Logistics Viewpoints

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Why Supply Chain Agility Needs to be the Next Normal

Guest Commentary | By •

supply chain agilityThe rug has been pulled out from beneath us. Doing things the same way we’ve always done them will no longer serve us, so we can’t simply put it back in its place. In fact, the definition of pulling the rug out from underneath someone is that doing so causes their plans to fail, because they have little recourse or time to respond adequately. It’s a fitting metaphor for the world’s supply chains, which have always had to figure out how to respond rapidly in the face of rug-tugging disruptions, although none at the scope of the current one. We can count on disruption occurring again, in some form, so the only way to respond is to build in the supply chain agility necessary to be able to respond more effectively next time our rug is yanked.

But we also don’t have to put the same rug back in the same place. Similar to moving into a new home and finding that many household goods no longer fit their intended purpose, the rigid, linear supply chains of old do not fit today’s needs. In spite of them no longer serving their original purpose well, like that old rug that doesn’t fit and no one even likes anymore, antiquated supply chain systems endure.

Rigid, linear supply chains are not agile

The drive for greater cost efficiencies drove supply chains to operate as lean as possible. And S&OP was built to work within the constraints of structures and systems, all aiming at producing the perfect plan. These constraints led to silos cascading information in a linear, sequential fashion, via disconnected spreadsheets from demand to supply to inventory and finally capacity. But handoffs between these silos cause latency, and systems limited by processing speed and storage can take days to compute plans. By the time the plan is completed it is hopelessly out of date.

Adding to that, how do you even forecast in a time like this, when the historical data that would normally be used to predict demand is not indicative? As McKinsey reports, in consumer goods the swings in demand have been most visible and prominent. For example, Nielsen data from March showed a 76% increase in household supplies like laundry and paper products but a 36% drop in cell phone accessories. It doesn’t take a data scientist to understand that if a statistical demand forecast uses past data to predict future trends, sales from April 2019 will be useless for April 2020, which will then be useless for April 2021. And even near-term the data will be problematic because as McKinsey points out, demand patterns will continue to vary based on whatever shape consumption takes as the economy recovers.

When demand and supply are fairly stable, forecasting algorithms approach a useful accuracy, and your planners can operate closer to cruise control, relying on automation to flag only the exceptions worthy of attention. But when we live in times like these, exceptions may be the entire day. Our supply chains have always needed agility to respond quickly, but especially once they sense disruption. The most accurate prediction we can make for the future is that times of disruption are the new normal. Which means agility needs to be the new normal.

What makes a supply chain agile?

When asked what about the current situation would make their company better in the long run, 72% of CFOs ranked better resiliency and agility as the number one trait, according to PwC’s COVID-19 CFO Pulse Survey. So what makes a supply chain agile?

I offer three capabilities essential to an agile supply chain – visibility, concurrency, and collaboration.

  • Visibility means being able to view the entirety of your supply chain, so you can plan across all the network and not just in functional silos. It means sensing problems immediately, with alerts that monitor your data, flag exceptions, and show the impact.
  • Concurrency means being able to make and manage synchronized plans across time horizons, business processes and organizational boundaries at the same time. With concurrent planning, a change in one part is reflected real-time across the entire supply chain – supply is not surprised by a change in demand, because it is visible instantly across the connected network without latency.
  • Collaboration is about bringing the right stakeholders together, in real-time, to evaluate alternative scenarios against your most important corporate metrics. When you can run scenarios across a connected supply chain instantly, you can create hundreds or even thousands ready for various what-if questions. With the best scenario in hand, your team can collectively move forward in a common environment, without triggering a prolonged chain of emails.

Disruptions pull the rug out from under us, but we don’t have to put it back the same way. I cleaned house as part of my own recent move, because just like many of today’s supply chains, what served yesterday’s needs won’t be useful going forward. Lean supply chains without subtier supplier visibility oriented toward a monthly planning process simply no longer work as designed. As we move from crisis management to the new normal, let this be a wakeup call for the supply chain of the future.

We can’t be sure of the near-term future: will it be shaped like a U, V, W or L (the alphabet soup economists use to predict the shape of the recovery curve)? Nor can we know what the new, or next normal will be in the mid or long-term. What we can be sure of is change, disruption, and volatility. Agility, especially supply chain agility, is the surest capability we can develop to help us navigate these times.

Polly Mitchell-Guthrie is the VP of Industry Outreach and Thought Leadership at Kinaxis, the leader in empowering people to make confident supply chain decisions. Previously she served in roles as director of Analytical Consulting Services at the University of North Carolina Health Care System, senior manager of the Advanced Analytics Customer Liaison Group in SAS’ Research and Development Division, and Director of the SAS Global Academic Program.

Mitchell-Guthrie has an MBA from the Kenan-Flagler Business School of the University of North Carolina at Chapel Hill, where she also received her BA in political science as a Morehead Scholar. She has been active in many roles within INFORMS (the Institute for Operations Research and Management Sciences), including serving as the chair and vice chair of the Analytics Certification Board and secretary of the Analytics Society.

Supply Chain Planning (SCP) Software Market’s Increasing Sophistication

Cloud/Software-as-a-Service | By •

In September I began, in February I reflected on, and this week I completed ARC’s Supply Chain Planning Global Market Research Study. I’m going to take this opportunity to summarize some of the study’s key findings.

scp

Supply Chain Complexity Meets Planning Intricacy
Global supply chains continue to be increasingly complex. This is not only due to outsourcing and an ever extending supply chain, but also due to competitive forces such as shorter product lifecycles and a proliferation of SKUs. At the same time, practitioners’ planning processes are becoming more sophisticated. Finally, SCP applications, supported by technology improvements such as data availability and computing capacity, are themselves becoming more sophisticated with more complex and holistic supply chain models, that are being run more frequently, with larger volumes of data representing a more granular level of detail. For example, sales and operations planning (S&OP) was the most frequently mentioned SCP application noted as a sales growth driver during my discussions with SCP vendors. In general, integrated business planning is a process that it a top priority for business executives and this is translating to increased sales of the software solutions that support the process. The pace at which S&OP and rapid analytics is being adopted is reflected in the 15 percent annual growth rate of Kinaxis over the last 3 to 4 years. And SCP suppliers’ plans for it in the future can be seen in SAP’s investment in its Integrated Business Planning for S&OP and HANA. The move to more holistic planning can also be seen in the widespread adoption of multi-echelon inventory optimization (MEIO) and the acquisition of MEIO applications by SCP software suite providers,  such as SAP and LLamasoft, to extend their offerings to include this essential capability.

SaaS-a-Fras
SCP applications have been one of the slower supply chain software categories to transition from on-premise, perpetual license sales to the Cloud, or SaaS. But it appears that the transition has reached critical mass. ARC’s research shows SaaS revenues to be the fasted growing segment of the market as newer vendors such as Kinaxis increase market share and larger, more entrenched market participants such as SAP, Oracle, and Infor increase the number of SCP applications they offer in the cloud and transition clients from perpetual license sales to SaaS. However, I want to note that it is still difficult to confidently determine if the transition from perpetual licensing to SaaS with have a net growth effect on the SCP market as a whole. A software company’s revenue typically suffers a setback during this process because perpetual license revenue is recognized upfront, while SaaS revenue is recognized ratably over the subscription periods. As a rule of thumb, it takes approximately 5 years of subscription revenues to equal revenue from a perpetual license. In this sense, SaaS serves as a drag on SCP market growth. However, SaaS also has the effect of transitioning the software supplier’s role to one of an ongoing partnership with customers. This has the potential to extend customer retention and potentially lead to greater long-term revenues for the particular vendor, and potentially increase overall revenues of the market. At the same time, the lower upfront costs reduce barriers to purchase and can encourage small and mid-sized businesses to make the “investment” in the technology, leading to greater market penetration and higher overall revenues for the market.

Summary in a Sentence
The global SCP market continues to grow, driven by the increased complexity of supply chains, the sophistication of planning processes, and the ability of suppliers to develop and practitioners to adopt more capable, sophisticated, and efficient SCP applications. For more information on ARC’s SCP study; including market segment sizes, market shares of leading suppliers, and growth rates of applications types and sales to end user industries, visit http://www.arcweb.com/market-studies/pages/supply-chain-planning.aspx.

 

S&OP and Analytics at Forefront of Supply Chain Planning Initiatives

Supply Chain Optimization | By •

In September 2015 I began the update of ARC Advisory Group’s global supply chain planning (SCP) market study. In a Logistics Viewpoints article published at that time, I discussed some of the major changes in SCP over the previous decade.  I am now concluding this SCP market study update. I have spoken with the vast majority of large SCP software suppliers within the market, discussed their companies’ SCP product roadmaps, learned about the evolving requirements of their customers, and reviewed recent sales patterns. Two of the widest-reaching and greatest overarching trends within the marketplace are as follows:

  • The shift from perpetual license to SaaS (cloud) is finally gaining momentum
  • Practitioners and vendors are “building off the foundation” of SCP. Meaning the greatest user adoption and supplier sales growth is coming from solutions – namely S&OP and analytics – that leverage core SCP functionality in a way that provides practitioners with a more holistic and valuable view of operations.

SCP Diag
SaaS (Finally) Hits the Main Stage
I believe myself to be one of the more hesitant analysts to jump on the “cloud” bandwagon (see The Cloud Conundrum: Is SaaS Always Best?). I believe that SaaS solutions can be a superior option to perpetual licensing for some customers in some cases. However, I don’t believe that SaaS is the panacea to all enterprise software ills. Historically, SCP applications have been one of the slower supply chain software categories to transition from on-premise, perpetual license sales to the Cloud, or SaaS.  However, ARC’s current SCP research shows that SaaS adoption of SCP applications has accelerated considerably. SaaS adoption has increased substantially, and a number of suppliers are investing heavily in their SaaS offerings to make SCP through the SaaS model even more appealing. Although I cannot disclose information from private conversations, I can point to public information that serves as example. The most visible example of SaaS growth in SCP is Kinaxis’ revenue growth at a 15 percent CAGR over the last three years.  Other SCP software suppliers are experiencing a substantial uptick in SaaS sales as well. In general, vendors see the SaaS model as a strong match for the needs of smaller customers that may be hesitant to put forth the large upfront investment often associated with enterprise-wide perpetual licensing.

S&OP and Analytics Reign Supreme
Three years ago the adoption of S&OP software solutions and supply chain analytics were already on a strong growth path. But today adoption and use of these solutions has reached critical mass. ARC’s diagram of the SCP software applications categorizes S&OP and Supply Chain Analytics as Extended SCP (see above). We categorize these solutions as extensions because they leverage the data and capabilities of the “core” SCP applications such as manufacturing, inventory, and demand planning, and provide users with more holistic visibility and the capability to run scenario analyses in an integrated, holistic fashion. As planning practices as companies mature, they are placing greater value on responsiveness and agility, are running analyses more frequently, and are interested in obtaining not just data, but actionable intelligence with an understanding of alternative actions and the likely results of pulling those operations levers.
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For more information on ARC’s forthcoming Supply Chain Planning Global Market Research Study, please view the abstract and table of contents from the 2012 base year study, as the sections and format will be similar.

The Next Global Recession

Global Trade | By •

At this point, experts are not saying that China has slipped into recession. But recessions are defined in the rear-view mirror, after they have already occurred. Further clouding the issue is the fact that leading economists have long questioned how accurate China’s GDP data really is. Companies would be well advised to start doing contingency planning assuming that China is in recession.

Further, companies need to also ask not just how a Chinese recession impacts their China business, but whether a Chinese recession, or even just a substantial slow down, will tip the world’s economy into recession. Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management says that a continuation of China’s slowdown in the next years will likely drag global economic growth below two percent, a threshold he defines as a world recession. China accounted for 38 percent of the global growth last year, up from 23 percent in 2010.

Recessions

One of the worst things a company can do when the world is tipping into a recession is to react too slowly. The key process for matching supply to demand is the sales & operations planning (S&OP) process. But if companies are using order history to forecast demand, they will be stuck with too much inventory. Demand driven companies, companies that have visibility to demand at the point of sale (POS), can sense downturns in demand much, much quicker. But accessing POS data is difficult in the US, only a few very large retailers provide this data. Accessing it in China will be all but impossible for many companies.

Companies that can spin their S&OP process more quickly will be better positioned to deal with a downturn. Many companies, do S&OP on a monthly basis. Increasing numbers of companies are beginning to do this process on a weekly basis. A few companies, actually match supply to demand in leading product segments on a daily basis.

Daily S&OP is beyond what many companies can do. But at an inflection point like this, some sort of daily planning is imperative. After the last global recession, I talked to one company that had implemented daily inventory planning meetings. In December 2008, it told all of its suppliers to stop all shipments for four weeks until it had a chance to recalibrate its demand plan. The company also moved quickly to resize the company by laying off workers, slowing production, and shutting some factories. As a result of these actions and its new supply chain applications, the company was able to come within five percent of its financial plan every quarter, even during the worst of the downturn. The company’s stock price, like many others, tumbled with the recession. But following the recession, the company’s fiscal discipline led to much stronger stock performance that its peers.

The next generation of S&OP is called integrated business planning. It is focused more tightly than traditional S&OP on how particular demand/supply balancing decisions impact revenues, profits, and cash flows. But during a recession, “Cash is King.” The cash conversion metric becomes an increasingly important KPI for the global supply chain team. To be successful, a Cash is King Initiative needs to drive performance not only in the global supply chain organization but also across the sales and finance teams. This end-to-end effort helps to insure that Inventory turns, Days Sales Outstanding, and Days Payables Outstanding targets are met with a goal of driving down the cash conversion cycle.

But in a recession, you have to be careful about this kind of initiative’s impact on key suppliers. If you slow down how fast you pay them, their financial integrity may be impacted. In a recession, companies have more to worry about than just demand. They also need to carefully monitor the financial health of their suppliers. One fairly simple tool companies use is a two by two matrix where on the vertical axis, a company places suppliers in boxes based on total product revenues linked to specific supplier components, the degree to which key components are single sourced, and the geopolitical and environmental risks associated with where a supplier operates. On the horizontal axis, the company assesses the financial robustness of its partners. If suppliers are placed in the top right hand corner of the matrix (high supply risk/high financial risk), procurement executives should require these suppliers to develop and present business continuity plans. And like with demand, companies should be monitoring these companies’ financials more frequently.

In conclusion, companies with flexible, responsive supply chains will weather a global recession better. These companies will be posed to buy distressed assets at bargain basement prices, grab market share when the recession ends, and outperform their competition in financial markets.

Procter & Gamble Speaks at the 3PL Summit

Consumer Packaged Goods (CPG) | By •

A week and a half ago I attended and spoke at the North American 3PL Summit and Chief Supply Chain Officer Forum in Chicago.

Procter & Gamble’s Julio Nemeth, SVP of Product Supply, also spoke.  He spoke about P&G’s supply chain initiatives. He had some interesting things to say:

  • They are now using demand sensing data in fairly sophisticated ways, such as the inclusion of customer web search data. However their forecast accuracy at the SKU is still only plus or minus 20 percent. Clearly, this is one reason they need a responsive supply chain.
  • P&G has rather forgone talking about supply chain systems and instead talks about their investments in analytics. They believe their supply chain systems are too siloed and they are missing global optimization opportunities. They are looking for a “fully interconnected platform” that delivers “holistic optimization.” I did not get the sense Julio was talking about an ERP solution because he wanted a platform and applications capable of learning and getting better on a day by day basis. If they can get to a “real-time instrumented supply chain,” P&G believes the upside is a 1-2% sales increase, 2-5% margin improvement, and 5-10% improvements in asset utilization.
  • The consumer goods giant has significantly sped up their planning cycles. They use to do S&OP monthly with weekly updates. Now the only part of the S&OP process done monthly is the financial forecast. In their fastest moving categories making demand/supply corrections twice a day!
  • Supply network design has gone from a focus on where plants should be located, to a look at the whole supply chain system with an increased look at risk management drivers. Clearly in a network design project you want to build where customers are located, but they also look at transportation reliability (including the availability of carriers and drivers) and the location of suppliers. Ten years ago, they were building fewer and bigger facilities. But today logistics costs are higher than manufacturing costs and that is driving them toward building more and smaller facilities. Their plants tend to serve the region they are in. There is very small amount of finished goods shipments between regions.
  • For risk management, they are using the MIT model which maps raw material and product flows and matches them to the financial flows. Those nodes which would significantly impact the financial flows need detailed contingency plans. A fire at a big plant would be one example.

Other than the keynote, this was the best attended speech that I was present for. Julio says that P&G’s core competencies are understanding consumer behavior and branding, but I would say that Mr. Nemeth is being modest. Supply chain management, even if they don’t call it that anymore, is clearly a core competence.

Baroid Centers Sales & Operations Planning on Transportation

Supply Chain Planning | By •

Sales & Operations Planning (S&OP) is traditionally defined as a cross functional process designed to balance supply and demand. The main players traditionally involved in this process are demand forecasting, manufacturing, sales and marketing, finance, new product development, and executive management. In most S&OP processes, transportation and warehousing folks do not have a seat at the table, and indeed are lucky if they are even told what the agreed-upon demand and supply plans are.

So when I heard a speech by Jerry Toliver, Global Service Manager at Baroid Industrial Drilling Products (a division of Halliburton) at the Sales & Operations Planning conference in Boston, highlighting how the transportation folks were at the heart of the company’s S&OP process, I was very pleasantly surprised. Baroid is a very large, global distributor of industrial bulk supplies for oil fields. The company purchases goods globally from over 600 suppliers. The goods flow into warehouses where they are treated and their quality is certified, and then they flow out to oil fields all over the world as needed. Because these are bulk products, the goods move by ocean, rail, trucking, and in rush situations, by air. A core part of Baroid’s value proposition is that customers will always have products when they need them, which is why Baroid sometimes uses air transportation. But, of course, this is a very expensive way to ship pallets that on average weigh 2,500 pounds.

This is a supply chain with long lead times. It takes 30 days for goods to ship across an ocean and get to Baroid’s warehouse, up to 10 days to certify the products at the central warehouse, and then up to 40 days to ship the goods to overseas locations. And yet Baroid promises customers 30-day deliveries. Not surprisingly this was a supply chain with a lot of inventory and sales people making just-in-case bulk orders for more inventory than they needed. The supply chain team never knew when those orders would be placed.

When Baroid moved to S&OP, which it calls “level loading,” the company told the sales folks that if they don’t participate in the forecasting process, their orders will not be honored. This was not strictly true, but it caused the sales folks enough grief that was easier for them to just participate in the forecasting process. Sales people do forecasting at the oil rig level.

The supply chain folks from Baroid admitted that their S&OP process is still maturing. They only began their journey to S&OP excellence within the last couple of years. Forecast accuracy, for example, is only 53 percent. Sales orders placed inside lead times, which drives high transportation costs, still occurs 63 percent of the time (it was 83 percent before S&OP).

Despite this, Baroid has achieved tremendous results and recognizes that it should have initiated S&OP long ago. Key supply chain metrics are improving. Inventory turn rates have improved, and indeed there is an increased ability for local stock points to pull inventory from other stock points in the region. Supplier shortages have decreased because the company shares its forecasts with suppliers. The on-time deliveries metric is improving and lead times are going down.

These improvements in supply chain metrics translate into a better bottom line. Cost of goods sold as a percentage of revenue is decreasing; in other words, on an order by order basis, the company is more profitable. And transportation savings are the key reason for that. There are far fewer less-than-container loads going out by ship. With S&OP, Baroid can aggregate orders and do far more full container shipments. And finally, partly because it is a more reliable supplier, the company’s revenues are increasing.

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