Synchronized value chain: Essential strategies for matching demand signals to supply networks

Transcription

1 Cross-Industry Supply Chain Synchronized value chain: Essential strategies for matching demand signals to supply networks In this white paper Introduction: Becoming a globally agile enterprise through synchronized value chain techniques 2 Synchronized value chain techniques: Key to effective supply chain management 3 Effective synchronized value chain strategies 4 Benefits of a synchronized value chain strategy 5 The synchronized value chain framework 6 Next steps 7 Conclusion: Supply chain transformation 9 Insight White Paper

2 Cross-Industry Supply Chain The ability to sense, and then respond rapidly to, demand signals across all supply chain partners is a key characteristic of the globally agile enterprise. Yet few businesses have put the organization, systems and processes in place that attack the root causes and mitigate the risks of supply chain instability. In this white paper, BearingPoint examines the common roadblocks to building an effective supply chain and provides specific guidance on how to put effective synchronized value chain measures in place. By more effectively responding to real-time or near realtime demand signals in the market, an organization can guard against costly disruptions to supply chain operations, dramatically improve the speed to market of products, enhance customerservice and reduce inventory. These achievements will not only help organizations leverage their supply chains to competitive advantage, but will move them toward becoming truly globally agile enterprises. Introduction: Becoming a globally agile enterprise through synchronized value chain techniques Inferior customer-service levels due to poor forecasting. Unacceptably long time to market for new products. Escalating costs due to, inflated inventory levels. These are just some of the negative effects of failing to accurately capture and swiftly respond to demand signals from customers, supply chain partners and employees. These effects are only exacerbated by globalization. The increased complexity of operating a global company makes the pain of supply chain failures even more severe due to the sheer number of nodes in the network. Globalization also makes it more difficult to sense demand from the market and orchestrate those demand signals across supply-side operations. Given the longer lead times required to get globally sourced, manufactured and warehoused products into customers hands, the potential impact of supply chain disruptions can cascade throughout an enterprise. One of the key foundations of a globally agile enterprise is a truly robust and dynamic supply chain in which the risks described above are both understood and addressed. Specifically, by putting synchronized value chain mechanisms in place to manage supply chain efficiency and effectiveness, enterprises can consistently execute to various global plans and service levels; effectively integrate across functions and geographies; and possess the decision support and governance needed for an ongoing strategy decisionmaking process that turns the supply chain into a competitive advantage. Most organizations currently base their supply chain operations on the sales forecast. Yet this raises a number of critical questions: How accurate is the forecast, and how responsive is it to changes in actual demand? How does that forecast translate into a demand plan? How are orders fulfilled? How are different products replenished differently? How are exceptions communicated throughout the value chain? How are operations adjusted when exceptions are known? In many organizations, the process for planning supply chain operations is in such disarray that it is simply ignored, and the plan itself can therefore cause more harm than good. Time and resources that should be dedicated to planning and exception management are used to implement stopgap tactical activities focused on expediting orders rather than executing strategy. Without the capability to perform forecasting and demand planning up front and to support that planning with a comprehensive execution strategy businesses may struggle to compete with others. BearingPoint has identified the elements of an actionable plan to help companies formulate and implement an effective synchronized value chain strategy. By creating cross-functional, demand-driven business processes, closely collaborating with customers, and putting IT systems in place that facilitate the transparency, accuracy and timeliness of data, an organization can be on its way to becoming a globally agile enterprise. 2 Insight White Paper

3 Synchronized value chain techniques: Key to effective supply chain management Precisely because the supply chain has become one of the most sophisticated and networked operations within an enterprise, the stakes involved in managing it effectively have increased exponentially in recent years. Without a well-executed supply chain strategy, organizations risk incurring high material and order expediting costs, suffering from excessive or insufficient capacity, succumbing to service and margin pressures, and experiencing difficulties shifting production and warehousing facilities to lowcost locations. Most significantly, many organizations find themselves focused on expediting product shipments rather than implementing synchronized value chain techniques that help corporations both sense demand signals and respond to them appropriately. Some of the major stumbling blocks many organizations face with their current supply chain operations include: Poor forecasting Everything begins with the sales forecast. Without an accurate one or the flexibility to manage exceptions and adjust the forecast quickly when demand signals indicate a potential problem organizations will be scrambling constantly to keep the supply chain running smoothly. Despite the fact that forecasts are by nature uncertain, many organizations have failed to develop the competency needed to cope with that uncertainty. For example, one high-tech manufacturing company experienced constant supply chain disruptions because a key customer s quarterly estimates of its need for product were consistently off target. Although contractually the manufacturer was only required to provide sufficient product to meet its customer s forecast, the sales team never enforced those terms. Thus, despite the fact that production was operating according to plan, the misread forecasting signals meant they still weren t meeting the actual demand. The firm ended up devoting meetings that should have been spent formulating supply chain strategy to figuring out how to allocate insufficient inventory among all its customers quite literally robbing many accounts to meet the needs of one and missing many service level requirements in the process. Failure to do a forecast reality check The demand-planning process must be capable of reacting in near real time to changes in actual demand. This can be done by monitoring point-of-sale (POS) data, which is obtained daily from the retailer or wholesaler, and using it to update the forecast. In addition, the sales team needs to monitor sales trends as well. Because they are closest to the customer, they are in the best position to determine why demand is not conforming to expected patterns. If sales are below forecasts, this indicates a problem with the sales plan, which should be adjusted as soon as possible; if sales are above expected, the organization must ramp up production or notify replenishment to make sure there are enough products to meet customer demand in the pipeline. By creating cross-functional, demand-driven business processes, closely collaborating with customers, and putting IT systems in place that facilitate the transparency, accuracy and timeliness of data, an organization can be on its way to becoming a globally agile enterprise. Siloed planning The sense aspect of sensing and responding effectively begins with capturing realistic demand signals from the customer. The respond portion involves translation of demand signals to executable processes throughout the enterprise. However, many organizations are still planning and communicating within functional silos, and are not capable of aligning synchronized value chain activities. Even if sales is able to sense missed forecasts, if they do not communicate that to production or replenishment, the organization will not be able to respond effectively. Moreover, if the entire supply chain function doesn t understand that forecasts and demand plans are just that forecasts and plans and, therefore, that they will inevitably change, it will not be flexible enough to function adequately. All functions need to be on board, and even then the plan will only be as good as its weakest link. Insight White Paper 3

4 Cross-Industry Supply Chain Long lead times Many companies are taking advantage of the low-cost opportunities for sourcing, manufacturing and warehousing made possible by globalization. Yet the fact that these operations are increasingly scattered geographically is causing longer lead times and impeding the ability for companies to respond or react to disruptions or changes within the product life cycle. When problems arise such as the introduction of substandard products into the value chain or failures to comply with the complex web of regulations proliferating throughout individual countries the likelihood of a catastrophic disruption is far greater. There are three ways that forging intimate relationships with customers provides companies with supply chain advantages. The first is that such relationships can mitigate the risk of demand fluctuations in the short term. The second is that both organizations the manufacturer and the customer can easily adapt to bigger disruptions that require more extensive changes to their respective supply chains. Finally, customers can help with product design and innovation, and make decisions about the timing of new product introductions and product sunsetting in a way that can help firms be more attuned to market needs. Miscommunication If upstream demand sense signals are not communicated, this not only impacts procurement, production and logistics but also has significant impact on new product development and a host of other support functions. Few organizations have created the cross-functional planning teams necessary to bring the supply chain out of a vacuum. The role of sales and marketing is to draw the customer into the process by obtaining market intelligence via customer forecasts, projected sales trends or even customer participation in the demand planning process. The demand plan is then used to drive the sales and operation planning (S&OP) process where production capacity is allocated to meet demand. In addition, sourcing personnel must be continuously communicating with suppliers to analyze trends and predict where disruptions may occur. Effective synchronized value chain strategies There are a number of ways that organizations can begin to formulate a synchronized value chain supply chain strategy. The most effective of these include: Establishing an S&OP program A robust S&OP program provides a platform for proactive business management. It is also an excellent way to jump-start a supply chain improvement journey. In the absence of a mature S&OP process, it is hard for companies to identify the supply chain issues across supply chain functions. Once a collaborative forum for planning exists, it can be used effectively to drive supply chain improvement initiatives. Collaborating with the customer Currently, most firms create forecasts by reviewing the previous year s sales and increasing or decreasing estimates based on what they think market trends are. Yet a much more effective strategy is to have frequent and regular conversations with customers. There are three ways that forging intimate relationships with customers provides companies with supply chain advantages. The first is that such relationships can mitigate the risk of demand fluctuations in the short term. The second is that both organizations the manufacturer and the customer can easily adapt to bigger disruptions that require more extensive changes to their respective supply chains. Finally, customers can help with product design and innovation, and make decisions about the timing of new product introductions and product sunsetting in a way that can help firms be more attuned to market needs. Facilitating cross-functional internal communication Internally, processes have to be in place to make sure that demand signals get accurately passed on via cross-functional processes that drive swift product production, inventory replenishment and delivery to customers. If the sales function isn t communicating with supply chain, production planning and other internal professionals and there are plenty 4 Insight White Paper

5 of places where the communication loop can break down all other supply chain efforts will come to naught. Additionally, every organization must strive for the one number forecast. There is no room in supply chain operations for arguing whose data is correct. Planning all year, not just once a year The planning cycle should not end once the forecast has been converted to a demand plan. The cross-functional team should frequently revisit the forecast to adjust the demand plan at regular intervals. These sense signals will help manufacturing or replenishment to respond more effectively; a nice added benefit is that forecasting will generally improve, as will customer-service levels. Getting data in order Data is the core of any type of supply chain management strategy. The ability to capture and collect relevant information such as POS data in real time or near real time, verify its accuracy and share it in a timely manner with all stakeholders is an essential aspect of becoming a globally agile enterprise. Master data management is a key part of this and involves taking a close look at the cleanliness of data and the processes for maintaining the accuracy of it. How is it getting into an organization s system? What procedures are guarding who can add, delete or change supplier, customer and product information? Global synchronization is another piece of the data puzzle. By putting into place a single global standard that allows an organization to align data formats with those of its suppliers and in turn allows those suppliers to sync data with their customers organizations can build a systemic process that allows them to judge the accuracy of their demand signals on a daily or even hourly basis. Getting cross-functional leadership buy-in Perhaps most significantly, the supply chain organization still does not have senior-level commitment. Today, inventory and physical supply chain assets tend to be owned by a director-level individual within operations. Yet, in addition to a C-level executive to champion it, the supply chain strategy must be supported by senior managers throughout sales, manufacturing, marketing and IT. It is essential that support cascade below the C-level through senior management ranks. Until line-of-business owners play a more active role in developing and executing the supply chain strategy, any initiative to transform it will be at risk of failure. Benefits of a synchronized value chain strategy There are a number of significant benefits to implementing a synchronized value chain strategy. Among them: Higher customer-service levels. A unified demand plan created through cross-functional consensus can result in significantly higher perfect-order fill rates. In addition to the quantitative metrics improvement around customer service, a mature synchronized value chain capability delivers qualitative benefits, such as improved decision making, better organizational relationships and greater control of the business. Reduced supply chain costs. Effective forecasting and inventory improvement and capital asset utilization together have the potential to lower costs dramatically. By reconciling supply network design, policy and processes with capacity considerations and key supply chain constraints, companies can reduce expenses such as having to pay for premium freight or make rush purchases. Global synchronization is another piece of the data puzzle. By putting into place a single global standard that allows an organization to align data formats with those of its suppliers and in turn allows those suppliers to sync data with their customers organizations can build a systemic process that allows them to judge the accuracy of their demand signals on a daily or even hourly basis. Leaner inventories. The role of inventory is to help maintain high customer-service levels in the face of the uncertainty of demand. By forging collaborative relationships with customers, leveraging POS data and instituting S&OP, organizations reduce uncertainty and make it possible to trade information for inventory. This cuts storage and handling expenses, reduces costs related to product obsolescence and returns cash to the business while simultaneously providing for faster throughput across the supply chain. Insight White Paper 5

6 Cross-Industry Supply Chain Faster time to market. A better internal planning function and more effective collaborative planning with all partners in the value chain enhance both new product launches and prelaunch promotions. Faster response to market pricing pressures. By reviewing competitor products and pricing to determine areas of opportunity and weakness, organizations can translate demand planning and competitor information to portfolio rationalization, promotions and pricing of products. The synchronized value chain framework At BearingPoint, we believe that successfully matching demand signals to the supply network rests at the heart of operating a globally agile enterprise. The sense part of the equation requires solid forecasting processes involving continual interaction with sales and customers and must include built-in flexibility triggers based on forecasting fluctuations. The response involves real-time communication, seamless coordination with suppliers and organized exception management. At BearingPoint, we believe that successfully matching demand signals to the supply network rests at the heart of operating a globally agile enterprise (Figure 1). The sense part of the equation requires solid forecasting processes involving continual interaction with sales and customers and must include built-in flexibility triggers based on forecasting fluctuations. The response involves real-time communication, seamless coordination with suppliers and organized exception management. Three foundational elements bring all this together: Leadership alignment and involvement. Not only must executive leadership provide guidance and support, but senior line managers must also play a critical role in coordinating synchronized value chain techniques effectively by helping their teams resolve barriers and effectively communicate across and outside the organization when needed. Cross-functional collaboration and training. There are a number of departments involved in the seamless execution of response to demand signals with the right supply. Effectively aligning operations, sales, marketing, manufacturing and IT is key to doing this. Such alignment requires training and education, as well as cross-collaboration during the normal course of operations. Advanced planning technologies. Technologies such as advanced planning systems functionality have advanced considerably over the past 10 years to include sophisticated business optimization, business process monitoring and event management in addition to the basic planning capabilities of forecasting, demand-supply planning, detailed scheduling and allocation. Although Manugistics, i2 and SAP Advanced Planner and Optimizer (SAP APO) have become mainstream for planning, managing exceptions and reporting results, they are no longer optional in order to compete, particularly given the rapid rise of globalization. Moreover, not every company needs all this functionality right away. First, they must clean house and put the right processes and organizational alignment in place before implementing the more sophisticated technologies. 6 Insight White Paper

7 Figure 1. The synchronized value chain framework Predicting demand, responding effectively and balancing the uncertainty in between requires cross-functional excellence across a number of key foundational elements both to sense demand and to respond to it effectively. Next steps Organizations struggling with supply chain issues can take a number of actions toward developing synchronized value chain capabilities. Start with a pulse check Businesses should begin by evaluating the current state of their abilities to meet customer demands. What challenges are they facing in this regard? Are they losing customers or market share due to poor logistics? Are their abilities to forecast or quickly correct imbalances poor? Do they have challenges on the supply side, making it difficult to meet the well-forecasted demands? Do they face obstacles in getting timely, accurate information for decision making? A first step is for an organization to diagnose its primary issues to determine where to focus its improvement initiative. It must then determine what its goals are relative to sensing and responding and isolate the gaps from its current state. Finally, it must be able to align its objectives to that of its overall business strategy. Retaining market leadership through value chain strategy A leading manufacturer of mechanical and electronic products was at risk of losing market share due to its failure to meet customer demands consistently. The firm lacked a clear policy for prioritizing the needs of its most important and profitable customers. In addition, non-standardized global fulfillment processes and little to no visibility of manufacturing capacity exacerbated the problem. With BearingPoint s help, the firm implemented an integrated value chain strategy using a phased approach that used advanced synchronized value chain techniques. This dramatically reduced the company s operating costs, improved product availability and enhanced long-term capacity planning. Most importantly, the firm gained the visibility it needed to synchronize supply with demand. Insight White Paper 7

8 Cross-Industry Supply Chain Initiate a collaborative and measurable improvement program A synchronized value chain strategy cannot be driven solely by the supply chain organization. Instead, senior-level executives from across the enterprise including research and development, engineering, manufacturing, sales, marketing, IT, and operations must participate in supply chain development and execution activities, as well as in strategic planning. To be effective, a business case for each stakeholder both internally and externally demonstrating that all participants will reap tangible benefits from their efforts must be in place. Collaborative supply chain planning boosts profitability An electricity distribution firm operating in a regulated environment in a rural market was plagued by inaccurate forecasts for the materials it needed to build and maintain its network and a technology infrastructure that hadn t been configured to meet the specific needs of its business. Inventory levels of these materials were unacceptably high, as were the costs of supporting them. BearingPoint helped the firm implement an integrated material demand forecasting process based on a standard sales and operations planning (S&OP) methodology that used synchronized value chain techniques tailored to address the unique challenges of a regulated industry. By developing a collaborative planning process that reconciled input from market development, operations and customerservice departments, the utility was able to create a significantly more accurate single number forecast. This, in turn, allowed it to formulate a supply-anddemand plan that closely aligned product supplies with highly variable market demand. BearingPoint also helped the firm design and implement technology tools that supported the new business processes across all product and market segments. The firm was subsequently able to slash inventory levels and dramatically reduce the amount of capital tied up in the product pipeline without compromising customer service. To accomplish this, organizations must coordinate among the key stakeholders within and outside their organization to initiate an improvement program, and set specific measurable and incremental goals that focus specifically on what they need to change. Match IT tools to supply chain processes A robust synchronized value chain process architecture should drive technology functionality and other supporting components such as organizational roles and responsibilities, metrics, and business rules. Too often the technology comes before the process architecture. World-class processes for collaboration, demand planning and S&OP cannot be supported by legacy transaction systems or manual workarounds. Advanced planning and scheduling (APS) software application tools allow organizations to build plans that leverage collaboration, respond rapidly to changes in demand, streamline inventories and structure operating plans to improve customer service and reduce cost. Organizations thus must first determine what process changes need to be made to achieve their goals. Then they must assess their technology capabilities and address their critical functionality needs by supplementing current systems with more innovative APS solutions. Build collaborative relationships with trading partners By educating their customers, carriers and suppliers, it modifies all trading partners understand the benefits of a collaborative process that drives waste out of the system and assist everyone in sharing the gains. This involves first documenting expectations in terms of the role of each trading partner and detailing the benefits they can expect to gain. Then, businesses can design and implement a process to share demand information across the supply chain. Set and achieve incremental goals Rather than attempting to reinvent a global supply chain strategy overnight, organizations should strategically look at the big picture but tactically start with smaller projects. By focusing at first on the low-hanging fruit and delivering results in quick stages that generally take between three and six months, organizations can build upon actual measurable wins and get enterprisewide buy-in for proceeding on a larger scale. Insight White Paper

9 Conclusion: Supply chain transformation Although most organizations initially treat supply chain management as a technology problem only, many have yet to understand that an effective synchronized value chain strategy also requires organizational and business process transformation. To be effective, supply chain optimization is an ongoing journey, not a discrete objective. And change management is a strategic imperative. The key challenge is obtaining buy-in to such a transformation from all key stakeholders. Once that buy-in is achieved, it is essential to get senior-level support across all organizational functions that goes beyond strategy development to actual hands-on involvement in execution. Transforming the business into a truly globally agile enterprise is the real prize. By developing a common view of demand forecast and order commitments between value chain partners, companies can build a consensus of supply capabilities based on collaborative forecasts. This, in turn, will allow businesses to generate global demand plans based on seasonal demand variations, historic performance, expected developments and performance at all organizational levels. By doing this, companies are taking an important step toward building a globally productive and responsive enterprise. Advanced planning and scheduling (APS) software application tools allow organizations to build plans that leverage collaboration, respond rapidly to changes in demand, streamline inventories and structure operating plans to improve customer service and reduce cost. Insight White Paper 9

10 Cross-Industry Supply Chain About the authors Thomas Wrobleski is a managing director leading the North American Supply Chain and Sourcing practice for BearingPoint. He has more than 18 years of management consulting and industry experience and specializes in supply chain and sourcing strategy, supply chain planning, supply chain execution, distribution and logistics optimization, replenishment, sales and operations planning, radio frequency identification strategy, supply chain systems, and global data synchronization. William Buz Bedford, CPIM, is a senior manager in BearingPoint s Supply Chain practice. He has more than 15 years management consulting experience. He specializes in supply chain strategy, supply and demand planning, network and inventory optimization, distribution and logistics strategy, replenishment, production and inventory planning, sales and operations planning, radio frequency identification strategy, and global data synchronization. Tom Harwick, CPIM, is a manager in BearingPoint s Department of Defense Mission- Related Services practice. He has more than 25 years of supply chain management experience, including 20 years of consulting experience. He specializes in supply chain strategy, demand and supply planning, sourcing and procurement, business process development, military logistics, and performance management. Sunil Sheoran, CPIM, is a manager in BearingPoint s Supply Chain practice with more than seven years of management consulting experience across multiple industries. His areas of expertise include development of supply chain strategy, radio frequency identification strategy, integrated planning operating models, sales and operations planning, supply chain transformation program management, business cases, and supply chain performance management. 10 Insight White Paper

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12 Helping our clients get sustainable, measurable results BearingPoint is a leading management and technology consulting company serving the Forbes Global 2000 and many of the world s largest public services organizations. Our more than 17,000 passionate, experienced consultants help organizations around the world solve their most pressing challenges, day in and day out. Through our collaborative and flexible approach, we help our clients get practical, sustainable, measurable results, make the right strategic decisions and implement the right solutions. We are BearingPoint, management and technology consultants. To learn more, contact us at BRNGPNT ( from outside the United States and Canada), or visit our Web site at BearingPoint, Inc International Drive McLean, VA BearingPoint, Inc. All rights reserved. Printed in the United States. BearingPoint is a registered trademark of BearingPoint, Inc. or its affiliates in the United States and other countries. Any other marks are the property of their respective owners. C USNY1100 Insight White Paper