In today's fiercely competitive global economy, almost every company faces the challenges of ever-increasing supply chain complexity. In the past, a typical company offered a limited number of products through a single channel, using one shipping method. No more. Now, companies face an explosion of SKUs, channels, suppliers and delivery options, along with more sophisticated, demanding customers and changing governmental regulations. Keeping up—while maintaining competitive costs and satisfied customers—is getting harder, especially because supply and demand variables are changing more rapidly than ever before. Despite these challenges, a handful of companies succeed year after year, consistently producing strong revenue and profit growth—companies like Wal-Mart and Dell, whose supply chain excellence is legendary. What's their secret? Market leaders exhibit a common characteristic: agility—an exceptional nimbleness and unparalleled ability to respond rapidly and appropriately to changing market conditions. Simply put, supply chain agility underlies the success of these companies. The following principles outline the multiple capabilities that companies with agile supply chains exhibit.
1. Agile organization
How can companies organize to enable agile supply chains? An agile supply chain is the result of synchronized, inter-organizational processes, designed to enable a rapid response to shifts in demand or supply. Processes and systems facilitate the real-time transfer of information and plans among multiple departments. Cross-functional synchronization is especially critical, with shared goals and metrics that support agility. The following capabilities allow multiple enterprises and organizations within one company to act as one:
Synchronized planning: The primary tool that coordinates different organizations is a synchronized plan that optimizes company performance—not just departmental performance. Once departments and groups within a company agree to a shared plan, individual organizations can synchronize their sub-plans with corporate objectives and goals. Then, different functional areas or cross-functional groups are given the responsibility and authority to deliver on their sub-plans with the understanding that not delivering on an individual sub-plan can compromise the overall plan and hurt the efficiency of the entire company. In this regard, agile companies live and die by their plans.
Fast escalation: In a dynamic world, variability always presents new threats and opportunities beyond the bounds of any plan.When these threats and opportunities arise, agile companies can respond quickly if they have "process playbooks" in place. These playbooks operate in much the same way that football playbooks do: predetermined actions are taken when particular situations are identified on the playing field.
Playbooks are effective because they're built on the reality that most situations recur frequently. And, often, pulling the appropriate course of action from a playbook is easier, faster and just as effective, if not more so, than inventing something new on the fly.
How does a company construct such playbooks? They're the result of contingency planning. For example, a company can outline the steps that should be taken if sales are down because of the weather, supply issues, shifts in market demand, or a competitor's pricing, promotions or product advantages. On the other hand, if sales are stronger than expected, a playbook can help a company capitalize on the opportunity and increase production to take advantage of the situation, as well as direct products to regions with the strongest demand. If there's a weakness in supply at a competitor, a playbook can help a company move quickly to fill the gap, winning new customers along the way.
Measurement of performance to synchronized plans: One of the biggest obstacles to taking appropriate actions when unforeseen variables appear is adherence to "local" metrics. For example, factory managers may keep making product that the market is not buying, reasoning that higher quantities decrease unit costs. Or Sales may promote a product to meet revenue objectives, despite the fact that delivering that product is causing huge supply chain inefficiencies and eating into profitability margins. Agile companies correlate each group's performance to the achievement of synchronized plan objectives. Did the sub-plan aid and abet achievement of the overall plan? If not, no points are scored.
Agility is an exceptional nimbleness and unparalleled ability to respond rapidly and appropriately to changing market conditions.
2. Keeping commitments via closed-loop plan management
In typical companies, most plans are "dead on arrival": they're out of sync with demand conditions, or violate supply constraints. Agile companies implement closed-loop plan management principles that involve rapid formulation of a realistic synchronized plan and continuous monitoring of plan execution. In other words, they focus on making the plan happen. Every area commits to its own sub-plan and provides early warning if deviations occur, enabling corrective actions that are rapidly executed and coordinated. In this way, the plan is globally optimized, and plan management becomes a local focus.
Plan execution is rarely a straight path. Agile companies understand that it's an ongoing cycle of planning, doing, checking and taking corrective actions. This "plan-do-check-act" cycle is applied to closed-loop plan management, a cornerstone of agility. Closed-loop plan management is made up of the following capabilities:
Constraint-optimized planning: The typical process followed when generating a plan is unidirectional, starting with a financial plan and followed by a sales plan, an inventory plan and a supply plan, and so on. The process is constraint-insensitive and slow. By the time the plan is generated, too many things have changed.
Agile companies have the ability to use the latest information on constraints in the planning process and to consider multiple alternatives to arrive at realistic, optimal plans—fast. The rule of thumb is to create a plan in onetenth of the time it will take to execute it; e.g., a 30-day plan should take no more that 3 days to create, review and roll out.
Proactive monitoring and analysis of threats: Once a plan is rolled out, it is subject to threats. For example, if the plan was to sell 300 units for the month at a rate of 10 per day, it's useful to check point-of-sale data to see if the expected sales are occurring. If 5 units were sold on the first day, it's helpful to understand the root causes of the shortfall in order to take appropriate actions to recover. If sales are down due to supply issues, the corrective action will be different, for instance, than if a competitor's price discounts are causing the slowdown.
Corrective actions: Plan owners are expected to take quick corrective actions to ensure that their commitment to the synchronized plan holds. Preferred actions are those that can be taken unilaterally; e.g., sales teams can take pricing and promotion actions to reverse sales shortfalls. Such actions reduce the element of surprise and variability for the rest of the business. Of course, sometimes a plan has to change—say, by reducing the plan by a certain number of units.When this happens, it's important to collaborate and communicate quickly with all involved parties, such as Procurement and Production.
Post-mortems and performance management: A rigorous post-mortem of each plan period helps companies understand the root causes of deviations and the reasons for corrective actions. This post-mortem can help improve the planning process and hold teams accountable for executing on plans. Such accountability greatly decreases the level of “gaming� the system by under- or over-forecasting. Emphasis also shifts from asking the question, "Why did this miss occur?" to asking, "When did you first know about this and what actions did you take?"
3. Customer intimacy via closed-loop demand management
Although a forecast is undeniably important, at best it's an educated guess of what might happen. The plan's the thing to focus on. Many companies confuse the two and thereby create limited accountability.While the forecast is often "owned" by an analyst, the plan is owned by a manager with a commitment to making the demand plan happen, despite variability. This process of making a demand plan happen is called "closed-loop demand management," where the plan-do-check-act process is applied to demand management. It involves the following capabilities:
Dynamic demand planning: While some companies focus on historic information to formulate their plans, it's more important in a dynamic market to focus on market trends, competitive position, customer collaboration and point-of-sale data analysis. Agile companies understand the leading indicators of demand better than the competition. In the semiconductor or consumer electronics industry, for example, demand depends on channel inventory. Such data become a key input to the demand planning process. Increased rigor in demand planning yields not just better understanding of what will be sold but also a far superior understanding of actions required for winning in the market.
Proactive monitoring and analysis of threats: Agile companies monitor sales data at their door and at the channel outlets on a frequent—often, daily—basis. They know immediately if only 5 units sold on day one, when the plan called for 10. Staying alert to shifts in customer demand or buying patterns can also present opportunities. If 15 orders are coming in daily, when the plan was to sell 10 units, agile companies will immediately begin research to find out why. If it turns out that a competitor's production line is broken, agile companies can quickly capitalize on this revenue opportunity.Working closely with their channel partners, these companies have already established organizational structures, management processes and IT systems to quickly transfer the information critical for analysis and decision-making.
Corrective actions: Sales groups can react to plan deviations with many tactics, including promotions and pricing. But the problem is, such actions may come too late to be effective. A lack of processes and tools for examining and reacting to variability may prevent speedy and appropriate corrective actions. Or there may be a cumbersome approval process to overcome. Here is where the process playbook described earlier is useful. It helps agile companies take required actions fast. An example is markdowns. If smaller markdowns are made earlier—before the product gets stale—the overall lost revenue may be lower than if larger markdowns have to be made later in the product life cycle.
Post-mortems and performance management: The emphasis here is on understanding what data could have better predicted the deviations from the demand plan, and what actions should have been taken that were somehow missed.
4. Supplier intimacy via closed-loop supply management
Supply management includes internal and external sources of supply. As suppliers vie to increase their return on assets, they actively reduce their excess capacity and inventory. The timely and accurate exchange of plans between manufacturers and suppliers helps suppliers maintain their responsiveness to variability. Agile companies deploy "closed-loop supply management," where the plan-do-check-act cycle is applied to supply management. The following are key capabilities in this cycle:
Supply planning: Typically, companies take weeks to convert demand plans to supply plans. Despite this carefulness, supply plans often fail because of an inability to correctly account for capacity, material and other logistical constraints in supply lines. How do agile companies take care of this conundrum? They implement fast supply planning processes that allow time for many iterations. The result is constraint-optimized plans. To support this planning process, agile companies expect their suppliers to respond to different planning requests in a matter of minutes. In doing so, they are able to see the supplier's ability to fulfill different demand requests and can quickly choose the optimal path. The different parties involved then receive their marching orders, which they commit to fulfilling.
Proactive monitoring and analysis of threats: Some suppliers will take all orders, whether or not they have the capacity and materials to fulfill the order on time, resulting in poor customer service. Agile companies expect both internal and external suppliers to notify them promptly if they are unable to keep commitments made in the planning phase. Similarly, they inform their suppliers as soon as possible if their own orders will be smaller than expected because of changes in demand.
Corrective actions: Managing supply means finding and fixing supply problems promptly. If a supplier calls and says it will only be able to meet 50 percent of commitment, an agile company quickly determines other sources of supply and analyzes the economics of quicker modes of transport—air freight, for example. It may even have to pass up customer orders if the margin doesn't look promising against additional costs.When scenarios change, the company's ability to perform "what-if" analyses is critical. The typical questions here are: "If I can't supply it, what's the cost to my company in lost sales? If we go into crisis mode to find alternative suppliers, will those costs enable profitability or not?" All plans must be assessed in relation to corporate objectives.
Post-mortems and performance management: Obviously, the critical factors in a supplier's ability to deliver to plan are keeping commitments and providing early warnings when problems arise. The flexibility and strength of the supplier's own supply management process enable both of these capabilities, so companies need to probe their suppliers' visibility into constraints and ability to rapidly respond to variability. Here, again, the critical question is not "Why did this miss occur?" but "When did you first know about this, what actions did you take and how will you improve your plan management process such that this will not happen again?"
5. Efficient delivery via closed-loop fulfillment management
Order fulfillment is where the rubber meets the road in supply chain management. Can the supply chain deliver orders reliably to customers' expectations and promises? What is the optimal path to fulfill the order? Typical order fulfillment paths are rigid: If a product is manufactured in China, it will travel from the Chinese factory to the U.S. warehouse and from there to the channel's distribution center and then to the retail store. But, increasingly, customers are demanding "direct ship" from the factory. One way that companies address this quandary is by responding to customer requests with commitments based on a firm, optimized execution plan. Agile companies deploy “closed-loop fulfillment management,� where the plan-do-check-act process is applied to fulfilling customer orders. This process involves the following capabilities:
Fulfillment planning: There are multiple paths companies can take to fulfill orders. For instance, different inventory locations can be tapped, and different transportation modes can be deployed. The pathway may be more complex when multiple line-items are requested, or when a sequence of multiple activities must be performed to meet the request. Agile companies are able to respond to complex order requests within seconds.
The fulfillment planning process takes into account many factors—current inventories, latest supply plans, existing customer orders, allocation rules, transportation times and cost factors to determine an optimal delivery plan for each request. Based on this constraint-sensitive fulfillment plan, companies can then issue execution orders to different players and make a commitment to the customer.
Proactive monitoring and analysis of threats: Agile companies continuously monitor the execution of the different actions required to deliver the customer order. By doing so, they are able to maintain real-time visibility into order status and generate alarms when any of the milestones are missed.
Corrective actions: When there is potential for delay, options such as using air freight, replacing the order with an upgrade or allocating inventory differently are evaluated. Post-mortems and performance management: Agile companies evaluate historical fulfillment data to find new ways of speeding customer fulfillment while optimizing fulfillment costs. Such data analysis helps them create more effective corrective actions in the future and helps to reconfigure their supply chain management processes for greater customer satisfaction and loyalty.
6. Rapid business reconfiguration
To move at the speed of business, agile companies reconfigure their processes as well as their physical plants and human resources. As the market changes, they might continuously reconfigure their supply networks, inventory strategy, fulfillment strategy, product designs and many more contributors to their success.
How do they do this? Consider supply network design as an example. Agile companies establish a small group of experts whose full-time job is to evaluate alternative configurations. Typically, this group uses computer-based models of the network and continuously updates the data—such as fuel costs—that support the network. They then run optimization routines to determine the ideal network to meet corporate objectives.
Agile companies strategize how best to manage product design and production, too. For example, printing on labels rather than directly onto bottles allows companies with global operations to hold off deciding which market to send products to—and which language to print on the label— until demand trends become clear. Agile companies aggressively deploy such postponement strategies to gain more flexibility. They tune their supply networks, inventory strategy, fulfillment strategy, product designs and other associated policies sometimes 10 times as often as less agile companies.
7. Agile IT systems
The processes described above need IT capabilities that are beyond what is typical in today's corporations. They're the processes of an agile company, integrating and synchronizing cross-functional capabilities across different organizations and partners.
The obstacles to this integration and synchronization are well-known in industry: Data critical for decisionmaking often do not reside within the four walls of one company. It's difficult, for example, to gain visibility into the data that show the status of one's own inventory, not to mention that of the competition in the same channel. Even data that reside within one company are usually residing in different systems, with different formats and at different levels of aggregation.
Moreover, because IT systems have not been helpful to planning processes in the past, the spreadsheet is still the number one planning tool used in industry. But spreadsheets cannot be optimized globally, making the plando- check-act cycle overly cumbersome and error-prone.
Yet, today's requirements for synchronization and integration call for systems and solutions that override the shortfalls of multiple systems owned by different partners in the supply chain. The traditional approach of replacing legacy systems with one new, centralized system is also no longer practical in terms of timeline or costs. Traditional approaches for data integration are also falling short of the current need for process synchronization.
Fortunately, there is a new class of systems that is rapidly becoming available. These new systems overlay existing systems and provide support for the plan-do-checkact functionality required in today's global business climate. They also provide the flexibility to rapidly reconfigure business processes. Here are the primary capabilities of these new, agile systems:
Visibility across multiple systems: Agile companies know how important it is to be able to read and interpret critical data in different ways.Whether involved in planning, monitoring execution or analyzing root causes of constraints and other variability factors, they strive to refresh their data continuously. Potentially valuable data may come from a wide range of internal and external sources—point-of-sale systems, the Internet, pricing sheets, research companies, a company's own databases and internal systems—and may come in forms ranging from SKU numbers and product categories to specific product names. Modern visibility tools that overlay existing data sources enable supply chain executives to tap into multiple data sources, and then convert data to formats that are helpful in analysis.
Event management: A flood of data is difficult to handle, however. So an agile IT system acts like an intelligent assistant, evaluating what events call for action from different levels of management at a company. Such "events" might be a change in a competitor's pricing or a rise in the cost of a key component. Agile systems create a checklist of factors to monitor on a regular basis, such as the weather, competitive pricing or the price of oil. The timely notification of events that have the potential to impact business allows for more rapid correction.
Root-cause analysis: The ability to determine the causes of problems is a critical prerequisite for delivering on commitments. But how does this work? Let's say sales are falling short of the demand plan. A process playbook to determine the cause may include the following steps: check to see if there was adequate inventory, then check sales of similar items, then check competitor pricing, and so on. IT support to flexibly implement such workflows is a key enabler of rapid analysis.
Planning and optimization: To achieve desired business results, plans must be continuously updated with current knowledge of market demand and supply constraints. Because plan synchronization across multiple entities requires a collaborative, iterative process among multiple parties, it's essential to have IT that supports flexible planning workflows. Optimization tools that evaluate multiple scenarios and suggest ways to minimize the impact of constraints are key to responding rapidly to changing conditions and creating high-quality plans.
Distribution of plan-execution tasks: We've discussed the importance of making the plan happen. Often, this execution function is distributed among different organizations and enterprises, requiring time-sensitive coordination. Consider, for example, the customer order that contains multiple line-items that need to be sourced from different suppliers and merged in transit to deliver a single shipment. The execution plan for this order will be handled by multiple parties—calling for solutions that can monitor and track progress across multiple systems.
Summary
The concept of a closed-loop, plan-do-check-act cycle is simple, yet powerful, and companies have embraced it in theory since W. Edwards Deming's articulation of the concept. But change is another matter. Creating a change management process to bring about a new corporate culture focused on agility requires a big commitment. Such commitments and the steps companies make to support them are not foreign to industry.When faced with a challenge of variability in product quality in the 1980s, companies adopted a systematic approach to bring about process and attitude changes—Total Quality Management. Similarly, now faced with huge inefficiencies caused by variability in business operations, companies must make a similar commitment to applying closed-loop principles to the process of generating and executing business plans. For most companies, the increased agility delivered by such a program will yield more return on investment than any other program to improve efficiency.
— by Sanjiv Sidhu
Managing Dynamic Demand in Electronics
CASE STUDY
The revenues of a global leader in semiconductor manufacturing had stalled over the last decade. The company wanted to increase its market share, especially in the area of high-volume logic chips. One way to do this was by improving its ability to deliver chips more quickly than the competition. Explains Pallab Chatterjee, chief delivery officer at i2 Technologies, "In the high-volume semiconductor market, the ability to deliver the right chip when the customer wants it is key to getting the order and gaining market share."
This was no easy task, however. The company made tens of thousands of different varieties of logic chips, and demand was hard to predict, since few customers provided forecasts. A customer might suddenly request 1 million chips—and want them delivered in two days. In the past, the company had negotiated delivery times, counteroffering five days instead of two, for instance. It had always been a leader in on-time delivery for these negotiated, deliver-to-promise dates, but now the goal was to sharply increase on-time delivery to customer-request dates, without increasing inventory. Performance in this area stood at almost 80 percent—not bad, but not good enough to gain a more dominant market share.
i2's analysis revealed that while the overall volume of demand was quite predictable, constant changes in how demand was distributed among products and regions challenged the company's forecasting efforts. For instance, changes in the demand mix meant shifting to products with different costs, production constraints or cycle times. Or demand shifts among regions rendered previous stocking decisions hopelessly outdated. The changes themselves were often small—perhaps a customer wanted a different part version, or to have more items delivered to one location than another—but keeping up with these many small changes was too much for the semiconductor manufacturer's planning and inventory management capabilities.
Taking a demand-driven approach to inventory management
i2 quickly understood the root of the problem: that no fixed plan can accommodate dynamic demand. Manually correcting mistakes as demand fluctuated, however quickly, was not a viable, long-term solution. Instead, this company needed a more flexible, demand-driven approach to inventory management that would continuously update the plan. i2 worked with the company to put in place an inventory management system that would automatically adapt to changing customer demand on a continuous basis—not just once a year. i2 analysis showed that the semiconductor manufacturer's delivery performance was satisfactory on fixed, predictable customer orders, but building to stock—for inventory or in anticipation of demand—was a different story. Here, any forecasts were quickly outdated, resulting in unavailability of needed parts. Despite the complexity of the company's business, its inventory control depended on just two main factors: the stage of completion to which products were built, and the locations where they were stocked.
Adopting a postponement strategy
The solution was to postpone the last stages of product manufacturing so that the company could delay making decisions about the final form of work-in-process products until demand trends were clearer. There are trade-offs to this strategy, however. Postponement is a compromise solution.While it is quicker than build-to-order, it has higher inventory costs. It is also cheaper than build-tostock, but not as fast on order fulfillment. Moreover, postponement puts limits on the second inventory-control factor—stocking location.While finished goods may be shipped to distribution centers near customers, "postpone" work-in-process must be assembled and tested at upstream facilities that are usually farther away, adding shipping costs and slowing delivery performance.
Despite these drawbacks, the postponement strategy would provide far greater flexibility and bring the company closer to an optimal, demand-driven approach to inventory management. After implementing i2 Inventory Optimization, the company was able to calculate the many complex factors involved in managing its inventory.Working closely, i2 and this manufacturer simulated different postponement and stocking strategies. This involved segmenting products in different ways—ranging from manufacturing constraints to demand profiles—until the company found an inventory management approach that optimized these factors. Mindful that any performance gains would evaporate as soon as demand shifted, the company scheduled weekly check-ups and adjustments to the strategy to ensure that segmentation always tracked current demand.
Results exceeded expectations. Delivery performance surged by 25 percent, almost double the simulation's estimate for one-time gains. Notes Chatterjee, "The original process had them negotiating with customers on delivery dates. Today, the semiconductor manufacturer is able to meet the customer request date without negotiation more than 90 percent of the time, without increasing inventory levels." Better still, the gains were immediate—unmistakable after one month—and reached new steady states only four months later. Success metrics were off the charts. Inventory savings alone made the project's ROI virtually incalculable. Inventory Optimization delivered the speed and agility the company needed to keep up with changing customer demand.
–– Martha Craumer
