Supply Chain Movement » supply chain

Natural risk behaviour

Martijn Lofvers — Fri, 21 Oct 2011 09:31:32 +0000

What is the company behaviour to risk and danger? Natural disasters in last years have made companies more and more aware of supply chain risks. The earthquake and the following tsunami in Japan made clear where risks of supply of components especially in the high-tech industry lays. A company needs to know that when a natural disasters occurs if it hurts their supply chain. Upstream supply chain visibility is a definite requirement to know where vulnerabilities lay.

According to a recent survey by Garter analysts supplier visibility focuses on reducing business risk and the need better for lead times. But there is a difference between supply chain status information from a company’s direct suppliers (Tier 1) and from Tier 2 and Tier 3 suppliers. Supplier engineering and quality-related events doubled the need for status information at Tier2/Tier 3 compared to Tier1 suppliers. Additionally, Gartner sees government legislation and regulation increasing more upstream for the “secure” supply chain , which will drive the need for additional upstream visibility and control in some industries, including medical, aerospace and defence and high-tech.

Companies that seek Tier2/Tier3 data do so to get “early warnings” on upstream engineering and quality issues before they impact Tier 1 and brand owner manufacturing processes. Approximately 70% of the researched companies by Gartner are getting Tier 1 visibility with shipment and order status. Of these companies only 30% have the same kind of visibility on Tier2/Tier3 level.

The main question to me remains how companies (re)act to critical information upstream. In nature animals behave differently in the matter of awareness of danger en responsiveness to it. An ostrich and an elephant are highly aware of risk, but behave differently. An elephant charges in times of eminent danger, just like most chemical companies when safety is at risk. Most banks know all kind of risk calculations for their products, but are like ostriches not responsive enough to change the business behaviour structurally despite the growing company risks in the last few years. A lot of transport companies are caught like a rabbit in the headlights because of increasing fuel prices and haven’t taken enough precautions for this.

What kind of animal is your company in the matter of risk behaviour?

Martijn Lofvers, Publishing Director & Editor-in-Chief
Supply Chain Movement
martijn.lofvers@supplychainmedia.nl

Free special Inventory Optimization on the iPad

Martijn Lofvers — Tue, 27 Sep 2011 08:24:51 +0000

The new European quarterly magazine Supply Chain Movement published a free special about Inventory Optimization. This edition features insightful articles and international case studies about inventory management in order to reduce working capital.

Download the free supply chain app for the iPad in the iStore:
http://itunes.apple.com/nl/app/supply-chain-media/id433251052?mt=8

After downloading the SCM app you can read the special edition of Supply Chain Movement about the strategic importance of Inventory Management to business.

Re-evaluating the supply chain post-Japanese earthquake

Martijn Lofvers — Mon, 05 Sep 2011 15:06:23 +0000

Japan’s devastating earthquake, tsunami and nuclear accident have served as a wake-up call across the world to show just how fragile global supply can be. With almost 9% of the world’s economic output coming from Japan, these events have had a direct impact on many companies that rely on Japan for manufacturing parts, and have caused countless disruptions across the global supply chain.

It has been reported, for example, that Apple was facing tight supplies on the lithium-ion batteries used in its iPods. The bottleneck was traced to Kureha, a relatively obscure Japanese chemicals manufacturer which had to shut down its factory near Iwaki following the disaster. Although the company’s factory had remained intact, it was the damage to the ports that was creating the blockage in the supply chain.

How does a company that outsources its production deal with unexpected events ranging from Japan’s catastrophic earthquake and tsunami to unprecedented floods in Australia or an Icelandic volcano? Until recently, many corporations entrusted their supply chain operations to middle level management. The chief purchasing officer, if he/she existed, usually reported to the CFO, CIO or COO. CEOs had relatively little exposure and experience in dealing directly with supply chains. Often, the purchasing officers paid more attention to cost and product quality than to the risk factors in sourcing. The earthquake in Japan is changing all of that since many global supply chains have been disrupted to varying degrees.

The global supply chain is the natural consequence of a rational attempt to remain “asset light,” in other words, focusing on a company’s core competencies and outsourcing the rest by taking advantage of low-cost sourcing. No one questions the value of the concept or of just-in-time manufacturing, but it is increasingly apparent that the approach works best when the global economy is stable, protectionism is not prevalent and strong, and there are few natural disasters. The global economy has become increasingly integrated, and the growing frequency and intensity of natural catastrophes, such as what took place in Japan need to be factored into strategic planning.

All of these factors have changed the rules of the game and created a radically new environment which requires a fundamental shift in thinking with regard to the supply chain.

From “cost and value” to a “cost, value and risk model”
Most companies see their mission in terms of producing the highest value for customers at the lowest possible cost. Asset-light and just-in-time manufacturing maximize efficiency, but the missing part of the equation is the risk that some part of the chain could malfunction.

A notable example of miscalculated risk is BP’s inadequate assessment of the potential danger from a deepwater oil leak in the Gulf of Mexico. Since BP had subcontracted its engineering to Halliburton, it assumed that the risk of a spill would be borne by Halliburton. As the public saw it, BP’s management was ultimately responsible despite the fact that the source of the mishap was outsourced. The miscalculation ultimately cost BP’s CEO his job. Outsourcing is still a valid strategy, but supply risk needs to be factored into the model.

Lego, the Danish toymaker famous for its plastic bricks, took a more enlightened approach. The company pondered outsourcing its production to an Asian supplier specialized in plastic injection molding for computer printers. A deeper investigation revealed that the two companies had radically different philosophies concerning the molds. The Asian supplier favored low cost, light-weight molds that were changed frequently as new printer designs came on line. In contrast, Lego, which depends on all its components interconnecting, sometimes uses the same molds for 40 years or more. A minor variation in the specifications risked making Lego’s bricks unusable leading to poor results for the company. In Lego’s case, it made more sense to in-source its production, even if it was slightly more expensive. The global supply chain is only as strong as its weakest link, and it is crucial to know where the weak links are.

From arm-length financing to joint financing
Another variable of risk is expensive credit in the post-financial crisis world. Large corporations like Cisco and General Electric normally enjoy preferential credit because of their size and dependability. Smaller companies are riskier propositions to banks and loan institutions, so credit is likely to be more expensive and limited. For smaller suppliers, this can mean bankruptcy if the cash flow dries up, and for a large corporation that outsources the lion’s share of its production, that can spell disaster.

Large corporations are learning that they can no longer ignore the credit conditions experienced by their key suppliers. At the basic level, major corporations can serve as loan guarantors to see that suppliers stay in business. More enlightened corporations have begun using their size to negotiate preferential terms for their key suppliers.

Honda is an example of a corporation that uses its heft to negotiate preferential prices on the steel used by its suppliers. Other corporations have used their size to convince banks to extend credit to suppliers at the corporations’ preferential rates. By securing cheaper rates for suppliers, the corporation reduces its own costs. The banks come out ahead since they face substantially reduced risk.

Another approach is for a corporation to simply extend credit on its own without going through a bank. When Toshiba wanted to build a new factory to ramp up its production of flash memory, Apple prepaid Toshiba $500 million for its chips so that the company could speed up the project. In the process, Apple ensured that it was not caught short and Toshiba eventually produced a third of the flash memory that went into the new iPad.

In the current climate, product life cycles are accelerating. The advantage to a company of being the first to launch a new product may be as little as six weeks. If a company misses that window, it will be unable to reap the full benefits of its R&D investment to bring new products to the market first.

Re-thinking the supply chain model
Given the enormous impact of the supply chain on a company’s bottom line, executive input at the highest level of the corporation’s management team is increasingly important. The transition from mere purchasing function to outsourcing requires expertise in managing external relations. While it is easy to quantify sales and production, deciding what weight to attribute to risk is more difficult, and it requires a different skill set and different metrics, as well as a new mindset.

Professor Carlos Cordon is the LEGO Professor of Supply Chain Management at IMD and Professor Winter Nie is Professor of Operations and Service Management at IMD. They both teach on IMD’s Managing the Global Supply Chain program.

The best Movies and TV Series about supply chains

Martijn Lofvers — Wed, 03 Aug 2011 12:24:46 +0000

What are the best Movies and TV Series about supply chains? And why? What is the connection with supply chains? And in which Movies and TV Series is the development of logistics into supply chain management perfectly reflected?

According to the editors of the Dutch Supply Chain Magazine the following Movies and TV Series should be in this ranking:

• Lord of War (2005) with the best opening scene about the supply chain of a bullet, from manufacturing to the end customer: http://www.youtube.com/watch?v=9d0d6qgsvTw

• Traffic (2000) about the supply chains of drugs from Pakistan via Mexico to the United States

• Breaking Bad (TV Series 2008– ), especially the episode about setting up a distribution network in several American states in Season 2, Episode 12

• WALL.E (2008) about an unsustainable world

• Monsters, Inc. (2001) with an incredible scene in an automated warehouse for hanging doors

Any suggestions are welcome can be added in the featured discussions in the LinkedIn group Supply Chain Movement. Thank you for your contribution.

PS Great movies about company life, not specifically supply chains:
• Swimming with Sharks (1994), www.youtube.com/watch?v=UH9OLQh46FY
• Office Space (1999), www.youtube.com/watch?v=fPP2jz4jyxk
• Horrible Bosses (2011), www.youtube.com/watch?v=mh9cG5dzs-U
• Up in the Air (2009), about outsourcing firing people, www.youtube.com/watch?v=hnrDgLs8fQo
• Suitemates (TV Series 2010) about a ERP software company, www.suitemates.com

The shape of infinity

Martijn Lofvers — Fri, 01 Jul 2011 13:11:17 +0000

While innovation and sustainability have of course both been around as long as time itself, they appear to be the hottest topics in the business world at the moment. In the aftermath of the recent and unparalleled financial crisis, countless directors are calling out for innovation while others are taking the sustainability route.

A recent global survey by MIT Sloan Management Review and BCG concluded that companies fall into one of two categories when it comes to sustainability: a small group of front-runners who are embracing sustainability, and the rest of the pack – so-called ‘cautious adopters’ – who for now are tentatively evaluating their options. The study also revealed that the ‘embracers’ are the best-performing companies.

In 2002, William McDonough and Michael Braungart published their thoughts on sustainable production in their book, Cradle to Cradle. They introduced the double loop comprising a biological cycle of nature and a technological cycle: by avoiding contaminating raw materials through the use of harmful chemicals during the manufacturing process, these can be reused over and over again. Logically enough, the logo of Cradle to Cradle is a horizontal figure of eight – the mathematical symbol for infinity.

In his recent book, The New Capitalist Manifesto, author Umair Haque from Havas Media Lab outlines how innovative companies switch, in the first of six cycles, from a Value Chain to a Value Cycle in which reverse logistics and reproduction close the traditional supply chain loop. Yet another new book, Jumping the S-Curve by Paul Nunes and Tim Breene from Accenture, describes the familiar business lifecycle and reminds us of how top companies continually reinvent themselves. Both authors agree that functional superiority, such as supply chain management, is important and yet barely enough. To illustrate this, they use the case of the successful Porsche Cayenne, in which good planning before the launch enabled the car manufacturer to anticipate its success.

According to Charles Fine from MIT Sloan School of Management, intelligent supply chain design can actually ensure that a company evolves healthily. In his book Clockspeed (1998), based on the developments in the computer industry in the eighties, he introduced the double cycle of shift from vertical industry and product structure to horizontal and modular structure, and back again – which formed, not coincidentally, the shape of infinity.

Martijn Lofvers, Publishing Director & Editor-in-Chief
Supply Chain Movement
martijn.lofvers@supplychainmedia.nl

The World of Service Logistics

Martijn Lofvers — Fri, 01 Jul 2011 12:14:49 +0000

As a professor in maintenance and reliability at Eindhoven University, I often find myself reflecting on the developments in service logistics. Service logistics covers all the activities needed to keep technical systems up and running. It is about corrective, preventive and condition-based maintenance, as well as measures that can be taken when the systems are being designed. In this case, it is about capital and consumer goods. The key performance indicators are system availability and Total Cost of Ownership.

Some time ago, I was reading a paper written by my predecessor, professor Geraerdts, who retired in 1991 as a professor in maintenance at my university. He concludes it with the trends he witnessed back then. Strangely enough, his list was almost identical to the list of trends I drew up for my inaugural lecture just last year! I could hardly believe my eyes. Is my list old fashioned? Or, have there been hardly any new developments in maintenance over the last 20 years? The answers here are no; and no. After some weeks of thinking about this, I concluded that it must have something to do with a variant on Moore’s law for the development of chips.

When you look at the development of technical systems, you can see that each generation is more complex than the one before: it has more functions, more components that can fail, and requires maintenance engineers to have a higher level of specialization. This forces buyers (users) to outsource their maintenance and to arrange a good, long-term maintenance services contract when buying (or leasing) a new system. The Original Equipment Manufacturers (OEMs) or other third parties, then become responsible for the maintenance as well as realising high systems availability. It is up to them to create enough scale to deal with the ever-increasing complexity of maintenance and the level of specialization.

In the past, it was up to the users to deal with these challenges, and they were successful for some time. Yet now, the challenge falls to these new third parties, those with extra tools at their disposal such as remote monitoring and diagnosis and facilitating maintenance using smart design choices. The question is, even if they succeed to deal with the challenges for the next 20 years, who will take over in 2030?

Geert-Jan van Houtum, Professor Eindhoven University of Technology and Board Member of the European Supply Chain Forum

The impact of company culture on IBP part II: Change

Martijn Lofvers — Mon, 28 Mar 2011 07:01:31 +0000

Implementing Integrated Business Planning (IBP) processes may challenge many existing values and behaviours in a company. For IBP to be effective a set of values is required. Some important ones are:

1. Group thinking: take a holistic business view rather then functional or silo view.
2. Feedback: the ability to provide and receive open and honest feedback on IBP effectiveness.
3. Collaboration: open and honest in sharing information and knowledge between functions.
4. Empowerment: believe and trust in each others capabilities, decisions and numbers.

The common denominator in all these values is trust. Furthermore it’s fair to say that these are values that need constructive behaviours, which will not be embedded in every company’s culture. This means that many companies that go through an IBP implementation require change in their business values and behaviours. And change isn’t easy!

In the 2010 second edition of the McKinsey quarterly, an article about change management revealed that according to a 2008 McKinsey study of 3,199 executives around the world, only 30% of change transformations are successful. The article mentioned that the groundbreaking 1996 change study – Leading Change – from John Kotter, found the same success rate for change programs. This means the success rate of change programs has not improved in the last 15 years.

In my 2010 survey on Supply & Operations Planning (S&OP); S&OP pulse check 2010, survey participants nominated senior leadership support and organizational silos as the biggest roadblocks to implementing S&OP:
• A lack of internal collaboration between the organizational silos is seen as a major roadblock by 48% of participants.
• 68% of survey participants’ believe that senior leaders don’t show the behavioural support required for the IBP change.

Now we know how hard change is in general and what the biggest roadblocks for IBP change are, it brings us to the next questions. How to detect in what change environment you operate and if how to know if you have any chance of implementing IBP successfully?

The first thing to know to understand your change environment is that there are three levels on which people resist change.1

1. Level1: I don’t get it: this involves facts, figures and ideas. It’s the world of thinking and rational action. It is the world of presentations, diagrams, processes and logical arguments.
2. Level 2: I don’t like it: this is an emotional reaction to the change. It is based on fear. People are afraid that this change will cause them to lose face, status, control, maybe even their jobs.
3. Level 3: I don’t like you: maybe they do like you, but they don’t trust or have confidence in your leadership.

These levels of resistance can be present in every echelon in the organization. Yes indeed, don’t expect every senior leader or stakeholder to get IBP, to like IBP, or to like you!

Secondly, before you start an IBP project, use the next four steps to discover in what change environment you are about to operate in:

1. Have informal chats with other IBP stakeholders on the track record of change programs in the company and how they view this IBP change. Does the company handle change well?
2. Check how many strategic projects are on the list in the board room. There should be a maximum of 5. If IBP is not part of that, or if there are 30 strategic projects, expect priority issues.
3. Have an informal chat with senior leaders if they ‘get’ and ‘like’ IBP. This will tell you if they are committed to support it. You might pick up level 3 resistance too.
4. Assess the company culture. Is it a demand and control environment, where people are micromanaged, feedback is seen as a personal attack and trust is low? Or is it an empowered, trustful environment, where feedback is seen as a ‘gift’ to improve people and process?

It can help to write a short web based questionnaire to IBP stakeholders. You can use free software like Kwiksurvey.com. Five questions can be enough to give you great insight in your change environment and it will take only 5 minutes for participants to complete.

Thirdly, based on the four steps, assess the change environment. If you’re in an organization that has a good record in change, that’s great for your project. If the company doesn’t have a great track record in change, that’s ok. Not all organizations can be great in change if 70% of change programs still fail!
Too many strategic projects will give priority problems and will slow you down, but can be dealt with. Level 1 resistance is hard work, but can be overcome by education.

Change gets harder when you discover level 2 or level 3 resistance. And it gets even harder if the company culture is one of demand and control. In these situations, it’s valid to say; get help. Help in communication, project planning, stakeholder analysis, stakeholder management, education, the whole lot. Human Performance or People and Culture departments should be involved here. It can’t be only up to IBP to make the change in culture.

If all the moons align in a negative way and the company has a terrible change record, your project is one of thirty in the board room, you noticed level 3 resistance and the environment you observe is a low trust demand and control environment, there is only one advice: forget IBP and run for your life!

1. Rick Maurer, Beyond the wall of resistance, Bard Press, 2010

Niels van Hove, Integrated Business Planning manager in Melbourne Area, Australia
Niels_van_hove@hotmail.com
http://supplychaintrends.wordpress.com/

Carbon Disclosure Project Supply Chain Report 2011

Martijn Lofvers — Tue, 01 Feb 2011 08:20:28 +0000

Over 50% of an average corporation’s carbon emissions are typically from the supply chain rather than within its own four walls. Managing supply chain emissions is therefore critical if we are going to address climate change effectively.

The Carbon Disclosure Project’s Supply Chain program is a unique collaboration of 57 global corporations who are members of CDP Supply Chain. These companies recognize the significance of the supply chain in carbon management. They are actively engaged in working with their suppliers to manage carbon and have the power and influence to really make a difference. This report is based on this work and is the most significant study of how business is managing supply chain emissions. The insights are informed by detailed data and research conducted with 1,000 participating suppliers across industries all over the world.

There are three core results from this year’s research:

1. Supplier carbon reduction ambition still does not meet global carbon reduction requirements to limit the rise of global surface temperature. Only one third of responding suppliers have a target for carbon reduction and even the targets that are in place are not sufficient. Should this status continue, this would mean global emissions by 2015 will increase by 6% instead of the necessary 20% reduction.

2. But there is hope…
Compared to last year, companies have improved in assembling the building blocks for dramatic change – including improved reporting, increased board level responsibility and greater realization that carbon management presents a wider cost and revenue opportunity rather than being a pure risk mitigation activity.

3. CDP Members are leading the way
They have started a chain reaction for engagement in the supply chain – they are increasingly using their influence and power to drive change. They do this by deploying differentiated levers to engage with their suppliers. These include redesigning products, directly reducing demand for carbon intensive purchases, working collaboratively with suppliers to cut emissions and making effective carbon management a supplier selection criterion.

The report highlights that it is still early days in the quest to reduce emissions. While progress has been made, a major step change is required if business is to meet the global requirements. Increased engagement and commitment in the supply chain is indispensable for achieving this. This report highlights that although there is work to do, through leadership – as demonstrated by CDP Members in working with their suppliers – a positive snowball and domino effect in the supply chain can bring about the change needed.

Supply Chain Resilience 2010

Martijn Lofvers — Mon, 18 Oct 2010 14:08:57 +0000

Business Continuity Management is proving to be an effective technique to better understand supply chain dependencies and develop a robust strategy to deal with disruption. BCM provides a practical and proven methodology to ensure an organization’s own business continuity programme accounts for supply chain disruption as well as enable close and transparent work with supply chain partners to develop their resilience in turn.

BCM’s “all risks” approach saves time in guessing which threat will realise itself and cause the actual disruption, thereby allowing time to focus on indentifying vulnerabilities and developing preparedness to deal with what ever threat may eventually affect the organization’s supply chain. The survey provides invaluable evidence to support the business case for investment in effective BCM programmes by identifying the level of disruption being experienced and measurable consequential impacts.

This survey builds on the 2009 survey, subsequent joint work with the Chartered Institute of Purchasing & Supply, and a BCI report entitled The Business Case for BCM, which identified that supply chain was the area of their BCM programme that most respondents were unhappy with.

To the buttons

Martijn Lofvers — Wed, 13 Oct 2010 14:46:44 +0000

Companies in the supply chain are becoming more and more dependent on third parties. They outsource more and more production to contract companies. At Apple, it has gone so far that the entire supply chain has been outsourced to Foxconn of Taiwan. With that it has lost its grip, with child labour and large scale bribes being the result. On top of that production companies hand over the distribution of products to logistical service providers and also let them perform more and more services.

Also, without a good IT system the processes in the supply chain don’t always run as they should. Choosing the right IT vendor is therefore crucial. I was curious to know if supply chain directors look primarily at the software functionality or at the supplier/implementation partner when choosing a package so I asked a few. Their opinions were noticeably divided.

I believe many companies look too often at the buttons. Many analysts and consultants also offer thick and expensive reports with all sorts of views on software functionality. Remarkably, authors of these reports pay little attention to references about software packages, probably because it is too much work to keep up with companies which use certain software satisfactorily.

If I’m choosing a car I’m really not interested in all the possible options. My previous car could automatically parallel park itself at the touch of a button; with my hands free I just had to give it some throttle. I used this function, which was included in the package option, just once. For me, a test drive and the reliability of the make of car is much more important than all the buttons.

Not long ago I drove a Porsche Panamera for a day together with Roel van Driel, VP Supply Chain of Philips Healthcare. At the end of the test drive I questioned the functionality of this sports car. But Roel, as an owner of a Porsche immediately began to talk about the brand experience and the visible attention to quality during a visit to the factory in Zuffenhausen. Watch out that when you’re choosing an IT system that you don’t blindly look at the buttons without focusing on the functionality.

Martijn Lofvers, Publishing Director & Chief Editor, Supply Chain Magazine
martijn.lofvers@supplychainmedia.nl