Game Changing Trends in Supply Chain: Part IV

In this fourth segment in our series on game changing trends in supply chain we review in more depth three of the ten trends:

• Forecasting to demand management
• Functional focus to process integration
• Incremental change to a transformational agile strategy

Game Changing Trend: Forecasting to Endcasting (Demand Management)

While many companies have improved in their ability to collaborate effectively across organizational boundaries with supply chain partners to improve forecasting effectiveness, a greater effort has been made to enhance internal collaboration between the demand, supply, and finance functions within companies to transform accurate demand forecasts into actionable business and supply chain plans.

Whether called S&OP (Sales and Operations Planning, a most regrettable term that has unfortunately found its way into the vernacular), IBP (Integrated Business Planning), or DSI (Demand/Supply Integration), these processes are designed to match future demand projections (demand forecasts) with future supply capabilities (supply forecasts), and to formulate business plans that achieve a balanced set of goals. While any company would agree that these are worthy goals, transforming silo-ed organizational cultures into cross-functional, collaborative ones has proven to be elusive.

A variety of culprits are to blame for the lack of success in these processes, but failure to engage the demand side of the enterprise (sales and marketing in a manufacturing context, and merchandising in a retailing context) is by far the greatest barrier to successful S&OP implementations. Accurate forecasts are not worth the paper they’re written on if they are not a part of a robust Demand/Supply Integration process. Transformation of demand and supply signals from external supply chain partners into collaborative business plans is the desired end state, and such transformation requires a collaborate organizational culture, a robust set of processes, and effective information technology tools to achieve. Considerable work still needs to be done in many companies to achieve this ideal.

Forecasting Versus Endcasting/Demand Management

A macro trend that has helped further the ideal of “endcasting” or demand management is the availability of vast amounts of end-user demand data, thanks to the ubiquity of scanners, which is now available for analysis and hopefully, insight into demand patterns not just from channel partners, but from end consumers. As many observers have noted, the availability of “big data” has not necessarily been combined with enhanced analytical tools to take advantage of that big data, at least not in a demand forecasting context.

For example, business forecasters tend to gravitate toward time-series methods to identify historical demand patterns that repeat with time. One of the most widely used time-series tools is the Holt-Winters approach to exponential smoothing, which was first developed over 50 years ago. Few useful time-series approaches have been developed since Holt-Winters, and unfortunately, demand forecasters have lagged behind their business analytics colleagues in the use of sophisticated data mining tools that could potentially identify causal patterns of demand. Such causal modeling tools are more important today than ever, with the emergence of new forms of promotional tools and the growth of “shopper marketing” as a critical marketing strategy. Time-series tools are far less useful in a promotion-intensive environment, but demand forecasters have yet to move beyond them to take advantage of the “big data” that is now so prevalent.

Keep in mind, though, that regardless of what it’s called, it’s a guess about future demand, and it will always, always, always be (to some degree) wrong!  Best practice is to gather as much information as possible, both from historical demand patterns (statistical forecasting) and from individuals who have insight into how the future might differ from the past. Thus, for every forecast, there can be multiple sources of input. How do you make sense of it all?  Best practice is to relentlessly measure the accuracy of the inputs provided from different sources, and to use those measures of accuracy to judge the added-value from each input source.

Game Changing Trend: Functional Focus to Process Integration

Cross-functional integration is, perhaps, one of the most challenging opportunities for businesses today. Oftentimes, a business will look upstream into the supply base and consider the integration with its supply base to be its most central integration problem. Other times, a business will look down the supply chain and consider the integration with its customer base to be its most central integration problem. However, we believe that the largest integration problem is cross-functional in nature and exists within the four walls of the business.

In fact, this problem causes internal business functions to conflict or compete with each other, leading to a reduced ability to deliver customer value and perhaps even to the destruction of customer and shareholder value. There are a number of reasons why cross-functional integration presents a difficult problem. Some of these reasons include (1) the firm’s operating model, (2) metrics, (3) alignment with supply chain, (4) culture, (5) and tools. Each of these enablers/barriers will be discussed in turn:

• Operating Model - Traditionally, firms have organized to deliver customer value by developing functionally specific organizational designs. This focus on the function has fostered excellence within-function, but has not yielded excellence in the connection of functions from the perspective of overall business process improvement and customer value creation.

• Metrics & Alignment - Often, metrics tend to drive functional performance, but are disconnected from cross-functional performance. For example, the Purchasing function may seek to reduce per unit raw material cost with longer lead times and larger lot sizes while the Manufacturing and Planning functions seek to create more agile and responsive operations with smaller lot sizes and reduce finished good inventory. Given the cross-functional nature of supply chain business processes, these functionally oriented metrics can drive functions to conflict and/ or compete with one another.

• Aligning Supply Chain Strategy – The supply chain strategy is often not aligned with a firm’s core competencies or strategy to compete. This results in a less than ideal collaboration within the supply chain functions, as well as with other business other functions. The supply chain strategy must enable corporate business strategy. For instance, the purchasing function may well be driven by a functional strategy that is not informed by, nor understood by other functions within the business.

• Culture - Frequently, businesses have not invested in developing a deep culture of cross-functional collaboration. Of course, there are some areas where cross-functional business processes tend to be better supported by a culture of cross-functional integration. An example of one of these business processes is sales and operations planning (S&OP). However, the state of “cross-functional culture” in businesses is generally poor. Interestingly, when asked, most business leaders will state that their businesses are very mature at cross-functional integration. In fact, this misalignment between perception and reality tends to hinder the development of a healthy cross-functional culture.

• Tools - The tools that businesses employ to enable their important processes simply don’t support cross-functional integration and involvement. For example, many corporations run their supply chains from excel spreadsheets rather than through integrated planning and execution systems that leverage common across all functions. This lack of tools and information technology systems that facilitate collaboration, results in the use of inefficient manual processes and more valuable resources being spent on gathering and crunching data, rather than analyzing, evaluating options, and making decisions.

In summary, we believe that cross-functional integration is a problem that exists across the business and all of its important functions. Further, without healthy cross-functional collaboration, it is much more difficult to establish and efficient end-to-end supply chain with trading partners such as customers and suppliers. To reiterate this point, business leaders must first create strong and robust cross-functional integration within their firm. Only then will their business have the opportunity to reach their integration potential with upstream suppliers and downstream customers.

Future Focus

This section presents our view of the current state of cross-functional integration and articulated a number of important drivers of successful cross-functional integration. In a future relaease, we’ll explore the importance of the specific case of cross-functional integration between the purchasing and logistics functions within a firm’s supply chain management organization. We believe that for too long, the supply chain functions have been strategically aligned with their functional strategies, but in competition with each other, leading to the destruction of customer value and reduced firm performance.

Supply chain executives should turn their supply-chain integration focus inwards. While the “great divide” was once described as the chasm that existed between marketing/sales and manufacturing/operations, the new “great divide” is between purchasing through logistics. Firms that strive to close this chasm, will outperform those that do not. The writing is on the wall.

  This chapter represents a brief overview of the PuLL (Purchasing & Logistics Leadership) initiative at the University of Tennessee.

Game Changing Trend: Incremental Change to a Transformational Agile Strategy

Our research confirms that firms would need to do three things to develop more adaptive and agile transformational strategies:
1) Identify and document an expanded total landed cost to serve framework   based on multiple scenarios and not limited to historical solutions
2) Develop business analytics and modeling skills for situations outside the norms of current business
3) Build better expertise in the application of decision support and IT tools to identify patterns, assess potential performance, and manage newly developed processes.

We see two important concepts that are now available to help firms move more rapidly from experience to a transformational strategy. First, the development of what many firms are calling “agile” supply chain strategies offer exactly the type of proactive and adaptive mechanisms needed to respond to unprecedented changes in the marketplace. Second, we believe that building and executing an agile strategy will be dependent on a management team that possesses the right mix of talent and decision-making skill sets necessary to navigate a firm through uncertain times. The remainder of this section focuses on several concepts, which will help firms move even further towards achieving a score of 10 in this megatrend.

What are Agile Strategies?

Agile strategies recognize that individual businesses no longer compete as solely autonomous entities, but rather as supply chains. In order to achieve a competitive advantage in the rapidly changing business environment, firms must align with suppliers and customers to coordinate operations and together achieve a level of agility beyond that of competitors. Supply chain members must be capable of rapidly aligning their collective capabilities to respond to changes in demand and supply. However, many firms may still not recognize what constitutes an agile supply chain strategy.

Alertness

Alertness is the first dimension of firm supply chain agility, and it can be described as the firm’s ability to quickly detect changes, opportunities, and threats. This dimension suggests that firms must develop the ability to recognize changes before they respond to them. Within sports science, research has shown that a player’s ability to execute tasks is dependent upon factors such as visual-scanning techniques, visual-scanning speed, visual processing, perception and anticipation. These factors are reflected in a players’ on-field agility.

Accessibility

Accessibility emerged as the second dimension of firm supply chain agility and is described as the ability to access relevant data. UT research suggests that once a change is detected, a firm must also be able to access relevant data to decide how to provide an agile response. Supply chain-wide information access is a key requirement for supply chain agility. This implies that agile supply chains must be virtual; that is, they must be information-based rather than inventory-based. Supply chain members must share real-time demand, inventory, and production information in order to build a more transitional strategy.

Decisiveness

Decisiveness is the third dimension of firm supply chain agility, and can be described as the ability to make decisions resolutely, i.e., with decisiveness using the available information. High performance in sports is ultimately determined by effective decision-making skills. Offensive players, who demonstrate proficient agility, employ superior decision-making skills in response to the movements of their opponents; as the complexity of the task increases, decision-making skills become even more important. Similarly, firms must create processes that enable them to process available information and make resolute decisions on how to respond to supply chain changes and not solely rely on historical experience, which may no longer be relevant. Processes such as Sales and Operations Planning help provide a forum for resolute decision making that utilizes the best available information in demand and supply markets.

Combined, the alertness, accessibility, and decisiveness dimensions of agility are created through coordination and planning processes to enable firms to determine appropriate responses to opportunities or threats. Agile coordination and planning processes are necessary, but not sufficient criteria for supply chain agility. A firm must also be able to act on agile decisions. Swiftness and flexibility are the capabilities that firms use to implement agile decisions.

Swiftness

Swiftness is the fourth dimension of agility. Once a decision is made on how to respond to a situation, firms must be able to quickly implement those decisions. Swiftness is defined as the ability to implement decisions quickly. Sports and military science identify the enabling role of swiftness in fostering agility. In sports science, the speed of movement and change of direction speed are both considered key components of agility.

Flexibility

Flexibility is defined as the ability to modify the range of tactics and operations to the extent needed. In a sports context, an athlete’s mobility of joints (i.e., flexibility) controls the range of quick adjustments an athlete can perform. The type of directional change (agility) performed depends on the flexibility of the specific body parts involved in the exercise. If an athlete exceeds his range of flexibility when attempting to perform a maneuver, injury is likely to occur.

Agility in Practice

Together the five distinct dimensions of agility (alertness, accessibility, decisiveness, swiftness, and flexibility) allow firms to rapidly respond to a volatile and ever-changing marketplace. However, according to research sponsor Ernst & Young, many of today’s leading firms are attempting to achieve these agile capabilities by studying and adopting the practices possessed by other more innovative firms. This could include benchmarking, purchasing intellectual property rights, or even acquiring smaller start-up firms in order to create more agile capabilities.

Summary

Overall, firms have made significant movement towards agile transitional strategies in the last decade and are much less dependent on experience based strategies. However, by understanding and improving their supply chain agility dimensions firms may continue to move towards a score of 10 in this megatrend. In addition, the recruitment and development of talented managers and employees who have the decision-making skills needed in an agile environment is critical for maturing in this area.

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