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Five steps for supply chain enhancement
What's more, volume growth—the amount of product moving through—can also nudge once-thriving systems toward less effectiveness. When this happens, key metrics—everything from on-time delivery to fill rates, from cash-to-cash cycle time to net asset turns—start falling below those of more efficient competitors. Localized fixes that attempt to address these issues may stave off trouble in the near term, but ultimately they tend to sub-optimize the supply chain. As a result, savvy companies are re-engineering their supply chains now to address these issues and burnish their competitive advantage. In order to do this well, they must first identify all areas where opportunities exist for supply chain improvement, then use various quantitative and qualitative measures to prioritize these potential fixes. Finally, they must leverage that data to secure funding for the proposed initiatives. If you're like many supply-chain managers, you struggle to identify and correctly order improvement opportunities for your supply chains. What follows is, our five-step framework to help you do just that.
Step One First, consider the scope of improvement. Will it be limited to a division or business unit, or will it encompass the entire corporation? Will you look at a subset of supply chain processes, or examine the full spectrum including demand planning, supply planning, production scheduling, supply replenishment, and order promising?
Within the scope identified above, examine the ongoing challenges by documenting and assessing: The structure of existing supply-chain processes The roles and responsibilities of all employees involved in these processes The ways in which information, materials, and financials flow through the organization The metrics the company uses to measure supply chain success and effectiveness
At the end of this step, you will have identified the scope of your efforts and collected key data points necessary for the analysis described in Step 2.
Step Two Using the data collected, perform root-cause analysis to uncover and document the key issues that are hampering supply chain performance.As you do this, you will identify many problems; from latency in the order commit process with contract manufacturers, to lack of visibility into customer business plans, to delays caused by design changes to a new product. Wherever possible, compare the company's existing processes to best-industry practices. When you've completed this work, you will have a shortlist of processes/issues to explore further. We'll look at how in the next step.
Step Three Using the list of processes and their core problems from the previous step, you may begin to identify potential improvements to your supply chain.Areas of improvement may include (but are not limited to): Automating existing manual processes through the use of Microsoft Excel spreadsheets during demand planning Modifying process to achieve certain objectives, such as deploying a S&OP process to improve alignment between demand and supply, or increasing collaboration within the supply chain to increase visibility and velocity Using key dashboard metrics to improve accountability and enable performance improvement
Step Four Once the solutions for key issues have been identified, the next step is to prioritize opportunities based not only upon their qualitative and quantitative business benefits, but on the ease with which they might be accomplished, based upon your current level of financial, personnel and other resources. One of the key questions you must tackle is this: how do we quantify benefits for a specific area of improvement? There are two possible approaches to solving the problem:
The benchmarking approach Many companies use this approach to identify potential savings from supply chain initiatives. It consists of base-lining current performance levels, comparing them to those of industry peers, then using the information to identify areas of greatest potential payoff. For example, a company may see that for 'Inventory Days of Supply' KPI, it lags its best-in-class peer by 46.1 days. With $2 billion in revenue, this translates into a potential one-time benefit of $253 million.The top-down approach. In the previous approach, the key to accurately estimating Return on investment (ROI) lies in having access to Key Performance Indicators [KPIs] within the organization and achieving consensus on targets levels.A top-down framework is useful where KPIs are difficult to obtain. In a top-down approach, for example, you will first capture existing inventory levels from your organization's annual report. Then, you will break products down into multiple tiers based on value/volume parameters, identifying Cost of Goods Sold (COGS) and manufacturing cycle time for each tier using information within the manufacturing system. Finally, you can calculate absolute minimum inventory required using the following formula: Absolute minimum inventory = (COGS*52 weeks)/Manufacturing cycle time in weeks.
Savings calculated from applying either the benchmarking or the top-down driven approach provide an ideal-world scenario: a supply chain where the three critical components—demand, supply, and production processes—work seamlessly and without variability. However, because this scenario is far from reality, offsets must be arranged to account for: Variability in processes Inaccuracies in forecasting (which can affect supply and production planning) Systemic inefficiencies
Keep in mind that variability in the supply of materials and production is addressed by maintaining safety stock. Therefore, you must reduce the ideal inventory savings calculated using one of the two methods by that amount. In addition, other offsetting factors can be applied to arrive at a desired inventory level. Such factors may include forecast inaccuracies, supply inefficiencies and unplanned downtime. They may need to be identified on a case-by-case basis, but their net effect would be to carry additional inventory over and above safety stock. You must therefore further reduce inventory savings by those values as you go in order to paint a more realistic picture of potential savings. Use these techniques to capture savings from each possible improvement initiative you have identified. By now, you should know the approximate dollar savings to be reaped from each initiative.
Step Five Once you have a quantified benefit attached to every identified savings opportunity, you can now create a two-by-two matrix to better hone in on those opportunities that offer the highest business impact for the least effort. In summary, the five-step process we've outlined here provides a repeatable mechanism to identify supply-chain improvement opportunities, use quantitative mechanisms to prioritize them, and select those that can deliver the greatest business impact.Throughout this process, you have also created a business case for the selected initiatives: why you should choose them over others, which are the quantifiable benefits from each of these investments, and when you might break even on these investments. That should bolster your position and help you sell these initiatives as you work with those who hold the purse strings in your organization.
Ashok Santhanam is the CEO of Bristlecone, a supply chain consulting firm (www.bcone.com). Bristlecone brings expertise across the entire spectrum of supply chain including demand planning, supply planning, network collaboration, sourcing and analytics. Related Links:
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