In most companies today, product development & engineering (PD&E) and supply chain are two different worlds, each with their own rules, their own way of operation and their own approaches. I remember a meeting with a client a couple years ago, where probing about how product development and manufacturing communicate to optimize the design of a product for manufacturing, and was told in no uncertain terms that the company had a product development, an engineering and a manufacturing department, and that each was independent.
Beyond the organizational debates, it is critical for organizations to have PD&E and Supply Chain working closer together. As patil, Bath and Ragsdell point out in an article titled "Accelerated Product development and Supply Chain Management", the three key components influencing the profitability of manufacturing organizations are quality, cost and delivery. It is by taking a holistic view that these objectives can be addressed.
PD&E should lead the product lifecycle, from concept development to end-of-life, being responsible not only to bring the concept to market (New Product Introduction), but also to manage all engineering changes along the lifecycle of the product. Gaining feedback from services (both for products under warranty and for others), the PD&E team can improve the quality of the product, and with it the experience of the customer.
Supply Chain on the other hand is responsible for the cash-to-cash cycle, from the order to the delivery of the product. They handle the manufacturing (outsourced or not), the supply of components/ingredients, the delivery of the product through the chosen distribution channels and the services/reverse logistics.
Not only do information flows need to be exchanged between the two key business processes, but decisions taken in one have major impact in the other. Many years ago, companies started to focus on "design for manufacturing (DfM)", now a newer term; "design for supply chain" is in vogue. But in practice, how much is implemented? That's the real question.
PD&E teams are creative and focused on innovation, while Supply Chain teams focus mainly on operations, ensuring the predictability of their eco-system. A different type of individuals can be found in each organization. This results in mis-understandings. Conflicts are difficult to settle and final decisions may have to be taken high up the hierarchy.
Developing an understanding of how the other party operates is critical for developing a more integrated approach. Years ago, when implementing their DfM program, HP used to establish combined teams (product development & manufacturing) that took the product from concept to market. That team then lead the manufacturing for the first 6 months of production, gaining an understanding of the implications of decisions taken in the design process. This helped us in those days foster the link between the two processes.
But the human aspect is not the only one. The product lifecycle process is mainly articulated around a PLM system, while the cash-to-cash process runs on an ERP system. Both systems are different in nature and integrating them is difficult. Often the introduction of the new product is the breakpoint. That is where the BOM and associated information is transferred from the PLM system to the ERP one. But that does not resolve the post NPI engineering changes, so building a bridge between PLM and ERP is a real need. SAP has done that with their SAP PLM module, but this one is not popular in the discrete manufacturing world. So, the problem remains.
One additional level of complexity is the increased involvement of suppliers in both the product lifecycle and cash-to-cash processes. Being it due to manufacturing outsourcing, or to optimize the utilization of specific components or technologies, one is now confronted not only with the integration of PLM and ERP, but also with the linkage of the supplier (and his systems) in the information flow. We believe that, moving forward, the latter will be addressed through community clouds, as described elsewhere on this blog.
There is space for a true PLM/ERP integration ant to my knowledge, this has not been solved yet in a satisfactory way. There is still room for improvement.
I have often been asked to share some of the Supply Chain Innovations HP has developed over the years. Such discussions have helped companies improve their own operations, but the question often remains on where to start. We use the Supply Chain Operations Reference Model (SCORTM) as a tool to start the innovation journey. Let me explain you why and how we do that.
During the HP/Compaq merger we were asked to "adopt and go", in other words, to keep the best processes and implement them in the operation of the new company. A merger is not the time to invent something new, rather to keep the best of both worlds. But obviously, when we got to the supply chain, both teams were intimately convinced their processes were the best. So, how should we take an objective decision? We decided to start from key performance indicators that identify the effectiveness of a process. But obviously there are plenty of KPI's and even more descriptions of how to derive them. We needed a standard, something that was neutral and both parties could accept. And here is where SCORTM turned out to be the answer. Indeed, SCOR has clearly defined KPI's that are linked to standardized processes, so allows the objective comparison of multiple processes. During the merger, we reviewed 964 processes, and realizing SCOR did not address all our needs, we created DCOR (Design Chain Operations Reference Model) and CCOR (Customer Chain Operations Reference Model), which we since handed over to the Supply Chain Council.
We then used the learning of the merger to help companies improve their supply chain operations. Indeed, the SCOR model provides beside KPI's and standardized business processes, benchmark results and best practices. So, how do we get going? We ask the company to provide us the 10 level 1 SCOR KPI values for their operations, using the standard definitions. We then compare these values with the results from the benchmarks, comparing companies in the same or adjacent industries. We often find that one or a couple of KPI's are out of range with the benchmarks.
That then becomes the starting point of a strategy discussion. It is not because you are out of range that this is a bad thing. All depends on what you want to achieve. Let me take an example. Let's assume you are a watch manufacturer and your order cycle time is 28 days, where the industry average is 4. If you are the manufacturer of commodity watches, this is terrible, but on the other hand if you are a high priced brand, this is perfectly fine. Indeed, you want to give a feel for scarcity, and so forcing customers to wait for their product is a real good thing. So, it's critical to line up the results of the benchmarking with the strategy and image the company wants to give.
Once we have identified which level 1 KPI needs improvement, we then go to level 2/3 and identify which steps in the process cause issue. In most situations it is a couple steps only that influence the delta greatly. Once those are identified, the best practice sharing is used. Indeed, are there ideas of what others are doing, that could be implemented and drastically improve the results. These are then implemented, and new measures are taken to see whether the improvements are actually achieved.
We have done such exercises with a number of customers now, and they have resulted in major improvements. IT systems have been implemented to support the transformed business processes and improve operations.
The great advantage of such approach is that it does not require a grandiose business process re-engineering, taking months to be achieved. Typically an exercise like the one described above, is executed in one or two months, allowing a speedy improvement. What we have often seen is that, once a first process has been improved, the focus moves to the next one. It's excellent for business process improvement, obviously not if the processes have to be completely redesigned.
In the current environment, where supply chains need to become very agile and where eco-systems are in constant evolution, a fast and to the point approach helps and makes it possible for enterprises to constantly improve and refine their operations.
The SCOR model is key to achieve this. It's clear definition, standard approach, combined with its benchmarking and best practices, makes it the ideal tool for such exercises. We have proven it in our own operations and with customers. You may want to do the same.
Now that we reviewed the different aspects of managing the Supply Chain and "Closing the Loop", it's time to look at what is required to make this happen. Obviously, to be able to do what I described over the last series of posts, I need data, data of what happens at the different levels in the Supply Chain. Some of this data resides in my own IT systems (ERP, CRM etc.) but the majority will be available through the companies in my ecosystem.
This is where "the rubber meets the road". Indeed, how do I get access to that data? Why would those companies share that data with me? It may flow from our business model. Indeed, if we have a SMI/VMI contract with a customer, we will have visibility of his sales and know the inventory in that node of the supply chain. That only works with tier 1 partners, and only with a fraction of them.
So, how do we get information from the remainder of our ecosystem. Well, we agree to share information. This is easier said than done. In an interesting study, dating from 2006 and titled "To share or not to share", Emile van Geel identifies four key success factors. Let's look at those a little more closely.
First, a clear strategic direction needs to be in place. If your company wants to build closer collaboration with partners, it first has to recognize and internalize the critical importance of those partners in the supply chain. This requires the acceptance that the relationship you have with your partner is important for both companies. You may want to argue that not all your partners are of critical importance, and I agree with that. The question is then whether a close collaboration is required with all partners, and my answer is no. It is important to identify early on in the process which partners are critical. One way to go after that is to identify the importance of their influence on the product you sell, or on the distribution of the product in the market. For example, if you make electronic equipment, you best have a close collaboration with your component and ASIC suppliers, but such relationship is not needed with your nut and bold supplier. This also forces you to think about who will provide you the key information.
Second, internal readiness is required. Indeed, if you want close collaboration with key suppliers, you may require your procurement department to change its attitude towards those suppliers. Indeed, it might be difficult to convince them to share a lot of information while having intensive price reduction negotiations. The best way to achieve close collaboration is by starting from a win-win approach. May sound old-fashioned, but it certainly works. Put yourself in the shoes of your suppliers.
Third, make sure that, when you open up your information to your ecosystem, you demonstrate execution excellence. Indeed, if you are sloppy in your own operations, don't expect a lot of willingness to go on a continuous improvement cycle. Exposing your performance directly to your partners will identify new areas where improvements can be made. Listen to their inputs and act. Establishing a good set of key performance indicators helps grab attention. The SCORTM KPI's are good candidates for that.
The fourth key success factor is trust. Building trust with partners is not an easy thing to do. Above all it takes time. Don't expect them to immediately trust you, if your procurement department has spent the last 10 years in screwing the last nickel out of them. This is often where close collaboration fails. Management does not understand the need for time in building trust. The impression is that because we have changed, the partner immediately needs to trust us, where he may ask himself what the trick is behind the change in attitude. According to McCutcheon and Stuart, trust is "the belief that the other party will act in the firm's interest in circumstances where that other party could take advantage or act opportunistically to gain at the firm's expense." That will not happen overnight.
In his paper, Emile van Geel adds a fifth success factor, innovation. I increasingly believe that, by listening carefully to partners and by reviewing operations jointly, we find many areas of improvement and innovation. However, that requires an organization to be open to listen to others, and not believing they are the best in the world. It is often difficult to change the attitude and develop such open and honest relationships. The Japanese are probably farthest down the road. Let's learn from them.
Around this time of the year, many companies are looking for the by now famous CDP (Carbon Disclosure Project) report. And the 2009 report is on-line. But that's not the only information available. For the first time CDP has also issued their first Supply Chain Report with as subtitle: "Managing climate change in the supply chain". In that report they are looking at scope 3 emission management amongst others and this is where things really become interesting.
Indeed, scope 1 (direct) and scope 2 (indirect, related to provisioning of energy) reporting is mandatory, but the unclear nature of what is included in scope 3 emissions makes their reporting optional.
However, from a Supply Chain perspective, analyzing the climate implications of outsourcing manufacturing and logistics, of buying components and intermediate products, and of managing the product flow from cradle to grave, is an interesting exercise. Not only should the environmental impact be assessed, but through understanding CO2 emissions, the actual amount of energy used can be assessed. Reducing CO2 emissions may have a direct impact in lowering the energy bill. Many companies forget this in their quest for carbon neutrality and the use of green energy.
Jean-Pascal van Ypersele, the Vice-Chair of the Intergovernmental Panel on Climate Change (IPCC), keeps pointing out the best energy is the one that is not used, not the one that is offset. In their quest of becoming green, companies should first look for energy reduction
To be able to do this, one needs to visualize the emissions across the supply chain, preferably on a product level. And here is where the problem is. Today no companies have the tools to identify the greenhouse gas emissions (GHG) at product level.
HP did calculate the total GHG emissions of its supply chain, and started reporting in 2008. Despite working closely with our tier one suppliers, the approach is still rather crude. Suppliers allocate HP's share of their energy consumption in proportion of the value of our business in their annual revenue.
This unfortunately does not allow taking key decisions related to which products require loads of energy to manufacture and which ones no. Balancing the portfolio from an environmental perspective is not possible with such approach.
Maybe we should take a completely different tag. For every product manufactured, we have a bill of materials (BOM) and a bill of process (BOP). If each partner in the Supply Chain could calculate the amount of GHG emitted to manufacture one unit of their product (component, sub-assembly, substance...), a "Bill of Carbon" (BOC) would be developed for each. I actually highlighted this concept in a blog entry last year, labeled BOS & BOC, new acronyms to get used to?
The question is obviously how this information could be consolidated to obtain a true picture of the environmental impact of the finished product. And here is where another concept I highlighted, called a community cloud, could help.
Indeed, if all participants would consolidate, using the BOC of all components included in the BOM of their end product, the amount of GHG emitted in the process, we would have a great view of the manufacturing impact. By adding the transportation piece that is found in the BOP, a reasonably complete picture could be established. Obviously, one can argue that averages may be used and, resulting from there, that the number is not absolutely correct. However, it would give a picture that is closer to reality and much more granulate than the current one.
Using a cloud approach, such community could be established without requiring one of the parties to implement a hosting infrastructure. No CAPEX investment would be required, making it easier for the parties to participate. A pay-per-use or subscription fee could be used to finance the service.
To take full advantage of this approach, it should be combined with standard metrics, such as the ones included in SCOR 9.0. Ultimately, this would allow companies not only to publish the carbon footprint of their products, but also to analyze the environmental impact of their product portfolio, allowing them to retire the most polluting ones, while promoting the others. Managing a portfolio from an environmental point of view prepares companies to benefit from upcoming legislation around carbon taxation and others, by understanding their impact at the product level.
Last week, I was in Singapore at the SCM Logistics World 2009. My presentation was around how to build a weatherproof Supply Chain through the increase of visibility across the ecosystem. Having talked about the subject previously on this blog, I'd like to focus this time on a debate that took place amongst the participants, and this one was focused on how to look at the end-to-end supply chain holistically and identify how the performance of this one could be measured.
Over the last 12 to 18 months, companies have cut costs as never before. The smart ones have done this in such a way that their supply chains have become leaner and meaner, resulting in real savings that benefit the end consumer. In doing so, they have lowered the inventory buffers that shielded portion of their supply chain from variability and uncertainty in others, and as such increased the level of risk across the ecosystem.
So, understanding the supply chain, its dynamics, how it behaves, and implementing the management processes and governance required becomes critical. Many people will agree with the statement I just made, but it is how to do this that holds people back. Actually, when browsing the internet on this subject provides little useful information. Yes there are a couple software packages and the odd presentation (to be paid for), but nothing else. Interesting.
Companies have been focused on their supply chains for years, but they do not seem to have thought through how to measure them end-to-end. I believe there is no need to make things more complicated that they are. The industry has been using the SCORTM (Supply Chain Operational Reference) model for years. This model proposes for each node in the supply chain a series of KPI's. Could we use those for an end-to-end measurement? That was the debate in the corridors of the conference. Let's look at it in a little more details.
Let's look at the level 1 KPI's. The first one, Perfect Order Fulfillment, is really a Supply Chain KPI, as it relies on all partners in the supply chain to deliver their elements to ensure the final product is complete, meets the specifications and addresses the expectations of the customer. With the buffer inventories disappearing, the ecosystem is no longer compartmentalized and using this measure as an end-to-end one makes sense.
The second one, order fulfillment cycle time is an interesting one. Indeed, if the supply chain manufactures to order, it is clearly a measure of the supply chain performance. On the other hand, if the customer is delivered from stock, obviously there is only a portion of the supply chain that affects this measure. This demonstrates that not all KPI's are applicable in the same way to the supply chain. However, the exercise remains interesting.
The next three, Upside Supply Chain Flexibility, Upside Supply Chain Adaptability (The maximum sustainable percentage increase in quantity delivered that can be achieved in 30 days) and Downside Supply Chain Adaptability (The reduction in quantities ordered sustainable at 30 days prior to delivery with no inventory or cost penalties)., are by nature supply chain measures, so do fit our approach here. The same applies to Supply Chain Management costs.
Cost of Goods Sold (The cost associated with buying raw materials and producing finished goods. This cost includes direct costs (labor, materials) and indirect costs (overhead)) is one that is difficult to calculate across a supply chain as not all partners are willing to work "open books", which is what you would need to correctly calculate this metrics from a end-to-end supply chain level. So, this is probably not a good metric to go with. The same applies to two other metrics, the return on Supply Chain fixed Assets and the Return on Working Capital.
The last KPI, Cash-to-Cash Cycle Time is applicable for supply chains that work in a deliver order model, but not for the ones that deliver from stock.
All in all, a number of KPI's are useful and could be applied if the appropriate data can be gathered across the supply chain. From experience I do know the use of a small number of KPI's already makes a large difference, so while we may want to think at creating a couple more, using the ones we already have, would help companies focus on optimizing their ecosystems and in turn improve their delivery capabilities in addressing the new opportunities that appear on the horizon.