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November 29, 2009

Enterprise Asset Sustainability

We do not inherit the earth from our parents, but borrow it from our children.

On December 7, 2009 global leaders and environment ministers from all over the world will meet in Copenhagen to discuss about climate change. Climate scientists are convinced the world must stop the growth in greenhouse gas emissions and start making them fall very soon. Corporations are discussing the implications of de-carbonizing the economy on their businesses. Some corporations are sincere in taking sustainability on whereas some are embracing it as a pure PR exercise. Whatever the reason, there was never a stronger impetus on sustainability than today.

One solution to sustainability may lie in Enterprise Asset Management EAM is still synonymous with preventive maintenance management and spare parts inventory management. Expanding the scope of enterprise asset management to include energy management and fugitive gas emissions will prove a useful aid in effectively managing asset sustainability and cutting down carbon emissions. An effective asset sustainability strategy should consider the appropriate management of energy of every aspect of the organization, from data centers and fleets of mobile assets, to facilities and fixed production equipment.
 
Condition monitoring capabilities of EAM software can be utilized to track energy consumption of critical assets. Building automation and control systems, environmental monitoring systems and power metering solutions can be integrated with EAM applications. The data fed from these systems can be analysed to monitor actual energy consumption of assets with designed consumption ratings.
 
Incorporating energy consumption triggers into routine maintenance programs will ensure that assets are not only operationally efficient but are also energy efficient. Analyzing energy consumption data will also lead to using better spare parts that improve energy efficiency. These spares might be bit more expensive than the normal ones but the savings in energy consumption will offset the additional cost. Incorporating asset sustainability in enterprise asset management strategies will ensure that EAM not only has the greatest impact but also the greenest one.

Leveraging Value from IT Asset Management – Insights from Gartner ITAM Summit

I recently attended Gartner’s IT Financial, Procurement & Asset Management summit in Orlando, FL (www.gartner.com/us/itam ). In line with Gartner image and spirit of shaping up and defining what’s hot and what’s not in the IT world, the summit was organized to present the current state and trends in IT Fin, Procurement and Asset Management world and would have certainly appealed to IT benchmark and best practice seekers.

Sessions were organized by tracks and during each timeslot, each track had a session going on a specific topic. I think this was done primarily to maximize the participation, which I believe was a good strategy as most of the sessions I attended were full house. I primarily attended ITAM sessions, though would have loved to attend the procurement ones as well (my portfolio included procurement services).

 

One of the key sessions I attended included session on IT Asset Management: Trends, Tools and Best Practices by Patricia Adams. The key focus was on setting the processes right before implementing a tool, especially putting a clear software licensing policy in place to ensure compliance and mitigate compliance related risks. She outlined 5 different stages of maturity in this area (similar to CMM) and shared that it is not easy for organizations to move up the curve and it often takes 18-20 months to move from one stage to the next. There was also emphasis on centralizing the IT asset inventory data and determine clearly which tool meets the inventory and compliance needs most (agent based vs. agent less).

The next key session on ITAM was presented by Frances O’Brien – Gartner Research VP – focused on perspectives to select and apply ITAM standards and framework. The key takeaway was that there is no “single standard fitting all the requirements” and the choice really depends upon what is required by the supporting business case. The session succinctly covered the existing standards, criteria to determine what’s applicable for an organization and how one should go about selecting and applying standards. The session factually outlined strengths and weaknesses of the key standards such as ITIL, COBIT, ISO-19770-1,4,6 and 7 and how / where these standards are helpful on key ITAM organizational criteria such as governance, risk, effectiveness and cost optimization. Finally, great emphasis was laid on building the business case right with clearly articulating the ROI in terms of benefits and costs, linking the business drivers to standards and outlining implications of key implementation scenarios (best case, worst case, most likely and “do nothing”). One of the suggested approaches which I could relate to very well based on my own experience was building the ITAM business case along with other key projects linked to business drivers where ITAM can accelerate the benefits, thereby improving the ROI of other projects.

Jack Heine (Research VP, Gartner) talked about the convergence of ITAM, EAM and IWMS highlighted the trends in IT and non-IT computerized assets and how these are driving the convergence of support functions in ITAM and EAM and the fact that this convergence is real and represents significant cost reduction / saving potential for the organizations as investment in facilities today is second largest corporate expenditure (after labor costs). Jack’s session also outlined some of the key organizational issues faced regarding this convergence – e.g. impact on software licensing cost (charge / connection), expansion of IT architectural standards, O/S and server migration plans, re-definition of IT backup and recovery. The session also presented perspectives on how this convergence can potentially drive convergence on the tool vendors as the need for consolidated asset view is becoming stronger.

From my perspective, the summit greatly helped in validating some of the key trends and perspectives we are observing through our own client base. Infosys’ EAM practice has clearly recognized the convergence and synergies of ITAM and EAM and we strongly emphasize to look at the asset management as a holistic discipline to drive compelling business advantage – not just cost reduction, but also leverage the assets to improve organizational responsiveness.

Overall, this was an exciting event and I look forward to attending the future one as well.               
Would love to hear from you, if you attended this one.

November 27, 2009

Buffett’s bet on railroads- basically, a bet on America?

Hope you had a great time with your family this Thanksgiving. For me, Thanksgiving was an excuse to maximize my time with my family before they left for India this coming Sunday on a three month long vacation.

Anyway, coming to the topic of this blog, today I watched this amazing show on CNBC called Warren Buffett and Bill Gates - Keeping America Great, where the two greatest legends of the current times took questions from Columbia B-School students on various topics ranging from the economy to philanthropy.

One question raised by Lisa Williams, a first year MBA student, caught my attention. Her question was directed towards Warren Buffett on his recent acquisition of Burlington Northern Railways. 

To give a little background, on Nov 3, 2009, Warren Buffett’s Berkshire Hathaway Inc. announced its intention to increase its exposure to Burlington Northern Santa Fe (BNSF), a railroad company, from its current stake of 22.55% to 100% for a whopping 26 Billion USD, making it his largest ever investment till date. Burlington Northern is in the business of operating railroad network in North America. It operates in about 32,000 route miles covering 28 US states and two Canadian provinces. The BNSF railway transports a wide range of products and commodities including the transportation of consumer products, industrial products, coal, metals, minerals, automobiles and automobile parts and agricultural products derived from manufacturing and natural resource industries.

Coming back to the question, Lisa’s question was, ’There has been a lot of discussion around the true drivers of the deal with Burlington Northern. I was wondering if you could share with us the key motivation for wanting to increase your exposure to railroad sector at this time’. In reply, the humorous Mr. Buffett quipped, ‘you know, when I was 6, I wanted a railroad set, my dad didn’t get me one..’, sending the audience into splits. Then he went on to explain his real rationale, which can be summed up in 5 key points 

One. Burlington Northern last year moved a ton of goods 470 miles on one gallon of diesel which is far more efficient than what takes place over the highways
Two. Railroads put a far fewer pollutants into the atmosphere than trucks will
Three. One train can replace 280 trucks
on the highway.
Four. Railroads are here to stay- you can’t move them to India or China.
Five. There will be more people in this country in future, that will be moving more and more goods and railroads would be the most environmentally friendly and the cost efficient way of doing that.  

In short, the railroads are tied to the future prosperity of this country. He called it ‘basically, a bet on America’ 

Before you rush to invest all your life savings in BNSF, I suggest you read further my two reasons for taking Mr. Buffett’s stated reasoning with a pinch of salt.  

Firstly, coal accounted for almost half the tonnage moved by BNSF in the first nine months of 2009 and a quarter of the company’s revenues. The coal that BNSF hauls is high quality and is responsible for more than 10 percent of the electricity produced in the U.S. Think about it, Mr. Buffett also owns MidAmerican, an energy company that owns coal fired plants in the states through which BNSF’s tracks run across. Sounds logical? BNSF may be an acquisition with a vision to secure shipping vehicle for Berkshire’s growing array of power plants, than a bet on America’s future powered by railroads.

Secondly, according to the US Department of Commerce Census Bureau 2006, the U.S. transportation system moved an average of 53 million tons of freight worth $36 billion per day in 2002. Trucks hauled close to 60 percent of the weight and two-thirds of the value of shipments. Trucking provided a better option than railroads to the manufacturers because it allowed them the flexibility to deliver smaller, more frequent and more reliable shipments that aligned closely with their production schedule and hence leading to lower inventories. However, in the recent times, there has been steep increase in the transportation costs due to increase in diesel fuel prices coupled with highway congestion problems, lower fuel efficiencies of trucks and regulations that put a cap on miles driven per driver. Companies have responded to these problems by investing in IT solutions that result in full trucks that never stop. They should instead be talking about using more of railroads, if Mr. Buffett’s vision has to come true. 

Both these thoughts lead me to think that it is not railroads that Mr. Buffett had in mind when he bought BNSF.  

Another interesting thing to note is that the top 15 of Mr. Buffett’s biggest investments include CPG companies (P&G and Kraft Foods), retail (Wal-Mart) and a railroad company within logistics (BNSF) and not a trucking company like J.B. Hunt. Would he use his powers to influence the CPGs/retailers to look at railroads for their transportation needs thereby increasing the profitability of his entire portfolio?

It would be interesting to see who goes laughing all the way to the bank. Either way, Mr. Buffett wins, because he also owns a couple of banks in his portfolio!

November 23, 2009

Part Two: SRM is Real

In my last blog “ Do we really understand SRM ( Supplier Relationship Mgmt)?” we defined Supplier Relationship Management" as a collaborative win-win business discipline of strategically managing the supplier engagement process to maximize the potential value of those relationships by providing seamless integration capabilities for smooth harmonized operations and aligned business goals with the partner supplier community”.

We had some valid questions coming up from the readers of how to address SRM in a bilateral relationship where the supplier is also a customer , how do we define a metrics model to track we are realizing what we planned etc but there were some very fundamental questions that needed answers to ensure the rubber meets the road. I have put my thoughts here to a couple of them for I believe this is essential to get to a solution which addresses this vision

Q.1. How SRM, typically considered a noncore process till now, helps business advantage to organizations?

Ans 1. We have to raise our expectations of the SRM organization. SRM is not about raising purchase orders. It is about creating an image of the organization – in goals and performance in every business community that it works with in furthering its business objectives. In other words replicating organizational values and capabilities in every of your supplier community, in some cases up to 40000 partners, often distanced by even geographies, cultures and continents.  This is a pretty daunting task by all standards considering that one is not directly controlling the management of these organizations.

Effective supplier relationship management can really contribute to overall organizations growth.

  1. Drive competitiveness: 50-60% of the costs of the product in most organizations are the cost of material. Buying better and using this material better (in terms of better productivity in manufacturing) is all that drives product competitiveness. Better quality product at lower costs is definitely impacted by the SRM process.
  2. Enable scale and growth: as majority of the value chain managed by the supplier community is outside the organization, better managing the external partner operations can help organizations be nimble and enable business growth rapidly without self investment and efforts.
  3. Better brand positioning: The supplier community from 200 to as huge as 75,000 suppliers constantly engage with the buyer organization and are really brand ambassadors for the buyer organization. Better relationship and engagement with this supplier community creates a better market value for the organization. In this world of business interdependencies, it is not uncommon to have your suppliers as your customers as well.
  4. Essential statutory compliance requirements: SRM enables organizations in complying to statutory requirements like SOX compliance and HSSE 

Q.2. Procure to Pay and other typical SRM processes are very internally focused. How can these internal processes enable the collaborative goals of as above mentioned by you?

Ans 2. Friend, this is the paradigm shift in perceptions we need to manage/ change. We have always looked at sourcing, contracting and procurement functions as internal transactional and operational functions internal to the organization, things that keep the day running.  We need to make a start of looking at this process from an external collaborative mission and we will start seeing a different image

Let us take a process scenario and explore the effects of effective SRM processes  based on supplier relationships ( Help Me Help u) and how that leads to the parent organization benefits.

 Scenario 1Scenario 2
Requisition to PaymentTraditional purchasing organization, multi-location buying organization, for PO creating and paymentMulti location buying organization has standardized the practices and policies and have automated self service catalog for their indirect material procurement
Results
  • Many buyers having a high number of suppliers
  • Buyers from different locations do not have consolidated visibility with whom they are buying similar items
  • Multiple PO ‘s for same item at the supplier from the same organization but different buyers
  • Paper based transactions is the norm - reconciliation of payments is a major accounting task
  • Self service ensures that there is little need to buyers for consolidation efforts ( taken care automatically)
  • Buyers raise consolidated requirement across the organizations
  • Automatic reconciliation of receipts and payment
Effects for supplier
  • Different feeling of engagement with the organization – very person dependent
  • High cost of fulfilling individual transactions ( freight costs can be significant at time ) for different buyers , passing this on to the client or affects his bottom-line, making him less competitive
  • Non standardization of requirements making it difficult for the supplier to leverage economies of scale
  • Supplier is able to leverage the economies of scale and lower fulfillment costs and make him competitive , enables him to scale and grow
  • Has a unified engagement process which is standard and does not vary with each buyer
  • Faster payments helps his Cash flow and makes his operations agile
  • Higher sense of satisfaction and supplier (SSAT) with a feel to continue the relationship, they will as long as they are growing.
  • Higher interests to satisfy buyer performance metrics
Leading to Effects for the organization
  • Due to lack of visibility and standards not able to consolidate procurement requirements and buy at better prices
  • Suppliers higher costs means higher TCO for cost of material for the OEM making them less competitive
  • Lower cost of material procured leading to highly competitive products in the market
  • Higher collective bandwidth for both buyer and supplier in collaborative improvement and strategic processes leading to better quality of products and faster launches
  • Better Brand equity in the supplier community creating more supplier interests to work for you and hence increasing your buying power
  • Strategic relationships and partnerships

Table 1 : SRM Scenarios

November 21, 2009

The Death of DRP- an eyewitness’ account

I simply loved reading Lora Cecere’s blog titled The Death of DRP. I loved it, because it brought me a feeling of déjà vu. You see, for the past few years, I was part accomplice and part eyewitness to the slow murder, while working on a supply chain transformation program for a leading CPG.

There are a number of changes that I have seen companies add to the traditional DRP, in effect taking it from push based to being highly demand driven. These are just a few examples that build upon Lora’s points.

Like Lora points out, traditional DRP assumes that order is the true demand, and applies rules to consume forecast based on orders. However, demand sensing technologies are replacing the rule based forecast consumption logic with statistically re-calculated forecast considering downstream data. Of course, demand sensing is only effective in the near term and hence push logic needs to take over beyond that. In this instance demand sensing software is being integrated with DRP by taking away forecast allocation and consumption functionality out of DRP at least in the near term.  

For large customers, shipment forecast out of the DCs are being replaced with requirements based on netting POS forecast with customer DC inventory using supply chain parameters and lead times. Once again, it is only effective when customer data is available and is useful only till a certain point in time beyond which DRP takes over. This is another instance where DRP’s forecasting functionality is being replaced by netted requirements from the customer.

Safety stock which was being calculated based on simple rules, without considering the network interaction, is now being optimized using multi echelon inventory optimization (IO) softwares. These tools look at a supply chain network holistically and arrive at a network optimized inventory target. While traditionally safety stocks are reviewed once a quarter or when there was a service issue, the IO tools recalculate safety stock every week. Here, DRP’s days of coverage rules and ad hoc safety stock targets are replaced by statistically calculated targets derived through a sophisticated process.

When you look at it closely, there are many more such instances where patch tools are being hooked onto DRP to make it demand driven. There are waves of transformation that are slowly taking shape in the industry that will slowly and surely bury DRP into oblivion if left on its own. I think it is time to reinvent DRP, to develop new comprehensive solution that does away with complex integration needs for sewing pull based patches onto the DRP workhorse. I think that can be facilitated through industry consolidation more than through traditional players developing new solutions. What do you think?

November 20, 2009

Customer benefits in Centralized Purchasing: A Case Study

Continuing from my previous blog, that described challenges and advantages through centralized purchasing, I would like to discuss this concept further with a real world example.Through centralized purchasing, the organization transformed its decentralized purchasing operation into a centralized structure so as to leverage its annual spend with suppliers. With almost one-half of purchasing in the organization being centralized the company had been able to reduce its materials cost by a significant amount in a year. The company’s goal now was to centralize purchasing in the remaining half and reduce the overall materials cost. Let us have a look into the process on how they achieved this. The procurement head formed commodity councils to develop strategies, manage suppliers and leverage spend among divisions for various materials required for their purchase. Before these councils were formed the procurement head did a review of purchasing at the organization level and identified a list of concerns that were to be addressed. In addition to reviewing purchasing processes and practices, the team met with commodity managers at different divisions for two hours every quarter to discuss technology roadmaps for commodities and suppliers. These meetings were instrumental in pulling the procurement function together. The organization concentrated on its major businesses in the market. It found that there were some cases where consolidation of purchases of some components could be done by two business units. In such cases negotiations could be done to have a structured process in place. Besides establishing commodity councils, the team also formed a general procurement organization and established a procurement engineering function to work towards reducing cost of existing products and to make sure high cost suppliers and products aren't designed into new products. Through this the organization was encouraging value engineering on current products to reduce cost. The team started evaluating its supply base closely and carefully checking suppliers' financial health. Evaluation included checking who was investing in capital expenditures, capacity and research and development. Such an evaluation pointed out the problem, that lack of investment in capital spending by major product suppliers was a concern since some components in the main business line were growing despite tough times. What it meant to the buyer - Centralizing purchasing was needed if a company is going to leverage its buys and reduce materials costs. Procurement engineers can help reduce costs by suggesting changes in materials, suppliers or processes In Conclusion - With centralized purchasing, we need to encourage Value Engineering on current products to reduce cost. For new products the idea should not only be to meet cost targets, but to actually drive supplier selection as far up the Value Chain as possible, so that our next generation of suppliers are strong, competitive and offer best in class services.

November 13, 2009

Sarbanes Oxley (SOX) and the Procurement Function: Let Us View Compliance as an Opportunity

SOX, better known as Sarbanes Oxley is as dry as “the desert”, nevertheless I’ve seen people resulting in tears trying to hide a yawn whilst attending a SOX seminar. ….Don‘t laugh at me, that’s what you’d feel to sit through seminars or sessions related to it, that’s what public opinion is. I remember such a session where, I was the host …lets not get to the crux of “that initiative”, We’ll for me it was positive, Ram Bhaskara had me initiate working on the topic & as a follow-on Gopi GR pumped my enthusiasm to begin research on the SEC’s (Securities Exchange Commission) strategy and requirements for Sarbanes Oxley and the procurement function.
I don’t want to repeat the shady state of affairs that affected Enron and others, that’s a stale tale.

Nevertheless, I went that extra mile on the “walnut” and tried looking at it from various angles; trust me, the first question in my current SRM implementation at an Oil field Services major was around SOX controls in procurement.
We’ll there lied a target audience that I could now vent on J
I gave them only 4 Quadrants of Gyaan that they had to know, to “know it all”, All that I had to communicate was that, please view “compliance as an opportunity” and not a threat or an axed burden
Dope Acumen
-          a 101 on how Procurement Controls impact Sarbanes Oxley
-          What are those sections in the Sarbanes Oxley act that are a focus area for procurement
-          Does the SRM solution they’ve chosen cater to the Audit points, customers want prescriptions that are implementable, reportable and biggest of all “Auditable”
..Little more on the length and breadth of the artifacts
1)      a 101 on how Procurement Controls impact Sarbanes Oxley
Procurement processes create hundreds, if not thousands, of financial transactions every day
What are the procurement Audit Points and the Business Objects that are impacted, see illustration below.
Dun & Bradstreet integration for Supplier relationship’s are now a necessity, more than a “good to have feature” in SRM solutions.

Organizational Processes 

2)      What are those sections in the Sarbanes Oxley act that are a focus area for procurement

The answer is very simple, its about satisfying the 4 Sections, the 4 critical Compliance quadrants
The agenda on the controls and the cause and effect becoming a CPO and CFO agenda item very clearly reveals that, all elements of compliance are under the CCTV now, there’s no hiding
Trust me these days there are trained auditors for Enterprise SOX audits, that can ask you very uncomfortable questions and you need to be prepared with an answer.Better preparation will get you past them and believe me, it will translate into benefits sooner or later, it continues to benefit my clients.

Sarbanes Oxley compliance opportunity
 

3)      Does the SRM solution they’ve chosen cater to the Audit points, customers want prescriptions that are implementable, reportable and biggest of all “Auditable”
After giving all the dope, customers new to Sarbanes Oxley, ask you very simple questions
-          Are we SOX compliant with the current package that we’re implementing
-          What are the key questions that auditors will ask us
-          How prepared are we, is our readiness factor healthy, do we need more time, more resources, more money, what do you suggest
The answer for this is easy these days, with almost all new releases or product lines across various package vendors bundling the features canned and auditable. To new customers, all of this looks very Jazzy in the beginning, they will give you 99% credit to themselves having been consulted, in the very first place.
If it’s a veteran oldie to SOX: They will bombard you with SOX reporting requirements across 302, 401(A), 404, 409either to be delivered out of the Box or via some custom development, but they need to have a leading edge to address Auditability, what they fail to understand till date is that, its not about getting a heavy duty compliance framework, its actually about understanding “What’s expected out of Basic Procurement Control” and building traceability in processes and more importantly following them end to end without break-points to derive maximum !!!!
Please do visit the SEC website to see sample audit questionnaires on SOX, you will also get to read a recent whitepaper published by SAP on Automating SOX audit testing
I know some of you would definitely read through till here, hence the last but not the least or let’s say the most “interesting” statement that I’ve ever heard about Sarbanes Oxley.
Compliance and Good Internal Controls is no longer Best Practice………….It is the Law!!!!

….If SOX interests you and you want to know more do collaborate for any follow-on, I’d be glad to help

November 12, 2009

Nostradamus, 2012 and Cloud Computing!!!

Nostradamus is known for his ominous, predictive, and mind numbing riddles of many disastrous events that have changed the course of history as we all know. On a separate note, there are plenty of influencing theories about how this world is coming to an end on 2012 Dec 21 that are astrological – such as Mayan calendar, and astronomical – such as an approaching star, in nature (check out the movie 2012 releasing on 13th Nov). I’ll leave to y’all-readers of this blog to pursue this interest further.

After having written a blog series on Cloud Computing I can’t stop but wonder how the Cloud Community would have progressed by the “literal” dooms day. For certain, people (as Oprah says it) would have realized that it is costlier to buy the infrastructure to host the applications vs. leasing the infrastructure for the same purpose. As you may have sensed by now, my predictions will neither be as ominous nor be as mind numbing as Nostradamus’s.
 
Cloud would be a nourishing place for a collage of providers and users. 


Paradise for Infrastructure Providers! for they can host a variety of private, public and hybrid cloud offerings. We can expect polarization towards infrastructure vendors which could influence the stack of products you choose to host your application/data.

Market place for Product Vendors! Sterling OMS Cloud license, WebLogic Cloud licenses, OS licenses, Oracle 10g cloud version perhaps which will lure a host of small and very small businesses to IT enable their businesses.

A Mecca for Service Providers and Free Lancers! Service providers can have their own offerings on cloud such as order management functions, demand forecasting functions and host their in-house IPs as services. They can also provide SDLC offerings involving just the code-build-test environments or services such as performance engineering offerings, regression test offerings etc. While the free lancers too can sport their ideas as services and make money.

It will be the time of Proactive Production environments. Although with virtualization we have achieved reactive environments, the call of the hour is to be able to manage these environments in a human-free and smart way. Instead of reacting to the increase in load, it is imperative to anticipate the load proactively and adapt to the imminent spike.

These advancements will surely attract a variety of users on the cloud that would include, educational and research institutes, corporations, media, retailers, healthcare, corporations, financial institutions, and even the Government! Here is an illustration of what I mean.

Cloud Users and Providers.JPG

(* - This image is originally from a Thesis report titled "A generic workflow-based model for the deployment problems in grid systems using MPIAB as a case study" by Guruprasad B. Nagaraja)

Now, with all these advancements in the world it would be unfortunately tragic if it ends by 2012, isn’t it? On a lighter note, if that happens, all these cloud users and providers will be looking up at the sky and panicking!

Demand sensing- is it a solution to capacity planning or near term deployment planning problem?

I came across an interesting blog on Kinaxis website which talks about the importance of demand sensing especially during the post recession recovery period (Is the supply chain finally being recognized by the mainstream as a strategic capability of a company?)  It talks about how Nokia could have avoided Q3 loss of $832 m, had it utilized demand sensing capabilities to sense demand upturn and accordingly adjust capacity well in advance. Using demand sensing, they could have (theoretically) looked at the future customer orders (or other leading indicators) and sensed that they are hitting them faster than their forecasted pace and used that information to identify the future capacity issues. However, I feel, even with a good demand sensing system in place, Nokia would have still faced the problem. To elaborate further, let me first explain how demand sensing system works.

There are three essential things that are required to implement demand sensing capabilities. For simplicity, let’s just call them indicators of future, past and the present.

SKU level forecast (without the benefit of demand sensing) serves as an indicator of the future. Demand sensing system uses this forecast as a reference while applying its magic to make it more accurate at a less time granular level. This input forecast is generally obtained from the demand planning system and can be at a higher level of aggregation (typically weekly or monthly level of aggregation).

Shipment history serves as an indicator of the past. This is used by the demand sensing system to develop a mathematical model of the past sales pattern. The system uses this information to break down the input forecast into daily level forecast.

Open customer orders serve as the indicator of present market activities. This is one of the main inputs for the system which helps it sense the pace of the product sale, and use that information to adjust the daily level forecast generated by the demand sensing system.

What comes out at the end is a daily level forecast at the SKU DC level that benefits from the current event information contained in the customer orders. This granular forecast is then fed over to the APS systems to drive the deployment and production mix decisions.

Assuming it would take at least two months to increase capacity; demand sensing needs to be able to predict the shortage situation at least two months in advance. Since open customer orders is a key factor that drives the accuracy of the demand sensing forecast, there should be open orders at least two months out and beyond in order to obtain accuracy that is better than their existing demand planning accuracy. Given the nature of the product Nokia cells (pun intended), I am guessing their order visibility will not be beyond a week or two, which means, forecast accuracy outside of the two weeks should be similar to that of their demand planning system’s aggregate forecast. Based on the above statements, I would like to conclude that demand sensing system alone could not have helped Nokia predict the sales upturn.

Here is my general question to the experts out there- is demand sensing really a solution for capacity planning? Or is it a tool to enable better deployment and production mix planning? Your comments are welcome.

November 9, 2009

A big fat geek wedding- JDA weds i2

On Nov 5, JDA Software Group announced its plan to acquire i2 Technologies  in a cash and stock deal of $396 m. The merger is said to bring in net annual cost synergies to the tune of $20m and help elevate JDA as a leading supply chain management software company with combined revenue of $617 m and EBITDA of $179 m. Unlike last year, when the much touted deal broke off due to JDA stating inability to borrow money, this time around, the deal  has been structured to ensure a high degree of completion certainty (through Plan A- Intended Structure and Plan B-Alternative structure). The deal is expected to close by Q1 of 2010.

JDA has a history of acquiring market leaders such as Arthur, Intactix, E3 and Manugistics and has successfully used these acquisitions to firm its footprint in retail, process manufacturing (mainly food and beverage with some foothold on consumer goods) and transportation space. Manugistics aquisition in 2006 helped JDA expand from Retail to process manufacturing (which accounts for roughly 50% of the overall manufacturing space). The other half is accounted by discrete manufacturing, where i2 has a stronghold. In addition to that i2 brings in strong solution in the transportation management space and managed services model. Through this acquisition, JDA would be able to offer a solution that links the extended supply chain through an integrated suite of planning, execution and optimization solutions. In addition to product offering, JDA would be able to leverage from i2’s focus on service based offering such as on demand capabilities and managed services.

JDA brings in strong marketing focus. For example, before JDA acquisition, Manugistics was facing the problem of customers showing unwillingness to upgrade to their latest 7.x version due to perceived product performance issues, leading to loss of upgrade revenues. JDA has done well in terms of stopping Manugistics customer defection. At one point in time every CPG/F&B company I knew was in the process of evaluating SAP APO as replacement for Manugistics, but now I am hearing about more companies going the Manugistics way, even in the retail industry where JDA Arthur/E3 products have had a stronghold traditionally. This leads me to believe that post acquisition, i2 will experience similar upturn in sales through JDA’s marketing and cross-selling abilities (JDA and i2 have 133 common customers as of today from a customer base of more than 6000).

What does all this mean for Infosys? Infosys has deep supply chain and domain expertise in Retail, CPG/process manufacturing and discrete manufacturing space, and package expertise in JDA/Manugistics and i2. We are structured in a way that every functional consultant gets to work on multiple packages within similar process areas- for example, a demand planning functional consultant can get to work on JDA/i2/SAP/Oracle. If i2 and JDA evolve towards a similar architecture, functionalities and look & feel, I believe, this would flatten the learning curve to pick up a new product, while at the same time provide exposure to an increased breadth of industries. We would also be able to gain synergies through merging our JDA/i2 Center of Excellence which would help our consultants and clients turn around implementation, upgrade and support projects much more quickly and effectively.

November 8, 2009

Supply Chain 007

Suspecting supply chain waste “I am Bond, James Bond 007” reminds us all of the many stories of Ian Fleming that made it to the movies creating block-busters. The British agent is out to stop the bad guys from destroying the world foiling their technically-advanced plans while the clocks count-down to the final moments of the film. Whether James Bond investigates the theft of a new super microchip and discovers a sinister Soviet plot to control the world electronics market or if 007 investigates the murder of a Jamaican couple who had refused to sell their estate to Herr von Hammerstein, the former Gestapo officer who is the chief of counterintelligence for the Cuban secret service- parallels can be drawn to today’s complex supply chains. I am Chain, Supply Chain 007. Supply Chain wastes can be eliminated by similar agents of change. Have you ever wondered, when on one hand when Retailers struggle to balance on-time deliveries with cost-per-mile; their transporters struggle with under-utilized capacities. As far as manufacturers are concerned, why are they forced to deliver product before they are demanded. Why should time be wasted within supply chains between the time of arrival of a truck for pick-up and the loading of trailers. Out of route stops, poor backhauls, order fulfillment mismatches, supply chain volume fluctuations, constrained warehousing, inaccurate inventories, overspent distribution are some of the many wasted opportunities for Supply Chain 007 to save. Now, for Ian Fleming to script the story for our Supply Chain 007 act, developing a comprehensive set of performance metrics to align with practical execution strategy for each of the supply chain department is a good first chapter to consider.

Impact on Warehouse Management systems in context of gATP implementation

 Global Available to Promise is one of the most promising modules of SAP to manage a sales order. The module has far-reaching impacts on business processes right from Sales Order acquisition to the warehouse level fulfilment strategy. In this blog, we will try to understand how gATP implementation (one of the core supply chain modules of SAP) is having far reaching consequences on warehouse management processes.

 A warehouse is an important element of a supply chain fulfillment process very foundational to how inventory, deployment and logistics costs can be optimized. In a typical CPG setup, warehouse has a control on what finally gets shipped to the customer. They have the control to do product substitution, adds to the shipments and finally any cuts required to the shipments.

 Product Substitution is required to be done when the original material requested in the order is somehow not available and a valid substitute is stocked in the warehouse. From a tactical standpoint, it would make sense to do product substitution at warehouse. Some reasons why this may happen are:

  • Order got confirmed due to an anticipated supply (procurement or production orders) that did not materialize on time
  • The inventory was incorrectly accounted due to mismatch in physical and system-entered inventory
  • Damage to original requested material prior or at the time of product picking.

 The downside of doing warehouse substitution is that the warehouse might inadvertently steal from other orders thus causing a negative ripple effect on the fulfillment plans.

Warehouse Adds is also an important concept. In many cases, specifically in stock transport orders between two affiliate plants, it might make sense to fill the truck up. This may involve adding products to the shipments, more than what was originally planned based on supply-demand situation. Thus adding a few products to send an optimized truck load makes sense.

In the same vein Orders may have to be cut due to a variety of reasons. For example instead of a 48 tonne truck only 45 tonne truck may be available or there may have been last minute rejections in sales orders. IN these situations, it makes sense for warehouses to take control of how the orders can be cut in an optimized way.

At the end of the day each supply chain is evaluated on Case Fill Rates and how optimized the truck loads are planned. In all these situations Warehouse has to work in a symbiotic way with the Shipment Planning and Order Management department. Taking last minute warehouse level decisions disrupts the plans laid out by the supply planning and global available to promise engines causing the supply chain to work in a global-sub-optimum fashion although local optima are realized.

Global ATP comes up with a globally optimum fulfillment plan with appropriate suggestions on Product Substitutions and confirmations to orders in times of very limited supplies. The confirmation is based on priority of customers, shipment dates, order entry dates or priority based on whether order is of Promotional or Emergency nature.

In a gATP implementation, it is thus very important for the project success to make sure that the solution in terms of the business process is bought in by not only the planning community but also by the warehouse management folks.

November 7, 2009

Being Unique with MCC: Can Something Buried Under The Hood Be A Differentiator?

Earlier this week, I was in a dinner meeting with the VP of e-commerce at a large general merchandise retailer along with some others from his management team. This was an all-hands meeting of vendor managers whose teams are helping the retailer string together a viable online retail channel. During the course of the dinner, I and another collegue got to spend a surprisingly uninterrupted 20-or-so minutes with the VP (considering the clamour there, it certainly was surprising and may be it helped that none of us were smoking!). Among various things we discussed, one comment he made caught my ear. He felt that in the entire supply chain transformation that's being conceived, differentiation can only be realized via the e-commerce front-end application. Rest of it, order management included, are just supposed to fulfill pre-ordained roles in a predictable fashion.

Now, I had to think dispassionately here and hold myself from behaving like a proud papa whose star son was being given the cold shoulder by the school principal. So, I tried telling him that he's looking at this entire program as "enabling online fulfillment thru dedicated warehouses" (read: ONE order entry channel and ONE order fulfillment channel) and not as a foundation for taking the retailer to the Multi-Channel Commerce way. His counterpoint could be summarized thus "well, Sterling Commerce OMS can handle it, other retailers have done it, at least in parts, so where's the differentiation?"

Now, I could have swallowed it if he had used the term "innovation" or even "customer experience", rather than "differentiation" to describe the fact that others have done it in parts. Just knowing all the options available - say, five kinds of order entry channels to be matched to six kinds of fulfillment methods in all possible ways of order/order-line splits and combination fulfillment  options - doesn't make something a non-differentiator. Why? because most folks today are only giving lip service to cross-channel strategies or are somewhere in the early miles into this long, torturous marathon of enlightened multi-channel order management/fulfillment due to the sheer complexity of actually doing it.

I didn't belabor the point looking at the obvious convictions of the other party; it would have been a limiting argument anyway, considering I was there to cement a relationship, not wreck it :-). That said, my PoV is that companies attemping even a wee-bit of MCC and actually getting it on the road stands to benefit big time. One of the fashion retailers in US who went live recently just tweaked a little bit of their fulfillment philosophy - exposing store inventories for online sales. The resultant spurt in sales the week after go-live when the system hadn't even stabilized resulted in massive doses of shock and awe, albeit of the happy variety. It also gave spurt to a parallel, ongoing program to enable store-to-store fulfillment.

Knowing all options on the table never makes for differentiation, implementing most of it definitely would help differentiate. For sure, it may not give immediate consumer pull like website checkout design or shopping cart performance. That said, if you can create a system that would fulfill customer orders, come what may, through any or all channels possible, word would definitely go around. Accurate fulfillment, timely fulfillment, increased fulfillment percentages all are back-end metrics that would never work to grab eyeballs, but if you aim to keep them coming back, that's where you'll want to throw some senior management bandwidth on.

November 5, 2009

S&OP Process – Do whatever suits you best!!!

S&OP has been talked about a lot almost everywhere and anywhere. The point of view that I am going to share through this blog is that there is no defined and one-single way to manage S&OP process. At least, this is what I have seen across various organizations in multiple industry segments. We have read about S&OP processes in books and various public domains, and almost everywhere the approach has been fairly generic, standard and uniform, but when it comes to real-world scenario, each organization takes a unique approach towards S&OP. I will share my opinion on critical success factors for an effective S&OP process and how organizations have been doing it differently. Read on….

As we all know that S&OP process is an integral component of an organization’s supply chain planning process, I believe an ideal S&OP needs the right mix of factors across Process, Technology and Organization dimensions. Due to its multi-faceted nature where it touches various stakeholders within the organization’s boundary, it throws up its own set of challenges, and in my opinion, these challenges are around how to ‘make it implementable’. I have laid out a small set of critical success factors that I feel are relevant for an ideal S&OP process – and I would welcome your thoughts and opinions around this too…

 

S&OP Process

 

Having said that, my observation is that each organization defines and manages S&OP in a different manner, and they have been successful in adopting it in the way that suits them best. I can share my own experience and what organizations do in the name of “S&OP”.

- I have always understood that S&OP process has to involve stakeholders from various functions such as Planning, Manufacturing, Finance, Sales & Marketing and may be R&D/Product development. But, this may be far from reality in organizations, where probably a couple of functions sit together in multiple forums and build consensus on final plans and this is what they call as S&OP. We may disagree saying that it is not the right way to run S&OP but it works and it works effectively within the organizational ecosystem…

- Very recently, in one of my client engagements in supply planning domain, I realized that the demand and supply planning functions worked in silos but still S&OP existed in the organization. I was surprised to see such form of S&OP where just Sales and Demand planning finalize the demand plan and push it to Supply side, and they were surprised too, to listen to our opinion of an ideal S&OP process. It has been working for them for quite some time and they don’t seem to change it at least for the next few years. For them, it is not practically feasible to include people from finance or product development at this stage. Marrying the big divide between Supply & Demand within supply chain is a very big organizational challenge…

- In another few instances, I have observed people working in supply chain functions meeting for a quick monthly meeting that might last for 3-4 hours. They discuss respective sales plans, review last month’s performance, and prioritize commitments from manufacturing and list down the action items in the end. When you ask them about if they follow S&OP in their organization, you can expect a very positive and convincing answer. They call these set of activities as S&OP process and why not, they can show you graphs that reflect improvements in forecast accuracy and inventory turns as a result of all this effort….

- Using technology as part of S&OP process is another area that is still nascent to most of the organizations. I understand that it is more relevant for organizations that have mature S&OP processes, but I have also seen people in leading organizations using simple excel capabilities to churn data, do lot of analysis and throw insights that are really effective for decision making. They may not have sophisticated what-if analysis capability but a smart blend of simple scenario planning with experience or gut-feel is sufficient enough to get them going…

I am sure you would have had such similar experiences as well. All of this has made me realized that although S&OP has got an ideal definition and approach, it is being used in different ways in each organization depending on how it is working out best for them. Each organization has its own set of organizational dynamics and constraints, and therefore, although we hear term S&OP being used by most of them, it may mean different things to each of them.

What are your views and thoughts on this. Do you agree to my opinion or do you have something different to share. It will be great to hear most of you; I am sure this is something that would have touched in some way or the other in your experience in supply chain.

Developing a Multichannel Reverse Logistics Solution - 2

In my last post I touched upon the key aspect of developing Return Channel strategy. That is easier said than done and needs extensive data analysis. This brings us to another key step in developing an effective reverse logistics solution: Analyze and Avoid.

One assertion almost everyone seems to agree with is that avoiding a return costs less than processing the return. There are many industry terms associated but the favorite I have come across is Gate keeping. Key factor in successful gate keeping of unwanted or fraudulent returns is a centralized access to the OEM policies and product purchase history. Accurate gate keeping does not mean having strict return policies, however means ensuring that genuine returns meriting attention are addressed immediately at the earliest interaction point and the returned merchandise moves swiftly through the disposition channel.
However the use of returns data does not stop here. Understand which products are returned the most and for what reasons. Key aid to that is developing and enforcing a standardized return reason and disposition mechanism. Increasing the granularity of Return Reason codes might add to a CSR's cognitive load during Return request capture, but correct categorization goes a long way in minimizing costs. Data built over time can be used to build analytics to track the percentage of returns by product SKU sales and by reason. Once the products with the highest return rates have been identified and the reasons for the returns, various strategies can be employed to reduce or eliminate those rates.
In my next few posts, I will share my thoughts on how to develop strategies for a collaborative reverse logistics process with channel partners and fulfillment partners. Meanwhile, I look forward to your experiences and thoughts on Reverse Logistics.

November 4, 2009

Evolving Models in Customer Order Servicing – Supply Chain Implications

Retailers of late are embracing the ATB model to maximize order promising, reduce inventory holding and to provide near-to-accurate delivery dates, thus providing improved serviceability to customers.

So what is ATB all about? How does it transform ones business? How should a business gear up to run in such a model?

ATB (Available to Book) is all about allocation of stock to customers orders based on booking date. This means that available supply (on hand, future stock, safety stock etc) is made available to customer demand in the most optimized way.

ATB model revolves around the concept of arriving at the best possible supply-demand match. It looks into supply that would be available in the future and ties it up with those customer demands that needs to be fulfilled after such a supply is secured as on hand. This prevents blocking up of current on-hand inventory to future demand which is then used for fulfill immediate customer demands.

Such a model calls for a dramatic change to the current business landscape, especially from its supply channels. Suppliers must be evaluated based on their capability to deliver on time as promised and also how far they are able to promise supply to be available, since this would be a driving factor for the business to promise delivery date to its customers. This leads to supplier categorization based on these aspects which eventually rolls downs to the SKUs supplied by them.

Another aspect to consider is on how recovery process needs to be streamlined, in case supply is not secured as promised to the customer demand. How orders will be re-allocated if supply fails and which orders will needs to be given preference which could be based on order promise date, order placed date, priority orders etc. Such ground rules need to be set in place upfront.

My 6 cents on S&OP best practices

In my earlier blog (Office politics and forecasting), I talked about how office politics contributes to forecast bias and how it can be overcome by implementation of a well designed S&OP process. In this blog, I will talk about some of the best practices I have come across in S&OP.

The principal output of the S&OP process is a consensus forecast that is used to drive all demand and supply management decisions. This is achieved through collaborative engagement of cross functional group through a monthly meeting, supported by documented business assumptions. A good S&OP process needs to contain following elements at the minimum.

1. Process ownership by an apolitical group- An empowered apolitical group needs to own the forecasting process. This group would be responsible for managing the planning process, resolving conflicts and responsible for arriving at a consensus forecast. In addition, this central group will also be responsible for generating a statistical forecast, which will serve as a reference point for the functional forecasts.

2. Consensus forecast based on documented business assumptions - Before the cross functional meeting, each of the functional group will come up with their documented assumptions on product, market and supply constraints. This will expose the thinking behind the functional forecast and help in promoting fact based discussions.

3. Time horizon ownership of functional forecasts - Functional teams should focus on where they can best add value. For example, the sales function’s intimate connection with the customers and distribution partners empower them with an accurate knowledge of the immediate term (0-3 months). On the other hand, marketing is more knowledgeable about the longer term over the product life cycle. Higher weightage has to be given to the functional forecast for those time horizons while arriving at the consensus forecast.

4. Explicit management of the gap between consensus forecast and financial goals– the finance function is responsible to ensure that the consensus forecast (when converted to dollar value) meets the financial goals of the company or analyst expectations. Any gaps in the consensus forecast with respect to the financial goals will need to be tracked explicitly so that proactive plans can be built to bridge those gaps. Discussion of the gaps will be an agenda item in all the consensus meetings.

5. Shifting the focus of planning farther out where business assumptions are unclear- organizations with immature forecasting processes tend to focus more on short term forecasts (immediate 2 quarters), typically in a firefighting mode. With implementation of mature planning processes, such as S&OP, the focus needs to shift farther out (12-18 months) where business conditions/assumptions are less clear as well as business benefits are higher.

6. Measure the forecast performance with the goal of continuous improvement- Develop industry standard metrics (such as MAPE and Bias) to measure the forecast performance. Use these facts to provide feedback to the consensus team. This will help in understanding functional tendencies to under or over forecast in a specific horizon and in turn help in correcting that behavior.

Do you have more insights into S&OP/demand planning best practices? Even bad practices would make an interesting discussion. I look forward to your comments.

November 2, 2009

Part One: Do we really understand SRM ( Supplier Relationship Mgmt) ?

I like statistics ……..Because it makes me think

1) 62% of Supply Chain operations did not have an accepted definition of Supplier Relationship Management in their organization

2) 50% of the companies having implemented SRM applications do not know how to measure the benefits of these initiatives.

 

I was equally confused as many others in the supply management function, of the various terminologies that are used interchangeably for the same sourcing and procurement processes e.g. supply management , supplier relationship management , strategic sourcing , spend management , supplier performance management .

I opted for a deep dive and surfaced more confused than ever. Depending on who was talking SRM the definitions also kept changing – product vendors have an application centric view; consultants talk transformation or implementation approach, and buyers look at this as managing categories and transactions.

Till I came across a white paper by Pierre Mitchell and understood the concept in a jiffy.

1. Supplier Relationship Management ( SRM) – Externally Focused ( Help me help you, [ to help " us"])

2. Spend Management – Internally focused operations - Show me my money

3. Supply Management – Customer fulfillment directed

4. Supplier performance management (SPM) - one-sided vendor performance management process or BI implementation focused.

I quickly tried mapping the KPI’s for each of these situations and realized how the same set of processes ( and leading buyers response ) could react differently to the variance in focus with the above 4 situations.

We decided to refine (re-define) our definition of Supplier Relationship Management.

Supplier Relationship Management" is a collaborative win - win business discipline of strategically managing the supplier engagement process to maximize the potential value of those relationships by providing seamless integration capabilities for smooth harmonized operations and aligned business goals with the partner supplier community.

With majority of the value chain of typical manufacturing organizations lying in the extended enterprise area of their supply chain and beyond the typical traditional internal strategic investments within the company’s span of control, we see that a " true" SRM program is a major competitive strategy organizations could strive for to expect major bang for the buck.

Joint goals leading to organizational performance 

Figure: Joint SRM KPI's with suppliers leading to overall organizational performance.

The challenge for organizations is really to guide this external focused collaborative theme to be enabled by the typically internally focused processes and the existing SRM technology applications that may not address this philosophy in totality on its own. Getting to the depth of this business vision and having a detailed solution plan to connect the business objectives ( & related now changed performance measures ) to each of the technology enabled business processes scenarios can make this happen.

Let us try to discuss some solution possibilities in the following SRM series. Meanwhile , look forward to your experiences and thoughts .

References:

1) Purchasing Must Become Supply Management by Pierre Mitchell.

2) Companies Are Confusing Supplier Performance With Supplier Relationships, State of Flux

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