SCM CONCEPTS

A range of SCM material for perusal

Multiple Virtual Supply Chains

 

In another example of software eating the world, supply chains will continue to virtualize, with information technology replacing, or reducing the need to invest in physical assets. What does this mean? Supply chains are made up of physical assets (property, plants, and equipment) and humans (labor). Customers want a unique and individualized experience as these resources coordinate and work together to deliver products; customers increasingly dictate when, where, how, and at what price the products need to be delivered. In the past, this would have meant investing in more and more physical assets. Today, information technology from ordering to transportation to warehousing to stores to factories needs to be used to create this unique customer experience, such that the customer perceives that you are actually providing them with their own personal supply chain. This concept is known as "supply chains of one" and is core to the concept of segmentation. 

The below graphic expresses the concept of multiple virtual supply chains, where for each customer order, or even order line item, a virtual supply chain is dynamically formed across the asset and labor base. For this to be effective, and to maximize profitability, it is critical that enterprises drive the creation of these dynamic virtual supply chains from segmented business strategy. This means that for each product-customer-geography combination, there is a unique value proposition driven from the business strategy of the company, based on business goals and competitive forces. For some such combinations, the company may want to win market share at all costs; in other cases, the company may want to maximize margin at the expense of market share. Thus, the business is a diverse portfolio of product-customer-geography combinations.

One of the key challenges for companies is to drive this segmented strategy from business strategy down through execution. As shown in the graphic below, this requires business strategy to be translated into functional operational policies and to continuously synchronize these policies across the various functional areas from customer back through supplier. 

For more  details on these and other concepts related to supply chain segmentation, see Supply chain segmentation: 10 steps to greater profits
 

Push-Pull Buffer Points

The simple graphic (below) illustrates the typical operational dynamics between upstream operations and downstream operations in a supply chain. While many describe their supply chains as pull, or customer-driven, almost all supply chains have a pull and push component. The key reason for this is lead time. Order fulfillment can be pull- or customer-driven, but the supply chain must already be set up for this; this setup is done by the upstream pushing, which much be forecasted and planned. 

One of the key considerations for supply chains is the "decoupling" point between  push and pull. The location and operation of the decoupling point are based on how you want to run your supply chain - customer fulfillment requirements, inventory risk, and cost. In today's environment, customers and competitive dynamics dictate when, where, and how their orders are fulfilled. This is increasingly dictating the location of decoupling points. 

Gross Margin Versus Inventory Turns

 

Examining the the relationship between gross margin and inventory turns is a simple way to get a handle on the operating dynamics of a business.  In retail, where it has been a long-used operating tool, it is called GMROI (pronounced jim-roy).  This simply means how long you can afford to keep inventory around. There is generally an inverse relationship between gross margin and inventory turns - if you have high gross margin products, you generally have low inventory turns and vice versa. This dynamic is followed closely in retail, but is generally true across industries. In the automotive industry, for example, seating is a very low gross margin business; these suppliers also run among the highest inventory turns in the industry (these are also inline sequence components, requiring JIT warehouses). 

In either case, necessity is the mother of invention when it comes to gross margin versus inventory turns. If you have a low gross margin business, then you need to drive high inventory turns, otherwise you will go out of business. The charts below show these dynamics for the 30 of the largest publicly-held retailers in the world. This simple analysis shows three main clusters. This type of clustering is generally true across industries; however, there are outliers. These outliers typically have a unique advantage based on product or business model; this allows them to run a business with very high gross margin and very high inventory turns. Apple is one such outlier. All companies would like to aspire to this, but structural dynamics typically cause them to operate within a certain band on both gross margin and inventory turns. 

Decade of the Customer, Circa 1996

 

Ken Sharma was co-founder of i2 Technologies (and a colleague and mentor of mine). He was a man of great insight who could distill complex topics in such a way that people could understand and learn. In 1996, his favorite conference presentation topic was "Managing on the edge of instability." In this presentation, he made the argument that the increasing complexity of the world, along with increasing demands of customers, required greater precision, and that greater precision required advanced decision making, which could only be effected through intelligent computer systems enabled by intelligent software. He then went on to explain the various components of such intelligent software. Many of these components form the basis for the supply chain management software that has evolved over the course of the past twenty years and also presage the world of artificial intelligence in which we currently live. Still, many of the underlying capabilities remain challenges today.

When perusing presentations such as this, it's striking how similar the concepts are to those being promoted today. It's also striking how insightful they remain. Below is one of the first slides of Ken's presentation, in which he is declaring the 1990's the decade of the customer. It seems funny now that were then talking about "one hour photos" when today we are talking about one hour home deliveries. Nevertheless, the concepts remain the same as we continue a multi-decade quest to eliminate time and distance.

 

S&OP with Integrated Control

S&OP used to be a planning process. Now it is a closed-loop control process, with the plan playing the critical role of the objective function for the control process. There is typically a monthly planning process to establish the objective function (plan), and then weekly and daily control processes to achieve the plan. During the control process, algorithms are run and then levers are executed whenever there is a deviation between the plan and results that come in from operations. 

As shown in diagram below, there is a general trend towards shorter and shorter cycles of planning and control, evolving towards a continuous (or real-time) process. Many people use the term "real-time" without understanding exactly how to define it. The "What is Real-Time?" post sheds some light on this. 

For more  details on how the S&OP process has evolved to a control process, see A rudder for course correction.

Evolution of Manufacturing to Units of One 

 

The variety of products available to consumers continues to grow. Items that previously could only be bought in bundles or by going to a superstore can now be bought in "eaches" on the internet for the same price. Furthermore, the manner of buying, delivery, and return is tailored to the desires of the customer. For many products, the manner in which products are attained is as important as the product itself. Supply chains are a key service extension of the product, and in may cases the key differentiator for customer choice. No longer is it a matter of building a better mousetrap - it's a manner of finding ever-better ways to put the mousetrap into the hands of the people who need them. 

In 1978, Taiichi Ohno published "The Toyota Production System," a book that describes the processes and methods that later became known as "lean manufacturing." Lean manufacturing was later popularized in the 1990 book "The Machine that Changed the World," written by James Womack, Daniel Jones, and Daniel Roos. The chart below was adapted from this book and used by various people in the 1990s and thereafter to describe the evolution of manufacturing from craft to mass to lean to mass customization, or units of one. The dynamic expressed in this chart could further be generalized to apply to what is happening across supply chains. The world is no longer one of batches, or bundles, or pallets, or cases; it's more a world of intersection of ones - one consumer, one product, one geographical location, one delivery. 

Of course, as the diagram shows, the world was once dominated by craftsmen who created and delivered unique products. The problem was that it was not scalable and thus per unit costs were very high. The answer was mass production - produce many copies of the same product and deliver them in the same way. This creates operating leverage - the higher the volume, the lower the unit costs; once you are above the volume break-even point, incremental volume creates huge incremental profits. This model started to break down as the world demanded more and more variety of products. The mass production answer was to build a unique asset base for each different type of product and to push them to market. This required large asset investment and huge fixed costs, resulting huge swings in profits based on volume variability. 

Eventually world gave way to lean manufacturing. Although it was created in post World War II Japan, lean manufacturing did not really take off globally until the 1980s and 1990s, and even then it was adopted after many near death experiences by manufacturers. Lean brought with it the ability to handle greater variety across a single asset base, along with a pull-based, waste-eliminating mindset. As the diagram shows, this path towards greater variety and lower per-unit volumes continues and intersects with the concept of multiple virtual supply chains and supply chains of one

Evolution of Manufacturing, from craft to mass to lean to units of one

Largest Container Ships

 

The following Maersk graphic was published several years ago in the Wall St. Journal. It provides statistics on the Triple-E, which is currently the largest class of container ships. One of our favorite statistics is that the Triple-E could ship 108 million pairs of running shoes.  This highlights a general long-term supply-side trend towards supersizing everything in the supply chain - factories, shipping, stores - to achieve economies of scale, allowing for lower costs and ultimately lower prices. While this has been the trend on the supply side, the trend on the demand side has been just the opposite - to unbundle, allowing for ordering of units of one in every possible desired combination, with customized delivery. Thus, distribution has become not just the decoupling point in the supply chain but also the mass customization point - to bundle together assemblies of finished goods, delivered when, where, and how the customer wants them. We will explore further this concept of push and pull and economies of scale versus economies of scope in future articles. 

Presentation Topics from a Supply Chain Conference, 1999

 

By now we are tired of hearing the words "disruption" and "digital transformation." The fact is that the world of business for the past two hundred years has always been moving from one state of equilibrium to the next. As time has passed the amount of time in equilibrium shortens to the point where there is no equilibrium. This causes people to think that things are being "disrupted." But if there is no equilibrium, then there is no disruption; there is only a state of change. Those companies that are good at change, can calibrate it correctly, can drive it instead of reacting to it, will win. The pace of winning and losing increases and as a result business is much more dynamic and exciting. This places a premium on learning - on what academics call "organizational IQ." Another related concept is an organization's "absorptive capacity" - it's ability to learn from and leverage the collective thinking capacities external to the company. This is central to any discussion on return on investment in R&D

One of the ways to absorb the capacities of others is through conferences - listening to what other customers, consultants, and technology companies are doing. Conferences associated with supply chain management and related topics have become an industry unto themselves. If you examine conference agendas in 2017 or 2018, you will find many very interesting topics. What's also interesting is that many of these topics we have been working on for years. One of the challenging and exciting things about supply chain management is that many problems are persistent; this is largely because the underlying complexities and details continue to morph. 

I have in my office agendas from various SCM conferences I have attended over the years. I recently examined two of them - from 1999 and 2000 - and picked out from the 1999 brochure what I thought were some of the interesting topics. These topics are show in in the diagram below. Close to two decades ago, these were the hot topics. If you didn't know they were two decades ago, you might think they are the topics for an upcoming conference next month. Of course, we would have to modify the topics to include the terms "disruption," "digital," "transformation," "IOT," "blockchain," "artificial intelligence," "cloud," "big data," "machine learning," and a few others. 

SCM Conference Topics, circa 1999