The Infosys global supply chain management blog enables leaner supply chains through process and IT related interventions. Discuss the latest trends and solutions across the supply chain management landscape.

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August 31, 2010

Neodymium: Toyota's pain and China's gain

For years China has been looked down upon by global manufacturers in US, Japan and Europe as merely "Low-cost" source. The global manufacturers had looked at China to supply something that is non-strategic and only valued by the price tag of the item. There was no emphasis on the uniqueness of China in terms of its source. It was felt that something that is easy to develop, but is price sensitive, can be transported to China and get developed there. This way the transportation changes and additional inventory costs due to longer lead times, would be offset by China's low cost of production. But Neodymium and a host of other Rare Earth Elements (REE) are going to complete change how the world views China. These REEs, the essential "protozoa" of 21st Century products, has China in the driver's seat to fuel growth. From Hybrid cars, Electric Vehicles, Mobile phones, Laptops, portable x-ray units to missiles.... all depend on REEs. And China has a 97% monopoly in production of these elements.

Toyota, with its vision of 1 million Hybrid Electric Vehicles (like Prius) by end of 2011 has a very strong dependency on REE to sustain its growth. Every Prius has about 1 Kg of Neodymium in its components and about 10~15 Kg of Lanthanum in its batteries. Some of the applications of REEs in the electric vehicles are Ignition coils, HVAC Compressors, Distance sensors (anti-collision sensors), Electric pump motors (multiple applications), Electric brakes, EPS, Seat belt sensors, Drive-traction motors, Car navigation system HDD, Starter-generator system etc. Over 95% of world Neodymium is being supplied by China. With the average demand of 29,000 metric tons per annum and an estimated growth of 13% annually, this material is going to be a very critical component for electric vehicles development across the world.

Neodymium is mainly used as a substitute material for permanent magnets. From ferrous permanent magnets (PM) with low magnetic strength to Cobalt based PM, the magnet material has evolved over the century. Neodymium was developed as a PM material in early 1980's, after Zaire, which produces 65% of world Cobalt had political unrest. Neodymium alone is not very strong, and needs another REE Dysprosium (added 5% by weight) to increase demagnetization at high temperature. Now Jiangxi Province of China is the sole producer of Dysprosium in the world. With so much dependency on single source China, for the basic raw material for REE, poses serious supply chain risk. But this risk to the rest-of-world poses the greatest opportunity for China to develop Hybrid Electric vehicle technology. BYD Co. is coming out with the first Hybrid Electric vehicle which is China's local development.

The risk is higher as Permanent magnet Electric vehicle components are not manufactured by the OEMs like Toyota, but by their Tier-1 and Tier-2 suppliers. The manufacturer of Neodymium magnets are further down in the supply chain tiers. These manufacturers do not yield so much clout and influence to ensure regular supply of REE raw material. This risk has been further heightened with China's restriction of REE raw material exports by around 72%. Though this measure has been taken to establish unified price mechanism and prevent indiscriminate mining and safeguarding environment, the raw material supply of REE to these low-tier suppliers looms large. To ensure supply security, Toyota through one of its subsidiary Toyota Tsusho Corp is setting up a JV with Sojitz Corp of Vietnam, to develop the Dong Po deposits of REE. But this will again serve only about a quarter of Japan's demand for Lanthanum, Cerium and Neodymium.

To develop the green technology in automotive industry, the quest for further diversified sources of substitute material is on. Will the Green fuel technology survive the monopoly of China in REE? This is a question which has ironic importance. While the world plans to shift from Oil to greener technology, it entails a shift from unstable set of sources (Middle East) to a monopolistic source (China). Also the bargain is between greenhouse-gases polluting the atmosphere to Thorium-radiation-hazards during mining of monazite ores for REE.

August 27, 2010

Reaping Benefits from Supplier Performance Management

Recently I attended one seminar on supplier performance management (SPM) wherein the audience seemed to have mix reactions on the topic have penned down some of my  thoughts on the same. With inorganic growth in many organizations tracking supplier's performance at global scale is becoming a new challenge. Global scale also leads to compounding of supply risk and performance issues namely -
1) Rapid inception of new supplier demands and expectations
2) Credit situation
3) Changing labour rates
4) Rising demands and government expectations
5) Working capital challenges and amidst variable demand
With these issues on hand, is SPM a full or a partial antidote?  Dealing in global environments with SMB suppliers, available credit and supply risk often comes up short. Accuracy is as a major concern and so is highly available coverage. By entering SPM internal information vs third party data available gives a greater control as both qualitative and quantitative metrics and risk indicators can prove useful, but challenge lies in defining and managing such programs to improve visibility.
We also need to check as to how we can meet these expectations with real time SPM. The primary objectives while encouraging such programs include -
1) Getting better insights of supplier performance
2) Building relationships to seek better opportunities
3) Identifying risks with accurate score boards
4) Preventing and mitigating supply risks
5) Investigating the accurate criteria for supplier On Boarding
6) Settings strategies for disengagement with low performers and high risk suppliers
7) Identifying suppliers continuous business improving opportunities
8) Working on development projects with suppliers
 Below mentioned are some of the ways that   can help explore real time SPM capabilities:-
1) Supplier survey and assessment development and deployment - Supplier scorecard should be developed with corporate goals in mind.
2) Probing the evaluations results - The overall SPM strategy should make sure it is aligned with corporate objectives so they enhance them not conflict with them
3) Conducting Stakeholder satisfaction results - It should also create a rollout plan to both the stakeholder and supplier communities.
4) Collecting information of suppliers performance from various mediums - The team must identify how it will collect, monitor and measure performance.
5) Checking the trend analysis - Performance data must be collected and becomes valuable over time. As a business grows and changes, the goals, strategies and metrics must be recalibrated so that everything is aligned
6) Checking the contracts and SLA and delivery times - Teams should establish time period associated with data collection, for example, quarterly.
7) Continuous tracking of corrective plans and improvement plans - Companies must act on the performance data collected so they can influence supplier behaviour.
8) Tracking audit reports or corrective evaluations - Once collected the data should be reviewed against criteria and shared with suppliers and stakeholders
 Finally success factors which can ensure success of SPM include -
1)  Ownership from management - Exhibit to senior management not only cost savings and risk avoidance, but also the value that high-performing suppliers can bring.
2) Setting quality standard with business process regrouping - SPM is a business process, not a scorecard. SPM requires a good, closed-loop business process in place in order to add value and to succeed.
3) Clear Communications - There should be transparency in communication between the suppliers and with the stakeholders in the firm. Communication on performance expectations with suppliers will help the suppliers and give them space for improvement which will raise SPM visibility and broadcast success.
4) Concrete Actions- SPM without actions, improvements, and follow-up is futile. Go beyond collecting data for the sake of data. Deliver improved supplier performance, reduced costs and increased supplier value.
5)  Measurable results- An SPM system is about results. When properly deployed and fully adopted, SPM can create both top line and bottom line value. Capture the value and communicate it to management.
 With these and an organized program implementation of SPM many can start reaping the benefits of SPM.

August 26, 2010

Why Centralized Inventory Data is critical for effective Order Management Platform

Of late, my interactions with regional and global business community, colleagues and ex-colleagues bring out immense interest in the next-gen Platform BPO solutions. While some speak about Cloud computing and some talk about SaaS, etc., many who prefer looking at Business relatively holistically, combining people, process and Technology aspects together, are using this term 'Platform BPO' frequently - they don't mind calling it Business Platform summarily, this is my observation.

Essentially, they are looking at Platform and BPO together as their business solution of the future - Platform being the readily available infrastructure and applications based on best-in-class business practices for reducing the IT Cost of Ownership and yet gaining competitive advantage through implementing best business practices, and the BPO being an option to reduce FTE count and cost with SLA driven Business Process Management: both being available on transaction based pay-as-you-use mode to gain business efficiency and effectiveness.

 

In reality, there are many implementation complexities in today's supply chain. Centralized Inventory visibility is one of the most Critical Success Factors for Effective implementation of Order-to-cash process through a Platform BPO solution today.

  

This is more applicable for the Manufacturing, CPG, and Retail Industry - particularly if they are global corporations, have multiple inventory locations, managed by multiple parties including 3PL players who use various Inventory management systems in the distribution network. This multi-location decentralized inventory management by multiple parties has evolved due to a plethora of Supply Chain planning and execution challenges.

 

On the other hand, particularly in the advent of e-commerce and increasing B2C business, it has become an enormous challenge for implementing Platform BPO based effective and efficient Order-to-Cash processes to deliver Order Accuracy, Pricing and Billing Accuracy, Perfect Order Delivery, Reduced DSO, Order-to-Cash Cycle time and Cost, Reduced Inventory, Flexibility and Adaptability, etc.

 

The Platform BPO service providers should and may be trying to build standardized processes based on industry best practices driven by business rules and automated workflow, and taking ownership of outcome through SLA.     

 

Real time Inventory visibility (both on hand and in the pipeline) is of utmost importance for checking inventory availability, based on which either order confirmation and fulfillment process or sourcing decisions take place. Distributed Inventory management systems as mentioned above create a series of problems for Order-to-Cash processes if the Order Management system is not integrated with a single online Inventory system - Performance of the electronic network and online availability of the inventory data (for checking and updating inventory) is not in control of the Platform BPO service provider. Interaction with the multiple and different inventory management systems to check and update inventory data becomes cumbersome. If there could be a centralized inventory database synchronized real time with the distributed network of inventory systems, it would have solved the problem. But more the number of inventory systems and parties involved in the supply chain more will be the risk of inaccuracy of Inventory data.

 

The SMEs in Manufacturing, CPG and Retailer business, who are looking for Order-to-Cash transformation program, according to me should keep in mind this aspect of real time centralized inventory management system - there may very well be a distributed network of warehouses, but they should update the same central database real time. Multi Channel order fulfillment, e-Commerce, Customer and Supplier connectivity, and Straight-Through-Processing will demand real time inventory access.

August 13, 2010

How to Control Proliferation of SKUs?

One of the current biggest challenge faced in supply chain management is explosion of number of SKUs. It is very common scene that total number of SKUs are 50 to 100 times the number of "Real" product offerings. By "Real" product, I mean, a product which customer buy to satisfy some of their needs. SKU is something which is created out of "Real" product so that it can be sold to a customer in a specific market place. There are many reasons for which multiple SKUs are created from same "real" Product. Some of them are listed below.

1) Customer Segmentation - Some customer can buy in big size but others do not have paying capacity so they buy in small quantity so business create different SKUs to cater to each of these customer segment


2) Consumer Behavior - Irrespective of paying capacity in some markets customers have inbuilt tendency to buy in bigger or smaller sizes. Depending on that for same product in different markets we need different size SKUs


3) Seasonal Consumption - Same product can be consumed differently depending on time of the year. Winter products will have smaller demand during summer. Accordingly you need different SKUs to tackle different seasonal requirements


4) Legal Requirement - In some territory there are some mandatory information that need to be printed on Labels. Hence Label has to be customized depending on market which lead to multiple SKUs for same product even for same size.


5) Marketing Campaigns - Packaging is called 5th P of marketing. To catch the eye of the customers in crowded market place packaging is changed often creating new SKUs

 
6) Logistics Considerations - Packaging that works in one geography context does not necessarily fits with logistics practices in some other geography. This warrants creation of additional SKUs to suit logistics scenario in each of the geographies product is sold

We can keep adding reasons to above list but bottom line is simple....supply chain management is getting complicated because of explosion of SKUs. It is very common that core number of product offerings of the company is 50 to 70 products whereas total number of SKUs are between 5000 to 7000. Another dimension of the problem is number of storage locations in distribution network. If company has 100 distribution warehouses then effectively supply chain management has to deal with 700,000 SKU-Location combinations. Imagine the amount of Planning and Execution effort spent in ensuring that each of these SKUs reach at the right place at the right time. We see very sophisticated planning engines and army of planers employed by most of the CPG companies to tackle this planning activity. Why CPG even other industry verticals are experiencing the same problem. In one of my recent assignments with leading Chemical company which operates in more than 100 countries, number of SKU-Location combination crossed 200,000. Same is story with Pharmaceuticals so this problem is very generic. I have rarely seen any initiative taken by any company to reduce the number of SKUs, on the contrary I see more eagerness to create a new SKU for flimsy reasons. In fact proliferation of "Unwanted" SKUs, in my opinion, is the source of biggest waste in Planning activity. My rough thumb rule estimate is that 20-30% of total SKUs are unwanted and created without proper thought. So effectively speaking 20 to 30% of effort in planning activity is a waste. I have following thought process which is one of the way to control SKU number.

Perform SWOT analysis for your core product offerings. Surely there must be some products which are real champions. Customers simply crave for these products. Every company has such block buster's. SKU strategy followed hardly matter in case of these products. Customers will "Pull" these products out of your supply chain in whatever size, shape or packaging they are available. In fact if the products are extremely good and low quantity SKUs are not available then couple of customers can combine also to buy a bigger size. In one of my assignments with Crop Protection company, some of their products offerings were so good that few farmers use to combine to buy bigger size package if smaller one is not available in the market place. You can surely reduce number of SKUs for these champion products without affecting sales revenue. On the other hand if product is facing stiff competition in marketplace because it is "Me Too" type then you need battery of SKUs to tackle competition.

But I have seen companies doing exactly opposite. For block buster's they create more and more SKUs as they are center of attraction for everyone but for the products which are not doing so well they cut down SKUs using some vague profitability and contribution logics. Just a thought worth putting your mind into. Are we following right strategy to control number of SKUs?

August 11, 2010

Competing on the true color of your Supply Chain

Since the year 2005, AMR has been publishing the list of the world's top 25 most admired and well run supply chains. The typical parameters or KPIs used to compare and rank as depicted in the reports are Return on assets, Inventory turns and Revenue growth.  Additionally, opinions of peers and AMR are also factored in when these ranks are arrived at.
I was wondering if these rankings also factor in the green element in the supply chain and whether it had any bearing on them - if not, at least if they were correlated. This year's report specifically mentions sustainability as a key point that merged on examining this year's winners. 

On examining the reports for the last few years one can see that Apple's supply chain is topping the charts for the third consecutive year this time around. It is among those very rare examples where the financial metric of inventory turnovers has jumped from 45 in 2009 to 60 levels in 2010 (which is only 2nd to McDonalds from this year's list). Coming back to our focus on sustainability and greening and what is the motivation for treading that path, I decided to have a look at the annual reports of these top supply chain companies. Though we all understand that even these biggies collaborate with multiple partners and vendors for an efficient supply chain, the true measure of greening cannot discount the partner's green thumb.

Critics argue that the way global sourcing and technological advances have become a part of modern supply chains, an inherent collision logistics and environment has crept into the system which is overlooked in the wake of "lean" practices. The collision can be illustrated in a case where a lean mean supply chain, with leaner inventory could result in more frequent trips between locations which could result in higher fuel consumption. In a report published by MIT Sloan Management Review, only 22 of fortune 500 companies have started "blunting" their supply chains' impact on the environment. Though this research focused on transportation practices at these companies, Apple among many others from the AMR list are missing from this subset of 22 fortune 500 firms. The Insight that this brings to the fore is in spite of having well defined sustainability scorecards and efficiency KPIs, not many organizations have been able to effectively internalize the same into their respective supply chains. Let us explore this in detail as we delve on few leading supply chains and their true color.

Talking about our chartbuster Apple, it shot down the proposal for a "sustainability reporting", the term if searched on Google takes you to a page which tells the story behind Apple's environmental foot print. The site goes on to explain the breakup of its green house emission in the entire life cycle:

 

Apple.jpgSource: www.apple.com
So, bifurcating the functions using the SCOR model, 48% percent of all emissions can clearly be attributed to source, make, deliver and return functions of the supply chain. Over the years, Apple claims to have reduced the average weight of iMac and saved 10,000 metric tons in material. Today's 20-inch iMac uses 55 percent less material than its first-generation, 15-inch predecessor. These examples  point to the fact that especially in an industry fired by innovation, the journey towards an efficient and sustainable supply chain begins much ahead in the value chain as in this case, at the drawing board itself.

Talking about transportation research shows that to make one Apple iPhone material comes from 3 countries ( Singapore, Taiwan, US)   travels to China to get assembled, inventoried and finally it gets fulfilled to customers and retailers from here. Apple assigns a 5 % percent figure to emissions due to transportation .The 2007 figure from department of energy states that transportation accounted for 28.4% of U.S. energy consumption and 33.6% of carbon dioxide emissions. Here too, the company's superior and minimalist design philosophy has resulted in 50% more boxes in each airline shipping container.

One Supply Chain leader that is highly respected in the industry by peers and analysts alike is Procter and Gamble. It has always rightfully earned positions ranging from 2nd to 4th in the last five AMR reports. P&G is among those few organizations which has clearly articulated its sustainability strategy, goals and progress measures. The sustainability report named "Designed to Matter "  clearly delineates how focus areas like product sales, operations, social responsibility, people sensitization and partner collaboration are aligned and meshed to the environmental cause.

P&G as a part of "Products Strategy" set sustainability goals for sales of "sustainable innovation products" which have an improved environmental profile. The FMCG major boasts of cumulative sales of $ 13.1(billion) since 2007 for such products. Similarly for "Operations Strategy" it set sustainability goal of 20% reduction (per unit production) in energy, water usage and waste disposal from its Manufacturing locations. It also went ahead and profiled its customers and segmented them into three categories viz-a-viz niche, sustainable mainstream and basic based on sustainable product propensity. Once this was done, products were  designed, keeping in mind the largest segment that were inclined to sustainably profiled products (which of course, provided their idea of performance and value). Here we see that clearly "green" as a philosophy is clearly embedded in the DNA of the organization. These examples with clearly outlined, articulated goals, KPIs can be seen in the areas of transportation and logistics too. In one another example P&G shifted to seal tight plastic bags from cardboard boxes thus saving 20% space on its shipments. Additionally, reduction in the amount of packaging material, identification of goods while stock management and movement , better convenience for retailers are the add on benefits being realized across the supply chain. Within transportation management P&G has been using intermodal strategies and making use of boats and rails thus reducing carbon emissions. Global pilot programs in Europe, Brazil and NA have done away with thousands of trucks plying on the roads. These technology and process led steps are also reflecting in the company's comprehensive stake holder engagement policy with suppliers. Suppliers are communicated about the sustainability guidelines and also evaluated on a regular basis based on parameters leading to a sustainable business ecosystem.

Supply chains like the above, along with leading names for example, Dell and HP who have been consistent performers in AMRs list, have been recognized for taking steps for a sustainable future. The set of motivating factors for greening among companies can be broadly classified into (a) regulation, compliance(R&C) and (b) driven by market forces. Market forces in today's world mandate competition based on sustainable products and operational strategies. Supply chains who had embraced it as a marathon at the right time and not as a 100m dash (or a knee jerk reaction to what many call sustainability as the new "Y2K") have catapulted their supply chains to the next level with measurable bottom-line benefits.

As we see here, there is a strong correlation in being a leading supply chain and being a champion of sustainable measures. Supply chain and operations being the major enabler of any demand fulfillment, this management concern has a mammoth stake in green initiatives. Of course, this function needs a supporting framework from corporate strategy perspective and executive commitment. As it is said "Companies don't compete -only supply chains do". Sustainable supply chains can give competition a whole new meaning very much in everyone's interest.

I would like to know the view of our esteemed readers - what do you think is the future of sustainable supply chains? Would it find its way from reports and whitepapers into manufacturing locations and transportation hubs? What do you think about end consumers and their enlightenment as enablers in making sustainably profiled products a success? What is the true color of competing supply chains you see around you?

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