed plan.  Having said that, in reality all steps explained above may not happen as planned and that could result in back orders or past due orders.  In short back order is a true sales order not fulfilled as promised due to material shortages.  The back order could be a result of various factors such as ineffective demand forecasting, poor supply planning, system (ERP) glitches, badly managed sourcing rules, incorrect product lead times etc.  All these dynamics play a vital role in strengthening planning activity.  Having a plan is as important as executing the same efficiently.  Back orders are the results of mixture of poor planning, inadequate distribution network and negligence resulting in carrying in aged master data resulting in poor promise dates and also forecast buckets.  Promise date is the date indicated for order execution based on lead time, inventory availability and forecasting.

What are the benefits of effective planning?

  1. Planning integrates teams within an organization and makes them work for a common goal;
  2. Planning eliminates uncertainties’ to a large extent.
  3. Planning inculcates collaborative approach.
  4. Indirectly improves employees’ morale as organization delivers better results.
  5. Planning eliminates wastage.
  6. Planning provides competitive edge.
  7. Planning encourages innovations.

How inaccurate is planning Globally?

Source: “Benchmarking Forecasting Practices” (2006) by Chaman L Jain and Jack Malehorn.

Some facts about Forecasting Function:

  1. Management Support – 54% Respondents indicated that their Management supports Planning Function.
  2. Forecasting as a Discrete Function – Only 36% respondents indicated that their organization has separate Planning function.
  3. Forecasting function responsibility rests with Supply Chain Function, it is moving away from Finance function.
  4. Conflict of Interest –  A full 60% of respondents said that in developing a final forecast, there was some bias on the part of managers providing input from various other functions (sales, marketing, production, etc.), with the strongest response in this direction from the consumer package goods industry.
  5. Consensus Forecasts – 49% survey respondents agreed that they use consensus forecasts.
  6. Forecast Horizon – 36% of respondents forecast one year out, versus 34% who forecast over a horizon longer than one year. 16% have only a quarterly horizon, and 13% forecast for only the following month.
  7. Forecast Buckets – Not surprisingly, a plurality of 38% forecast in monthly time buckets, versus 17% that use weekly forecasts, 14% that do quarterly forecasts, and a surprising 22% that just use annual forecasts.
  8. Production Lock-Down: 45% of the companies in the survey (all industries combined) lock their production schedule one month out, versus 20% at three months and 16% at two months. 9% claimed to lock product schedules more than 6 months out.
  9. Forecast Monitoring: 72% of companies consistently monitor, and 67% of them revised forecasts on a monthly basis.
  10. Consensus Meeting – According to the survey, 76% of companies have some form of consensus forecast meeting.
  11. S&OP Planning – 70% of companies say they use an S&OP process in their companies.
  12. Collaborative Planning, Forecasting, and Replenishment (CPFR) – 43% of companies have taken such an initiative, and is growing. That is 13% increase over 2006 numbers.

Source: Annual Forecasting Benchmark Data Released by Forecasting Institute – Published in Supply Chain Digest.

Key outcomes of S&OP Planning:

  1. 15% less inventory
  2. 17% better perfect order performance
  3. 35% shorter cash-to-cash cycle time
  4. 10% higher revenue
  5. 5% to 7% better profit margins

Source: AMR Benchmark Analytix data

A good planning process is vital to supply chain continuity. A strong supply chain continuity capability ultimately relies on strong, well-chosen and well managed business planning process in a collaborative environment. The benefits of a strong planning process include collaborative partnerships within and outside organizations.  Planning is a disciplinary business process which infuses serenity to the business and minimizes uncertainty.


Today Supply Chain is going through re-engineering phase due to global financial turmoil, raising costs, volatile currency fluctuations, unpredictable demand, lack of qualified supply chain talent and punishing markets.  Collaboration is the top priority of the day.  Supply Chain flourishes though collaboration and collaboration is the key to supply chain success.  Leaders collaborate and the boss dictates.

In order to drive effective operational excellence within supply chain, we need leaders with vision and thought leadership skills.  Jesus Christ once said, “If the blind lead blind, both shall fall in a ditch”.  Isn’t it true from Supply Chain Perspective?  If the boss/manager is faking, the end result is ditch as mentioned by Jesus Christ.  Hence the need for the thought leader is very critical to drive the supply chain excellence.

Generally, people do not want to leave the jobs unless there are some compelling financial reasons or work culture related issues. People quit their jobs due to the heavy-handed work culture and the work culture is created by the boss/manager.  Many think that they are good bosses and sadly what they know is their perception and not the team’s feelings.  The boss generally believes in one-size-fits all theory and never develops an individual strategy to retain and grow the talent.  In today’s complex world there are too many bosses, but very few leaders around.  The leader will do whatever it takes to maximize their team members’ engagement to achieve organization’s success; while bosses just want to enjoy the privileges of their position and more interested in saving their jobs.

Are you a Boss or a Thought Leader?

Just for the benefit of everyone let me clarify what is thought leadership?  Thought leadership is a business jargon for an entity or an individual that is recognized by the team for having innovative ideas.  The term was coined in 1994 by Joel Kurtzman, editor-in-chief of the Booz Allen Hamilton magazine, Strategy & Business.  The Boss is a person who exercises control over other employees in a workplace environment.

Let us find out some differences between a Boss and a Leader/Thought Leader:

  1. The boss drives group members; the leader coaches them.
  2. The boss depends upon authority; the leader on good will.
  3. The boss inspires fear; the leader inspires enthusiasm.
  4. The boss says “I”; the leader says “we.”
  5. The boss assigns the task, the leader sets the pace.
  6. The boss says, “Get there on time“; the leader gets there ahead of time.
  7. The boss fixes the blame for the breakdown; the leader fixes the breakdown.
  8. The boss knows how it is done; the leader shows how.
  9. The boss makes work drudgery; the leader makes it a game.
  10. The boss says, “Go“; the leader says, “Let’s go.”
  11. The boss reacts and the leader works proactively.
  12. The boss command with power, the leader leads with values.
  13. The boss assigns responsibility and not authority, the leaders encourage succession.
  14. The boss creates fear, the leader instils confidence.
  15. The boss knows all, a leader asks questions.
  16. The boss leads by force, a leader by example.
  17. The boss creates followers, a leaders creates more leaders.

Some interesting Quotations:

  • A good boss makes his men realize they have more ability than they think they have so that they consistently do better work than they thought they could. – Charles Erwin Wilson

 

  • Your real boss is the one who walks around under your hat. – Napoleon Hill

 

  • Leaders need to be optimists. Their vision is beyond the present. – Rudy Giuliani

 

  • The person who knows HOW will always have a job. The person who knows WHY will always be his boss. – Diane Ravitch

 

  • The real leader has no need to lead – he is content to point the way. – Henry Miller

 

  • A good manager is a man who isn’t worried about his own career but rather the careers of those who work for him. – H. S. M. Burns
  • One measure of leadership is the calibre of people who choose to follow you. – Dennis A. Peer
  • Leadership is action, not position. – Donald H. McGannon
  • You can’t lead anyone else further than you have gone yourself. – Gene Mauch
  • The leadership instinct you are born with is the backbone. You develop the funny bone and the wishbone that go with it. – Elaine Agather
  • You don’t have to hold a position in order to be a leader. – Anthony J. D’Angelo
  • Leaders are visionaries with a poorly developed sense of fear and no concept of the odds against them. – Robert Jarvik
  • A good leader is a person who takes a little more than his share of the blame and a little less than his share of the credit. – John C. Maxwell
  • A leader is best when people barely know that he exists. – Witter Bynner
  • A man is only a leader when a follower stands beside him. – Mark Brouwer
  • I suppose that leadership at one time meant muscle; but today it means getting along with people. – Indira Gandhi

Global supply chains need thought leaders, if the boss transforms into a LEADER, the world is different for the team members.  More leaders grow in the organization as leadership flourishes under a LEADER and if that leadership is thought leadership, it would be a great benefit to supply chain.  Today’s supply chain needs out of the box solutions due to ever changing and challenging business dynamics.  We need thought leaders to manage supply chains more effectively and provide the critical answers to the business challenges!


Dwindling global economy is a big cause of concern for 3PL industry.  I remember a saying, “When the going gets tough, tough get going.”  How relevant it is for today’s situation?  Well, what I am trying to say is that we need effective human resources to tackle complex issues resulting due to melting global economy.  Unfortunately, Supply Chaintalent shortage is almost threatening  the existence of Logistics Industry.  We did hear about Inventory shortages, it is strange to learn about Supply Chain talent shortage.  My objective of this article is to review 3PL business trends, impact of global economy and how Supply Chain Talent shortage will have impact on Industry.

The global markets for 3PL (Third Party Logistics) services registered a growth rate of 6.8% in 2010 compared to 2009, according to Armstrong Associates. Asia Pacific region is only second to Europe in the areas of supply chain outsourcing 3PL revenues.  The below pie graph indicates that Asia Pacific region contributes 29% of the global revenue.  Asia Pacific registered a growth rate of 15% compared to 2009.

Logistics Spend:

On an average the logistics spend as percentage to sales revenue is estimated to be 12%.  Whereas US, Europe and Asia Pacific are at 11%, Latin America stands at 14%.  This only indicates that Asia Pacific market is mature in offering 3PL services to their clients while Latin America is still emerging as a 3PL market.  The general perception is that only Transportation activities are outsourced.  To certain extent that is true.  In Asia Pacific Region, 61% of the total logistics spend is directed towards transportation and 42% is incurred on Warehouse and other value added services.  The global average stands at 56% on transportation and 39% towards warehousing and other activities.

It would be interesting to note that only 42% of the logistics spend is outsourced globally and in Asia Pacific it stands at 47% which is highest compared to US and Europe.  This indicates that Asia Pacific can be considered as matured 3PL market.

Factors Fuelling the Growth:

  1. Pressure on Corporates to cut costs;
  2. Low Cost Country Sourcing;
  3. Off-Shoring and outsourced manufacturing arrangements;
  4. Focus on Core Competencies;
  5. Ability to expand rapidly and establish business in local markets;
  6. Complex global supply chains.

Global Volatile Economic Trend impacting SC Outsourcing:

According to one report global growth is likely to slow down and is expected to be approximately 3% per year on an average.  Interestingly this slowdown is attributed to emerging markets slowdown and any recovery in advanced economies will be offset by the emerging markets sluggish growth.  The projected negative growth of emerging markets in 2012 could be mainly due to slowing global trade.  This is not going to be a good sign for Asia Pacific markets and in particular for 3PL industry.  It is anticipated that the emerging economies will grow around 3.3% during 2017-2025 which is greater than 50% reduction compared to 2011 growth recorded by these economies.

What are the activities outsourced today?

According to CAPGEMINI 2012 Survey, the below are the variety of services outsourced to 3PL Service providers globally.

Domestic Transportation 83%; Warehousing 81%; International Transportation 70%; Inventory Management 66%; Order Management and Fulfilment 65%; Customer Service 64%; Transportation Planning and Management 63%; Cross-Docking 62%; Product Labelling, Packaging, Assembly, Kitting 62%; Freight Forwarding 58%; Customs Brokerage 50%; Reverse Logistics (Defective, Repair, Return) 56%; Information Technology (IT) Services 51%; Supply Chain Consultancy Services Provided by 3PLs 51%; LLP (Lead Logistics Provider)/4PL Services 42%; Service Parts Logistics 38%; Freight Bill Auditing and Payment 34%; Sustainability/Green Supply Chain-Related Services 31%; Fleet Management 26%.

What is disheartening to note is that 24% of the respondents to the survey floated by CAPGEMINI indicated that they would be insourcing the logistics activity.  Some of the reasons given for insourcing include cost reductions not realized, some believe that logistics is a very important function and their core competency and not willing to outsource.  Diminishing service levels also could encourage the outsourcing community to think towards insourcing.

What is bothering Logistics Industry?

Logistics industry includes the Corporations (known as shippers) and also 3PL Service Providers.  Generally, we hear about product shortages in the market place due to improper planning, gaps in business process, due to long lead times and raw material shortages.  We are experiencing the TALENT shortage recently.

“ARE YOU PREPARED FOR THE SUPPLY CHAIN TALENT CRISIS?”  This is not the title for my next blog article, this is the white paper published by Massachusetts Institute of Technology, US.  This article identifies the key skills that are missing in Supply Chain talent today.

It is believed that Supply Chain practitioners need a combination of “hard” and “soft” skills to effectively manage in an unpredictable commercial environment. The above article reveals that “Supply chain analytical skills are necessary and important but not sufficient; sufficiency comes with these other skills.” The “other” skills he refers to fall into the “soft” category, which includes thinking creatively and appreciating the big picture.  “Not getting bogged down in the numbers,” is how another supply chain leader describes the blend of skills he looks for. Managers must be able to use not only the analytical tools at their disposal, but also the qualitative output, he explains. This is an important observation in a profession that relies heavily on quantitative analysis.

I strongly believe that in today’s challenging supply chain world, the talent should also focus on managing situations and shortages.  Inventory Shortages in today’s world is a certainty and every Corporation in the world goes through the phase of material shortages at some point of time.  Supply Chain Managers are expected to manage the situations and fulfil empty promise, and that could be reason 64% of the Garner research survey respondents indicated that problem solving skill as the most important.  This applies to 3PL as well.  The shippers (outsourcing companies) expect the 3PLs to solve their problems and problems are resolved by humans and that talent seems to be in short supply.

CAPGEMINI 2012 survey indicated that organization success largely depends upon, “ability to Execute and Drive Operational Efficiency and Improvements” as the third most important driver for organizational success.  This was agreed by both Shippers and 3PL operators equally.  Factors that could affect retaining the talented staff include:

  1. Talent Development;
  2. Succession Planning;
  3. Effective Retention Strategy;
  4. Team Environment (Office Politics plays a vital role in people leaving jobs);
  5. Effective talent review process;
  6. Performance linked rewards.

The above survey reveals that the right people and leadership in place is the number one driver of their companies’ success in the next five years. But the supply chain industry is experiencing supply chain talent shortages.

Even though many shippers and 3PLs share the same concern of talent management and retention is their biggest worry, nothing is being done to save the precious asset of the organization.  According to Australian Human resources institute only 37% of Organizations have plans to attack the employee retention problems whereas the rest have no plan in place and press panic buttons when key employees gives the notice.   Organizations may have to embrace the activities of the talent cycle (source: CAPGEMINI 2012 Survey) have the ability to ensure a continuous supply of experienced, well-rounded logistics talent.

Source: CAPGEMINI 2012 3PL Study.

3PL industry needs talented people to manage today’s crisis world and deliver seamless solutions to the complex supply chain problems.  The outsourcing activity will see tremendous growth when out of the box solutions are offered to the Corporations who are looking for help and solutions in managing their supply chains.

 

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