Five maxim compass navigates supply chain efficiency

Posted on 8 Sep 2009 by The Manufacturer

Richard Renshaw and Alan Braithwaite – both of LCP Consulting and Cranfield University – have developed a five maxim supplier management ‘compass’ to ensure supply chains remain efficient during the downturn while primed for the upturn.

In a tough economic climate, when demand is down, there is an imperative for companies to review their supply chains to reduce cost, remove activity that reduces profitability and conserve cash. Many midsize manufacturers have found themselves particularly vulnerable in the downturn with long term customer and supplier relationships on which they are particularly dependent and where expected volumes just aren’t there.

Preservation of viable economics alongside valued long term relationships becomes very testing, requiring a degree of trust not required in brighter times. The truth is this is a situation that many have never previously experienced.

We have developed five maxims for the recession – a ‘compass’ that can be put in the hands of functional managers. The maxims are:

Reduce unprofitable complexity:
It is crucial to truly understand how both customers and products erode margin. Our experience is that 15% of either or both customers and products erode more than 50% of profit potential. Designing this group out or designing their profitability back in is a key step to connect the supply chain to the company’s performance. We also find that these unviable activities often detract from profitable activities as well as creating losses in their own right.

Build in customer service excellence:
Service excellence is often discussed as a marketing imperative, but seldom connected to the true cost of non-performance both in sales and recovery costs. Outstanding performance protects the customer base that you want to keep and avoids the costs of replacing them when they leave, as well as making good your mistakes. Operational excellence led by supply chain design and planning is a critical capability.

Design, plan and execute for agility:
In the current climate, demand will be unpredictable and volatile; companies must respond without lots of inventory, huge capacity and asset surpluses to cope with change. Agility is about fast flexible processes to meet real customer demand and only inventory that will not be a risk to the business. Speed is the key; fast and accurate processes have been shown to improve customer service and reduce inventories and manufacturing assets.

Synchronise and integrate to eliminate waste:
In our experience lean management methods can cut waste and cost along the supply chain, streamlining flows and making operational performance a central focus. Companies that have applied this generally admit that there is still much more to play for; however they are in a strong position entering the downturn.

Collaborate to leverage performance:
Building and nurturing key relationships along the supply chain will help suppliers give you more for less; whereas if you just negotiate on price you will miss out on benefits and they will leave you high and dry when times get tough. For many this will be a new skill and mindset. The future will be about cooperating and competing through shared supply, manufacturing capacity, and distribution and logistics; service providers will need to create blocks of scale and give a level of cost and service transparency that has been lacking.

Although all five of these are critically important, the last three are especially relevant to the challenges for mid size manufacturers and their partners along the supply chain.

Keeping suppliers in the link
The unpredictability of today’s demand requires an agile response that bridges long term relationships, eliminating the inflexibility that might develop as a result of the norms of better times. It is necessary to work with suppliers to accelerate the supply chain, which should involve both information and physical flows in the supply chain. The first step on this journey is to start regular communication along the chain on supply chain; the aim is to ensure supply chain planning processes in customers and suppliers connect in a way that starts to anticipate problems and opportunities. This does not imply systems integration but does require trust, for example sharing forecasts earlier or direct sales data to enable earlier reaction to changes in demand.

There are well established processes to support this maxim with good benchmarks; making them real begins with agreed rules. Very often we find that rules have been established but there is a cultural acceptance that ‘rules can be broken’ because ‘we are operating under exceptional circumstances’.

This leads to an illusion of flexibility in planning that is not grounded in the reality of the physical supply chain. It also creates cost faster than it adds value. Rules need to be firmly established with realistic (and challenging) batch sizes, capacity flexibility, lead times, etc. The process that integrates this approach, ensuring demand and supply is balanced with financial implications understood, is often called Sales and Operations Planning (S&OP).

LCP Consulting was recently working with a mid scale pharmaceutical manufacturer where the perceived wisdom at a functional level was that reacting to urgent orders a couple of weeks out was doing what it takes to be flexible and give good customer service. The reality was that unplanned demand was disrupting planned supply and compromising wider customer service. Establishing clearly defined time fences to prevent this conflict and providing scheduling stability improved customer service from 42% to 68% in 8 weeks.

It takes disciplined focus from senior management to judge how to intervene to get the required agility, especially when requests from customers with urgent orders come in. This is being addressed within the implementation of the S&OP process.

A defined set of metrics helps the company navigate, prioritise and focus, ensuring day to day delivery is achieved. KPIs can indicate recovery from irregularities and progress towards strategic goals, giving guidance throughout the supply chain and hopefully driving the right kind of behaviour at all levels of management. When the metrics are inappropriate it’s not surprising that the wrong behaviours are experienced along with poor results.

The same pharmaceutical company experienced much animosity in planning meetings as a sister bulk pharmaceutical plant was persistently castigated for being the packing plant’s worst supplier. Interplant communication thus became strained. The measure of supplier delivery performance was changed to be one based on original packing plant request date rather than a modified date. The focus then changed to understanding changes in packing schedules and the contribution to the poor performance from the packaging suppliers. The planning dialogue was transformed and as a result a more value added focus was generated.

Taking some time out
Time compression has been a supply chain concept for years. But the recession could not be a better time to seek its benefits. We find that faster is invariably better and cheaper; less time means less inventory which frees up precious cash. At first glance this is counterintuitive. But think when things go wrong, faster means that less of the supply chain is affected, less stock is to the wrong specification, and fewer customers are affected. Implementing time compression requires mapping out the supply chain, noting actual process durations, cycle & transit times, batch sizes and frequencies, so that the opportunity for reduction can be identified. This is far more effective if it spans both in-house and suppliers’ processes.

A speciality chemicals manufacturer recently mapped out some of its problem products in response to a strategic goal of achieving an average of less than 60 days end to end inventory. Analysis revealed one product had 89. Much of it was due to practices adopted with its logistics provider like continually sending 5 containers in a single shipment, and also of a sub contractor who had built a comforting queue or work in progress prior to his process to ensure high equipment utilization. Joint investigation with the sub contractor has enabled improved scheduling to be implemented to reduce waiting time and remove 10 days of inventory. This was an example of simple integration to eliminate waste. The example also highlights an internal communication problem, a global average being seen as a target, to get the average some products will need to be much faster!

A medium size Scandinavian food manufacturer had significant problems with waste in its chilled food lines. This was caused by the combination of short shelf life (storing excess production as inventory for more than a week was not an option) and uncertainty of demand on a week to week basis. What was open for discussion however was how the shelf life was shared between the manufacturer and wholesaler (but not the retailer) and the actual weekly sales from the wholesaler. This has led to a new level of collaboration being implemented , leading to more accurate forecasting, a better schedule and less waste not only at the manufacturer but at the wholesaler. Taking the time to develop the necessary relationship and trust to make the collaboration effective was pivotal.

Give visible sponsorship
To make consistent change happen as in these examples requires active executive sponsorship on short timescales. Current circumstances are demanding that companies react in ways that are different to 12 or 18 months ago. We think this is the biggest challenge to unlock value from our maxims.

The transparency and openness required represents a big mindset shift.

Sharing inventory and demand data with wholesalers would not happen without senior commitment and assurances through the supply chain on how information is used. This has made the food manufacturer easier to deal with as a supplier and makes the wholesaler a preferred customer and less of an opponent.

Making resource available to enable valuable change happen is a prerequisite. However, often the expectation is that it fits in the background at a lower priority than the day job. This means many things happen in parallel, not giving the desired effect of supply chain acceleration. The imperative is to focus on what will deliver value quickly, make decisions about how resource will be allocated and give visible sponsorship so others can feel comfortable about making progress. This plan should be sponsored inside the company and across the divide with suppliers or customers.

The focus here is value; not all suppliers within the supply base have the same value, some are genuine partners you want to take forward with you but supplier segmentation will tell you that some are not. Any sense of ‘duty of care’ must be applied in the right place, which should lead you to ask how important you are to your own customers.

Following the maxims, at least in part, will provide focus and value that is beyond the dreams of most CEOs. Technical skills alongside open and trusting communication are imperative for realising that value.

Richard Renshaw and Alan Braithwaite are principal consultant and chairman of LCP Consulting respectively. Alan is a visiting professor at Cranfield University where Richard also researches and lectures.

LCP Consulting identifies where supply chains make major contributions to how businesses operate profitably and compete effectively. It supports businesses to review, re-design and implement changes to their end-to-end operations. Our factbased diagnostics pin point exactly where and how to cut costs, enhance operational efficiency and invest for the future.