Supply Chains that seek to  transform themselves and become world class require a great deal of internal alignment among individuals, organizations and metrics.  Unfortunately, companies are not wired well to achieve such cross functional success.  Metrics are often too narrowly focused and executive goals actually encourage departments not to collaborate when it impacts their reward system.

A Manufacturing VP gets rewarded when his or her unit costs go down.  Since capital equipment utilization plays such a large part in this KPI it is not surprising that long production runs are favored over smaller batch sizes that more closely reflect what the market wants.  The Procurement VP, on the other hand, gets rewarded on cost reductions which translates into buying more of the cheapest parts that can effect quality, manufacturing and customer satisfaction.  The Sales VP gets bonuses based on top line revenue growth and is cheered-on when making bullish forecasts. Add it all up and it is no wonder we have such schizophrenic supply chains that “bob and weave” between too much and not enough supply.

Enter the new Supply Chain guy or gal who was hired to bring it all together and take a fresh look at the problem.  After the polite introductions, the listening tours and the unanimous agreement that the Supply Chain is broken and must be fixed the real work begins.  The most critical success factor is now how does the organization perceive the Supply Chain organization and to whom does it report to?  Many companies hire someone to “study the problem and work with the stakeholders” to develop  a common plan.  Unless the Supply Chain Exec reports either to the CEO or COO this approach is bound to fail to meet expectations.  Like governments there are simply too many special interests who have mutually exclusive goals and performance metrics to overcome the passive resistance that is sure to follow.  The Manufacturing VP will agree we need to be more responsive to the customer and would be willing to run smaller batch sizes if the forecasts were more accurate.  The Sales VP would be willing to forecast less defensively if Manufacturing were more responsive..  If you have kids, you get it… it is always someone else..

Most companies simply lack the vision and courage to re-invent themselves to become a customer demand driven Supply Chain.  In fact, most Supply Chain organizations report into Operations and many into the Materials organization which implies it is viewed as an inbound raw material availability problem not an enterprise execution one at all.  This is a clear sign that senior management does not take Supply Chain seriously as a business model success factor.  It is no wonder that the last half of the 1990′s we saw inventory turns go backwards for many global companies as they stretched their supply lines further and further across the globe.  Even after implementing Vendor Managed Inventory and making suppliers carry much of the costs they still find themselves with a glut of finish goods scattered all over the world chasing customer demand.

Why does this happen?  Why do we spend millions of dollars on departmental software only to end up with more efficient departmental silos? The answer lies in the fundamental misalignment of our organizations to serve functional cost goals and the corrosive effect of executive bonuses to produce short term quarterly results.

Just like Washington, it becomes a game of chicken to see who will fail first while protecting ones turf, position, influence and payout while the customer is left wondering why it is so hard to get their needs met?

Which leads me to the “Green” part of this problem.  First we all, we know our Supply Chains are at risk of huge increases in energy prices when the recession ends.  We know that we are using oil much faster than we are finding  large new reserves and that China, India and Brazil are creating a huge new middle class that will compete for this diminishing supply.  We know that we are incredibly dependent on oil (>60%) from foreign sources that are either unstable states or really don’t like us at all.  (Some even use our money to fund terrorism!)  We know that we are pumping more and more CO2 into the atmosphere and it is a green house gas that warms the planet. We know that critical resources like copper and rare earth metals are becoming more and more scare.  We also know that our manufacturing and consumer waste causes pollution that have indirect costs on health that will no longer be just “externalized” for free.  The SEC ruled this week that all corporations must now spell out their environmental risks that could impact financial performance.  This includes costs due to cap and trade legislation, EPA rulings, or State or Local laws requiring pollution abatement.

If we know all this why do we hear so much about “doubt, skepticism and mistrust”?  Why are we not focused on solving these problems that will impact corporations and individuals alike?  Could it simply be that consequences of these problems are beyond the horizon of the short term impact on turf, position and payout?

What do you think?

The speaking agenda was packed with aging ex-CPO’s from companies whose glory has long since faded.  Companies like Sears and Chrysler whose products and services are so unexceptional that they have nearly lost all relevance in the marketplace today.  In the case of Chrysler they weren’t even “too big to fail” but just a place that employed a lot of hardworking people who we need to keep working to prevent wrecking the economy even further.

Listening to these ex-CPO war stories made me think that this position is so ill equipped to lead an organization to their next new market that they are actually placing their companies at great risk.  I had a chance to talk to some very bright CPO’s who clearly had an abundance of people skills, ability to spot excess costs and negotiate for win/win outcomes but they lacked imagination and insight into what is about to become the largest opportuntiy on their horizon: the emergence of a new energy driven economy as the next “Internet” scale business innovation.

I was curious why the dominant topic seemed to be how to reduce indirect purchasing costs.  You know, how to buy office supplies and janitorial services cheaper.  I was surprised that Sustainability was not even on their radar.  Even worse, many talked openly how they felt Global Warming was not a problem that they thought much about and they suspected it was just a fad.  It occurred to me that this profession is so preoccupied looking backwards analyzing “spent money” they can’t envision how to save money in the future.

I was surprised that not one of these high powered CPO’s thought that energy prices would rise again once the recession ends or that they will have to pay more for diminishing supplies of key raw materials like rare earth metals, lithium batteries,  precious metals such as platinum or silver.  Instead they were laser focused on travel spending, services and printing costs.

Message to the CEO: Don’t hand the binoculars to these guys.  They can only tell you where you have already been.

Companies that once excelled at managing lean inventories and building-to-demand now find themselves struggling to maintain customer service levels by placing more and more product, closer and closer to customers manufacturing, distribution and retail stocking locations.  The Days of Inventory Outstanding (DIO) for some industries are actually heading the wrong way.  The figure below, from CFO Magazine, shows that multi-line retail, durable goods, communications and networking companies have actually lost ground adding several days of inventory to their footprint of global warehouses (negative numbers are bad meaning increasing DIO).  Even though this data includes the fourth quarter of 2008 representing the beginning of the  financial crises I was surprised that the numbers weren’t worse.  Then I began looking into E2open’s order push out and cancellation rate and realized that inventory was being flushed back to contract manufacturers and throughout the supply chain.

Days Inventory Outstanding change from 2006-2008

Demand Planning organizations have come under an unbelievable amount of stress as of late trying vainly to align volatile demand to inflexible supply mostly because customer order lead times are a fraction of the actual manufacturing cycle time of parts that make up their products.  OEM and retail customers think in terms of days or weeks, not months or quarters that is actually required of long lead-time components (semiconductors, LCD panels, or hard drives).  Predicting demand has become more like gambling than forecasting where suppliers are forced to wager on whose order will actually come true.   This is compounded by the fact that many companies have outsourced much of their operations to contract manufacturers and do not even place orders anymore with their key component suppliers further lengthening the supply commit process making it more opaque.  Add more  ship-to locations, new products and customers requiring greater delivery flexibility with less inventory risk to the mix and it is easy to understand why fulfillment organizations feel overwhelmed.

Common Demand Management Challenges:

No one seems at all happy with Order Promise cycle times, especially customers who seek new sources of  supply because their suppliers have simply not paid enough attention to their demand management processes.  During 2004 – 2008 inbound supply chains were aggressively being re-tooled with the latest supply planning software to lower inventory and improve visibility (see E2open resources: Celestica Reduces Inventory) while demand management processes were only half heartedly re-engineered.   This was a terrible error delaying many of collaboration and process transparency that had been brought to the supply side.  Now companies find themselves with manual planning processes built around excel and silo software applications unable to scale their business.  Here is a partial list of common demand challenges I see over and over again.

• Proliferation of Portals:  Every customer wants their portal updated adding more manual overhead and cycle time.
• Low percentage of customers are B2B due to the time and cost to on-board them.
• The B2B data that is available must be manually merged with demand still coming from phone, fax, email and excel orders.
• Long sequential planning processes; too many specialized functions touching too many orders.
• Gaming the forecast is still all too common (either by the customer or by field sales force).
• More and more customer specific products are adding configuration complexity.
• Pressure to just say “yes” to get the order, then chase the supply, is increasing the number of “hot lot” exceptions. “If every order is an exception then no order is…”
• Excessive time is spent collecting data, validating it and checking order acceptance rules.
• Even employing “standard B2B protocols” too many customer process maps are unique requiring continual maintenance every time a back-end system changes.

While suppliers struggle to get a handle  on these challenges their customers are not waiting for things to get better and are beginning to push their processes onto their suppliers.  Many are implementing Vendor Managed Inventory programs, requiring discrete orders to become blanket orders, self invoicing and generally pushing more process administration down the supply chain adding cost, complexity and ironically reducing flexibility.

From an environmental point of view this means more energy used and more carbon emitted only to oversupply the market with products that eventually need to be discounted, reconfigured and/or cross shipped to another region with more demand.  The progress of environmental initiatives that many companies are so proud of (packaging reduction, internal energy reduction and carbon footprints…) pale by comparison the real waste and pollution caused by building products without real consumer demand behind it.  Furthermore, putting products on sale to stimulate demand is the most expensive way create demand.  It creates a permanent source of margin pressure and conditions the buyer to delay an order waiting for a price reduction that then causes companies around the world scrambling to expedite everything during the last few weeks of every quarter.  The waste this causes is mind boggling…

But if You Try Sometimes, You Can  Get What You Need…

Getting better at being more demand driven requires radical process transparency, near-real time information on how your supply chain is performing and the ability to manage-by-exception.  The days of simple arms length business transactions are over.  Supply Chains are now networks requiring a new way to manage and respond to demand when and where it happens.  Here is a list of things to consider:

• Look into SaaS platforms to connect your trading partners and provide you with only one “pipe” to manage.
• Connect 100% of your trading partners.  The only way to have “one version of the Truth” is to have one version of it for everyone.
• Make sure the platform has full process breadth.  Wide is better than deep.  Have all participants see their part of the end-to-end process from customer to supplier.
• Make sure it can operate in a mixed model environment, discrete orders, blanket orders, OEM channel, Distribution Channels etc…  Remember process breadth is better than feature depth.

Put all of this in place and you will be able to “execute your plan” and not have to “re-plan your plan” over and over again. Think of re-planning as rework and a symptom of the larger problem of lacking process transparency and control.   Focus on implementing an execution platform to run your beyond the fire-wall processes on one set of numbers.  While your ERP will remain your system-of-record to run your financials, your SaaS execution platform becomes your “system of process” common to all trading partners allowing you to quickly respond to customers so what they “want” can become a lot closer to what they really “need”.

Supply Chains also have a “pre-existing condition” clause, it is called “termination for convienence”.  The bolierplate behind most Purchase Orders today contain language that basically gives the buyer the right to cancel any order if business conditions dictate.  This is the escape hatch built into most contracts allowing the buyer to change their mind. The condition which triggers this clause is usually a change in market demand and herein lies the rub: all contracts (especially Blanket Order contracts) are ultimately subject to the certainty of a forecast.

What do you think?

Consumers are becoming increasingly aware of the environmental impacts of the products and services they choose, in fact, studies have shown that about 10% of customers today are willing to pay a little more for a “green” product while 25% of them couldn’t care less.  From a Marketing perspective, however, the real prize is the remaining 65% of consumers who have yet to make up their minds. If building brand value is all about associating your products to newly identified needs and wants then it is especially true if the next generation of consumers choices differ from those of their parents.  Savvy companies like Walmart view their customers in generational terms and know they must remain relevant on the environment and sustainability.  They understand that young people today have a keen awareness of pollution, population growth, and resource depletion and the few lectures that parents do get from their children are all around recycling and energy use.  If the environment and sustainability become intergenerational issues than we better get used to “green” marketing.

What about “green” operations, or more precisely Eco-Operations; haven’t we been doing Lean manufacturing for years and why isn’t that enough?  It is true that Lean and Total Quality efforts of the past were very effective at eliminating waste but are not necessarily well calibrated to reduce future risks and costs in a resource constrained world. Lean manufacturing will tell you a great deal of how your current activities generate waste but won’t tell you much about how the cost of energy will impact you in the future and what you should be doing about it today.  Lean will not shed much light on the cost of carbon or how it could ripple throughout the economy due to regulatory legislation. “Green Business” is then really about the sustainability of your operations, your supply chain and ultimately your products impact on the planet.

It is clear now that environmental regulations and their costs will only increase, whether from straight carbon taxes or more stringent limitations on the use of hazardous materials. In addition, resource limitations, whether of fuels or other raw materials, will also likely lead to cost increases in the future. Though many of these costs will be borne directly by suppliers rather than brand owners, they will eventually be passed on throughout the network resulting in higher-priced products. As costs rise, companies’ imperatives to heed and improve their environmental records will move from idealism and marketing strategy to a more straightforward economic concerns. The quest for profits will ultimately drive sustainability.

Why is Walmart doing this? During their July Milestone Meeting in Bentonville Arkansas, Mike Duke, the CEO explained that most of the great retailers of the past were unable to appeal to their next generation of customers because they had either failed to change with them or had become less relevant.  While Walmart knows it has, and must continue, to deliver on their promise of “More for Less”, it is now concerned about how to deliver on the “Live Better” part of the slogan; especially if these new consumers prefer products made with sustainably in mind (see Joel Makower’s “Why Doesn’t Green = Better“). Mr. Duke noted that the children of today’s customers care deeply about environmental matters.  To the largest retailer in the world it is not only a matter of staying close to their future customers but also managing brand risk by not appearing to be out of touch with their present day customers.

Walmart is taking the lead in focusing their suppliers on their carbon and resource footprints as a way to drive competitive advantages and protect their brand. With tens of thousands of partners around the globe they feel they have the opportunity to not only improve the quality of the products they offer but also eliminate sources of unnecessary costs deep within their supply chain.  To make the point Walmart explained that by focusing on packaging and transportation efficiency in 2008 they were able to increase case load by 3% while driving 90 million fewer miles and saving $200,000 in the process.  They accomplished this by using more fuel efficient trucks, filling truck tires with nitrogen and working with suppliers to increase packaging density and deploy more intelligent routing. To accomplish this Walmart had to work closely with their suppliers to reduce the amount and size of packaging used to ship products.  This sort of Supply Chain collaboration will become the model of Operational Excellence as companies seek to meet Walmarts sustainability targets.

Product Label Transparency

About 40% of the products sold today at Walmart and Sam’s Club are private label products.  These are products where Walmart deals directly with the manufacturer to eliminate name brand owner markups.  This is especially significant as it will likely be these trading partners who will be the first wave of manufacturers to provide information needed to create the eco label.  Since Walmart is, in effect, the brand owner they have every right to require disclosure on all hazardous materials, energy consumed, Green House Gases (GHG) emitted or water consumed during manufacturing and shipment to Walmart Warehouses but they stopped short of requiring this level of detail, at least for now (see “It’s Easy Being Green, The Meaning of Eco-labels”).  To get traction quickly they are asking 15 simple questions around Energy and Climate, Material Efficiency, Natural Resources, People and Community.  Straightforward questions like:  Have you measured your corporate greenhouse gas emissions?  Have you measured water use and waste generation?  Do you know the origin of all the components in your product?  Do you know where your components are made and do the factories follow local laws?

Risk Management

As the largest retailer, Walmart drives more resource consumption than any other business in the world.  In a crowded world of 6.7 billion, expected to balloon to 9 billion by 2050, there is a practical limit to the amount of resources we can continue to harvest if everyone wants a lifestyle similar to those enjoyed in the developed countries.  Walmart understands that under as a business-as-usual scenario within a few short decades resource constraints will pit the “haves against have nots” and prices will begin skyrocket.  Not good for their business…

A closer look into the current economics of first world production, distribution and consumption reveals horrible inefficiencies from a system perspective. Nearly half the electrical energy produced is wasted within the distribution system and by inefficient appliances, half the food production in the US is ultimately thrown away and cheap energy and globalization has produced incredibly complex supply chains that are fragile and bloated with unneeded costs.

The Future of the Supply Chain

The days of linear supply chains and arms length business relationships are coming to an end.  Globalization killed it and in its place are now value chains and networks that are both competitive and codependent on a flow of information from consumers to manufacturers.  Walmarts sustainability initiative is not about crushing suppliers or stealing their IP or creating new bureaucracies, it is about becoming more efficient, lowering costs, extending natural resources and improving the standards of living of consumers around the globe.  In 2006 Walmarts price competitiveness was thought to have resulted in savings for consumers of over $287 billion, or $2,500 per household according to Global Insight  an independant research firm. Walmart knows it must squeeze this waste and more out of production and transportation systems to remain the top retailer. And as Martha Stewart would say “that’s a good thing” for the next 3 billion people on the way.

The reason for this is that shareholders will no longer tolerate the rate of return generated from plant and capital equipment investments.  A few million dollars can buy you a shiny state of the art chip shooter or a brand new product capable of making tens of millions of dollars.  That is why manufacturing is really moving “offshore”.  Actually, it is moving to any shore where low rates of return are tolerated to build new factories to employ people and win market share.  Contract Manufacturing, for example,  is a brutal business with single digit margins rivaling grocery stores yet the capital investments required to complete at a global level are staggering. So why do they do it?  This is the real  life version of joke about “making it up on volume”… If the economy is good, the market is strong, their customers products are hot, and the supply chain liabilities manageable then it is possible to make some money.   Otherwise it is a ”challenging business” to be in as they say. 

Now that we have unwound Brand owner manufacturing it is very unlikely it will ever go back to the way it was.  Critical manufacturing skills once lost are gone for good.  My father was a time study engineer who loved figuring out how to do things with less effort.  His colleagues were highly skilled (and well paid) engineers, designers, technicians and mechanics that could make anything and keep it running forever.  Now after decades of layoffs, plant closings, and “technology transfers” to low wage countries the skills have disappeared.  

The hope for a new Green Economy built around jobs is getting a lot of airplay from the Obama administration and several US companies that see huge market opportunities and there is a lot of merit to the concept of manufacturing things again that the world will want.  More efficient jet engines, wind turbines, water distillation equipment, carbon capture infrastructure are all part of the mix.  They represent technology core competencies we have and are not the kind of things Contract Manufacturers will shove offshore to save a few pennies.  The problem however is where will the skilled human resources come from?  Sounds like a good problem to have when your running nearly ten percent unemployment.  The Green Economy cannot come soon enough for them.