For many years now, people have been arguing that PLM applications could brighten the supply chain. As far as I can see, it has not happened (yet?) PLM-Supply Chain Integration helps manufacturing firms see the big picture, says Alan Earls. So, why is there no more focus on that integration? And why would it now be a good time to look into this in more details?
You would just be landing from Mars if you did not know we just went through a tough recession. Some will even argue it is not over yet. Companies have used all available cost-cutting recipes to balance revenues and costs, trying to keep out of the red. But how many have focused on improving their product margins through improving designs for cheaper manufacturing and service? I have not heard that many discussing such efforts. Benefits can however be great.
To understand the relative cost of each step in manufacturing, one may want to go back to Activity Based Costing (ABC) techniques. The objective is to identify the specific cost of each product feature and then identify how to reduce cost without harming the features of the product. You may remember that, a number of months ago, HP won the Franz Edelman Award amongst others for their complexity ROI calculator. Although this tool is looking at whether an additional platform or feature should be developed (in other words, will the additional cost be offset by additional revenues, increasing the overall profit), a similar approach can be used to identify what is most costly in the manufacturing of the new product, and whether this cost can be reduced.
This however requires a close collaboration between product development and supply chain, and here is where the issue often start. Product development engineers are typically rather creative and like to develop something new and exciting. Supply Chain people are all about operational excellence, simplifying how things are done. So, right from the start we have different characters that may not work well together. On top of that we need reliable information on what the costs could be, making things even more difficult.
To get the integration going and benefiting of the results, one of two things need to happen. Either the company needs to be in a desperate situation to reduce costs (price) of their products to stay in the business (the "burning platform" syndrome), or a strong top management push needs to be in place. If both are there, it's obviously even better.
A couple years ago, I met with the engineering department of an automotive OEM. I asked them if, when defining the stamping process for a hood for example, they could go back to the design engineers pointing out to them that a small change in the design could reduce the number of steps dramatically. They looked at me like if I was coming from another planet.
When looking at it from an IT perspective, we have some great similarities between the purpose of PLM and ERP systems. Indeed the objective of both is to provide a community with the most up to date information and keep it abreast of changes. However, the nature of the data is different. Where in PLM it's all about features, functions, specifications, engineering changes, in ERP it's about part numbers, orders, quantities, schedules etc. But as already mentioned above, both need to interact closely to minimize product costs. It requires the integration of two worlds, and that is in my mind why, in many companies it has not been addressed yet.
The benefits go from the ability to leverage volume pricing to faster production ramp-up. And these are no small benefits, but often they are overlooked or only partially addressed. In the current search for cost reduction, this may be a good time to address the issue and take full advantage of the potential savings, so why wait?
On April 27th, HP was presented with the Prestigious Franz Edelman Award for contributions in breakthrough analytics, transforming a complex product portfolio. Since 38 years, the Franz Edelman competition, run by the Institute for Operations Research and Management Science (INFORMS), attests to the contributions of operational research in the profit and nonprofit sectors. The award is another demonstration of HP's Innovation in the area of Supply Chain.
HP did win the award for its development of innovative analytics applied to the management of product variety, the number of different products and configurations HP offers its clients. More than $500 million were saved over the last three years, while delivery times were shortened and customer satisfaction improved.
The work being honored includes both the Revenue Coverage Optimization (RCO) software algorithm developed by HPLabs, and the company's complexity Return on Investment calculators, developed by HP's Strategic Planning and Modeling Team (SPaM), according to the press release.
As HP's reach has grown, also have the number of SKU's and product configurations, making the Supply Chain extremely complex to manage. Marketing is looking at increasing the number of platforms and features to grow market share and customer satisfaction, while the Supply Chain team looks at better forecasts and less inventory to reduce costs and lower cycle times. The issue is to provide both parties with reliable information to allow them to optimize the equation between configurations and inventory/responsiveness. Two series of tools have been developed for this purpose:
- The Complexity ROI Calculator, used prior to launching the product, calculating the profitability impact of the fixed and variable costs associated with the complexity of the product offering. The tool, based on statistical analysis, inventory theory and other cost modeling techniques, screens proposed products for a minimum complexity ROI, before the product is included in HP's offering.
- The Revenue Coverage Optimization manages product variety by analyzing product order history to identify the relative importance of the product in the mix. It ranks the products according to the revenue generated and enabled. The efficient frontier of revenue coverage and portfolio size is established. Once ranked, the product in the portfolio are included in the core portfolio, the extended portfolio or become candidates for discontinuance.
The combination of the two series of tools allows the identification of core and extended offerings, and the adjustment of service levels to each class of products.
Core offerings products are now stocked in higher inventory levels and are made available with shorter lead times, while extended offering products have longer lead times and are either stocked at lower levels or not at all.
Both tools have been used by many business units within HP to streamline their portfolios. One division of PSG established that roughly 20% of their products, if optimally selected, could completely fulfill 80-85% of all customer orders. As HPLabs states it Innovation + Smart Planning = Happy Customers.