Guide to Supply Chain Management Page 11
Tier-skipping
An extension of the DC bypass is bypassing the middleman altogether. In complex supply chains there can be many middlemen, and each one can add significant value to the product or service. Nonetheless, the more links there are in the value chain, the longer it takes material to move from one end to the other, and the more it costs. That is why companies such as Wal-Mart, IBM and Delphi Automotive sometimes skip levels in designing their worldwide end-to-end supply chains.
Western retailers generally prefer to deal with their Chinese sources rather than agents, brokers or wholesalers because that eliminates those parties’ mark-ups and the overhead cost of dealing through them. IBM views its customer as its customer’s customer, and conversely, its supplier is its supplier’s supplier. It wants its suppliers to see their customers as the end-customer, not IBM. “[Tier-skipping] completely changes how you put the supply chain together and the reward system,” says Ian Crawford, vice-president of Global Procurement Sourcing.
Ghana Nuts, a global trader in soya, groundnuts, cashew, sheanuts and sesame, and a producer of soya oil and meal for Ghana, Burkina Faso and Côte d’Ivoire, set up an out-grower programme whereby it buys directly from soybean farmers rather than purchase through multi-layered distribution channels. The more direct relationship ensured a consistent and reliable source of supply at prices at lower prices than were previously found on the market.
Such a mentality requires much more transparency – even open books between trading partners. That is why Delphi Automotive shares the gains of improvement programmes with its suppliers. If they find ways to save money, the two companies share the savings.
Supplier kaizen
Kaizen, a Japanese term for continuous improvement, uses management involvement, self-directed employee work groups and failure analysis tools to achieve steady and incremental improvements that cumulatively make big improvements in productivity and flexibility.
Herman Miller, a US furniture manufacturer, has had extraordinary success making its suppliers’ operations lean. The company measures its cycle time in flow-days, which is the cumulative cycle time from supplier to the customer. It took 60 days to get from metal fabrications at the supplier to chairs at the customer. The material was handled 80 times and underwent only five hours of actual work during the 60 days. “The customer is not willing to pay for that,” says Drew Schramm, vice-president of supply chain at Herman Miller. “We need to bring the cycle from 60 to 30 days.” To do that, the company is bringing lean concepts to its suppliers. It is also grading its suppliers and classifying them. The company’s classifications include new product development partner and preferred supplier. If the supplier does not fit into either of these classifications, it falls backwards, so to speak, to become a transactional supplier.
Consignment and vendor-managed inventory
Consignment programmes, whereby the supplier owns the inventory until it is consumed by the customer, can be an effective way to push inventory cost back on to the supplier. Under these programmes, the customer does not pay the supplier until the inventory is used, even if it sits on-site at the customer’s warehouse. Consignment is common practice among retailers. For example, Monoprix, a French retailer, has suppliers replenish the display stock of their cosmetic items at their own cost until the items are sold.
In vendor-managed inventory (VMI), the supplier determines the right level of inventory to be held at the customer’s location and replenishes the inventory without instructions from the customer. For example, W.W. Grainger, a US hardware supplier, replenishes nuts, bolts and small spare parts for its customers as they are consumed. VMI can lower inventory costs (both labour and inventory carrying costs) while increasing item availability when the supplier has more sophisticated logistics processes and information systems than the buyer.
Design for manufacturability
Design for manufacturability is about conceiving new products not for beauty but for ease and cost-effectiveness of manufacture. When he started his business in 1945, Marcel Bich did not invent a beautiful pen – he invented a pen that could be manufactured at low cost. The BIC pens took the market by storm and set the design for ballpoint pens for nearly 50 years. More complex products such as automobiles and high-value electronics are harder to design for manufacturability because of their many parts, but General Motors created a breakthrough in 2000 when it launched the Celta, a $5,000 car, in Brazil.16
Electronic data interchange and paperless work flow
One way to rationalise cost is to cut overhead, and paper-based transactions certainly create overhead. Many purchasing transactions are handled today via UN/EDIFACT (Electronic Data Interchange for Administration, Commerce and Transport) or by ANSI (American National Standards Institute) ASC x12 transaction sets, which eliminate redundant data entry and improve accuracy. In small companies, the move to electronic transactions can be a hassle, but in large companies it often eliminates entire clerical departments, so is an important efficiency gain.
Air transport authorities, for one, are standardising data transfer formats to streamline interfaces between organisations and increase interoperability.
David Brennan, assistant director, special cargo standards at the International Air Transport Association (IATA), is involved in making revisions to the International Civil Aviation Organisation (ICAO’S) Technical Instructions and the UN Model Regulations to permit the use of electronic data transmission in lieu of paper documentation. Associated with this work is a review of the regulatory requirements to harmonise the different modal regulations to remove specific requirements, or at least have mutual recognition between the modes to facilitate multi-modal transport. The work at the UN and the ICAO supports the IATA e-Freight programme, which is aimed at helping the airfreight industry eliminate the need to generate paper documents for air cargo shipments. One aspect of e-Freight is aimed at converting 13 standard shipping forms17 from faxed documents to electronic data interchange (EDI) formats.
Christophe Eggers, head of international network and transport at La Poste, the French postal service, experimented with a no-paper waybill on a shipment in Canada, as a test of the ability of the system. Often, the problems with paperless transactions are in the details.18
Members of IATA’s container committee highlighted the type of missing information that stymies the progress of paperless document exchange: missing fields of data on forms, such as unknown contact person at the final delivery location, missing ID codes, wrong quantities or using numbers already used for previous orders, no stickering/marking layout, and no information about changes in corporate identity or logos. In fact, the top ten messaging errors are mundane, such as missing or erroneous account information.19, 20
Savi Networks, an information services company, is helping the Chinese and Thai governments to implement technology that will save time in customs and increase cargo screening accuracy.21 It gathers, merges and assesses data from multiple document sources to develop a more accurate profile of risk. The papers include purchase order/advanced shipment notice, booking confirmation and routing, terminal receipt and drayage detail, vessel load plan, conveyance and container location and intermodal interchange status, truck status and proof of delivery. The programme results in both improved efficiency and increased security. The efficiency benefits include reductions in inventory carrying costs, out-of-stocks, lead time variance, theft and lost containers, and administrative costs and fees. The security benefits include advanced trade data for risk targeting, end-to-end location and status information, and electronic seals to better track international shipments.
Tension Envelope, a US manufacturer of speciality envelopes, implemented electronic payments and summary billing to simplify its internal processes (that is, reduce paperwork and overall transactions where it was not necessary).
7 Synchronisation: competing on reliability
FedEx set the standard for reliability in 1973 with its bold new air express delivery model and
its claim that the packages it handles would “absolutely, positively” be delivered on time. SNCF, the French national rail company, defined reliability in the 1980s: if a train was scheduled for 13:00:00 and you arrived at 13:00:15, you’d know you’d need to run and jump to catch the train. Toyota and Honda raised the bar on the reliability of automobiles throughout the 1990s.
Reliability is a crucial aspect of customer service, and high service levels can command customer loyalty and support premium prices. The perception of reliability may be more important than reliability itself, since the price that buyers are willing to pay is usually tied mostly to perception. Yet the fact remains that reliability is not a given today. These companies became famous because it is hard to be reliable and not many companies are. Hence many companies look to supply chain management (SCM) tools and techniques to back up their strategy (or their claims) of reliability.
Success factors
To compete on reliability, the bullwhip effect must be reduced or eliminated. This means addressing its root causes: seasonal peaks, promotions, cyclical peaks and order batching. This is where SCM gets tricky. Influencing seasonal peaks or promotions, as in retail promotions, involves close collaboration with marketing and sales. Predicting the timing of or mitigating the effects of cyclical peaks, as in the oil industry, is almost as hard as predicting the stockmarket. And reducing order batching is hard because it often goes against the natural incentive for buyers, which is to place large orders to get volume price discounts.
If the four aggravators of bullwhip were visible to all the parties in the supply chain, theoretically they would have the information needed to avoid or counteract it, which is why there has been a lot of investment in visibility solutions and event management – detailed recording and posting of order information for customers (and sometimes suppliers) to see. Even if there were full visibility, however, companies need to develop the information systems to compute the optimal order, and people need to be willing to share data and limit counter-productive behaviour such as maintaining extra buffer stock and hoarding.
Performance advantages
Companies that achieve synchronous supply chains outperform those that do not. Eliminating or reducing the bullwhip effect allows companies to function effectively with less inventory and less fixed assets, which produces a higher return on capital.
A synchronous flow requires less inventory, which means less working capital. The average stock being held is substantial, so the gains if you reduce it can be too. In the US in 2008, the average days held were 47 days for electrical equipment, 63 days for motor vehicle and parts dealers, and 54 days for clothing and clothing accessory stores.1 In contrast, Tesco, a large UK retailer, which is often heralded for its supply chain efficiency held only 18 days of inventory in 2007, over a third less than US grocery stores such as Safeway and Kroger, and only slightly below that of convenience stores.2
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Table 7.1 Benchmark asset turnover rate of synchronisation-focused companies
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Industry
Benchmark asset turnover rate of companies with synchronisation focus
Hotels, restaurants & leisure
2.75
Technology, hardware & equipment
1.63
Household & personal products
1.63
Capital goods
1.60
Energy
1.54
Transportation
1.42
Software & services
1.35
Materials
1.31
Telecommunications services
0.95
Utilities
0.77
Diversified financials
0.58
Insurance
0.44
Banks
0.10
Average
1.38
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Source: Boston Strategies International, based on an analysis of data from Thomson Reuters and Boston Strategies International’s 2008 supply chain performance benchmark study
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For more asset-intensive companies, less bullwhip effect means less plant assets needed to handle peak requirements, which translates to less fixed assets.
Both inventory and fixed assets are reflected in return on capital employed (ROCE, net income divided by fixed assets plus working capital), and for capital-intensive companies fixed asset turnover can be used as a proxy. Companies that follow a synchronisation supply chain strategy earn 2.6% higher fixed asset turnover than those that follow other supply chain strategies (16.5% for those that focus on strategies to reduce inventory and working capital compared with 13.9% for those that do not), according to a 2008 survey by the author of 29 companies. In addition, companies that have managed to synchronise their supply chains have better ratios of cash flow to sales than those that do not. That puts companies that work on making their supply chains lean – such as McDonald’s, Ahold, Blyth, PepsiCo, The Limited, Wal-Mart, Famous Footwear, Galeries Lafayette and Marks & Spencer – ahead of their competition. Table 7.1 (on the previous page) shows asset turnover performance benchmarks for synchronisation-focused companies.
Table 7.2 shows benchmark cash-flow performance levels for synchronisation-focused companies in a range of industries.
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Table 7.2 Benchmark cash flow: sales ratios of synchronisation-focused companies
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Industry
Benchmark cashflow: sales ratios of companies with synchronisation focus, %
Telecommunications services
24.2
Energy
22.5
Utilities
19.4
Diversified financials
18.6
Software & services
18.5
Materials
16.8
Insurance
15.7
Household & personal products
13.5
Transportation
13.4
Hotels, restaurants & leisure
12.3
Technology, hardware & equipment
11.1
Capital goods
8.6
Banks
8.4
Food & drug retailing
3.5
Average
14.8
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Source: Boston Strategies International, based on an analysis of data from Thomson Reuters and Boston Strategies International’s 2008 supply chain performance benchmark study
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UPS follows a careful synchronisation strategy. By applying industrial engineering principles to improve the efficiency and reliability of every aspect of the company’s operations (for example, by conducting time studies of its couriers and developing standard procedures that every depot must follow), UPS earned a return on equity of 23% in 2002–06. In contrast, US freight trains cannot compete effectively with trucks even at much lower prices, because of their unreliability compared with trucks.3
Superior financial performance is related to better operational performance, as follows:
Higher first-pass yield (the percentage of good output generated through the production process the first time – not including rework): 78.2% compared with 75.8% for companies not oriented to synchronisation.
Lower variance (standard deviation) of production cycle time (production cycle time is the time between start of production and delivery to the department interfacing with the customer): 86.8% compared with 91.1%.
Lower percentage of incorrect orders: 1.1% compared with 2.4%
Less inventory: 20.9 days, compared with 35.4 days for non-lean companies.4
Better performance on operational metrics such as defects per 100 units, space required, operator time, materials consumed, cycle time, equipment used, rework/rejects/scrap, set-up time, waiting time, downtime and distance travelled by a part,5 in addition to the metrics above.
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br /> Note that the companies that performed well on synchronisation did not necessarily have higher margins like the companies that focused on rationalisation. Lean manufacturing and lean distribution reduce operating cost, but a well-executed rationalisation strategy can do better at that. These results support the concept of sequencing rationalisation, synchronisation, customisation and innovation initiatives. If resources are limited, it may make sense to choose a strategy and orient resources to it rather than trying to be excellent at everything.
Toyota production system
If Henry Ford’s assembly line was the original example of a synchronised supply chain (most activities were literally synchronised with the next ones in the production line), then the Toyota production system (TPS) is the modern equivalent. The TPS embodies many synchronous concepts, and has for that reason been applied by many firms both inside and outside the auto industry since its development in the 1960s. It is a set of norms, philosophies and tools, interrelated as a system, that form the mental mindset of teamwork at the company. As there are numerous books on the subject, this brief overview is intended only to describe how the various elements in this chapter form a consistent system.
The TPS operates on a number of high-level principles, each complementing the other. Four principles underpin it: