As Director of Product Strategy at HighJump Software, I am responsible for crafting the strategic direction of our products by taking into account all of the external and internal requests/ideas/trends. I hope this blog will provide insight into specific areas of supply chain software.
Having graduated from Duke, I am an avid basketball fan and support all of Minnesota’s underachieving sports franchises.
Why am I happy that people don’t consider last Monday night’s college basketball game the greatest final ever? Luckily for me Gordon Hayward’s shot glanced off the rim and backboard allowing Duke to capture our fourth national title. Hats off to a great Butler team and a phenomenal tournament.
Now onto the topic of inventory. If you ask most CFOs, they would point to the balance sheet and tell you the dollar amount of inventory on the books. It seems like it should be an asset; it is something your company spent time and money to create. Heck, we make a living selling millions of dollars of software and services so companies can better manage and track their inventory with warehouse inventory management systems.
So why is inventory not an asset? Why does Dell dictate their suppliers locate their warehouses literally across the street from their facilities? Why has the concept of consigned inventory become popular in the retail world? Why do many companies such as Amazon and Target not ever inventory the item but allow the manufacturer/distributor to drop ship directly to the end customer? All of the above practices allow the company with power in the supply chain to delay or completely remove the necessity to take actual ownership of the physical product. Inventory has become the proverbial hot potato. No one wants to take ownership of the inventory and if they are forced to, they want to own it for as little time as possible. If inventory is an asset, then why does no one want to own it?
In almost every industry, the day the brand new product comes off the manufacturing line is when it is most valuable. Every week, day, minute afterwards the inventory is at risk of losing value:whether it is actual expiration dates/best before dates for food products, technology obsolescence as everyone is pushing for the next generation product, or the latest edition update to a college text book. This is why FIFO (first in first out) is such a popular pick algorithm as it rids the business of the asset that is declining the fastest and keeps the product with the longest runway on the shelf.
Another reason inventory is not an asset is the working capital it ties up. Every piece of inventory your company has in its possession is money that could potentially be used elsewhere in the business. The company loses the “optionality” to find the best return those dollars could generate. While it is quite possible putting that money into inventory of a hot product is absolutely the right decision, once the decision is made you cannot get that dollar back and put it into R&D or hiring a new person. This makes it absolutely essential that your company watch closely your investment in inventory.
It is surprising that many companies have not reduced the amount of inventory they keep in their supply chains. In a recent post by Dan Gilmore at Supply Chain Digest, he details by industry how many companies have not appreciably reduced their inventory since 2004. In a day and age when investment of every dollar matters, maybe people need to take a closer look on how to optimize their inventory levels throughout their extended supply chain. Supply chain management software solutions can help. Au revoir, Go Duke!
Related Posts:
Where is Your Inventory? Even Today Some Companies Still Don’t Know
All of the Inventory I Want to Ship Is Sitting In My Yard!
While at Duke I took a graduate course entitled “Environmental Economics”. It was a fascinating course that detailed ways we could assign value to public goods/externalities (air, water, public parks, etc.). One of the concepts we discussed was an approach to limit greenhouse gas emissions via a similar approach to the current Cap and Trade legislation for carbon emissions. First to level set for those of who are not familiar with the Cap and Trade, Wikipedia defines it as:
In the classroom this seems like a great approach, but after further consideration I believe there are several flaws with this approach:
Another solution, proposed by Thomas Friedman in his book Hot, Flat, and Crowded has more appeal. He proposes setting a floor on the price of a barrel of oil, for example something in the range $125 - $150/barrel (You could do something similar with the price of a gallon of gas). The price floor could be tied to CPI so we avoid another AMT debacle. The price of oil would still trade at the market rate, but if the market rate is below the price floor then the company buying the oil would have to pay the price floor. The remaining amount would be the tax collected. If the market rate is above, then no tax would be collected. This tax would go specifically to funding projects/start-ups/etc. that are focused on either alternative energy sources (solar, wind, etc.) or on making existing energy sources more efficient (i.e. smart grids, high efficiency heating/cooling, etc.). Not only is this transparent, it removes a high degree of variability from a major cost center for supply chains. Granted either approach will result in cost increases, but with the price floor the cost increase will be known and able to be projected with a lot more certainty. Shippers could predict total freight spend with more accuracy since the accessorial fuel surcharge from the carrier should be less variable. Another important benefit is that this will spurn innovation and investment to develop viable alternatives. No longer will investors and large corporations have to worry whether oil oscillates between $40 - $80/barrel but will know if they can make a more cost-effective alternative if oil is at least $125/barrel it removes risk from them deciding to fund a project. Many of these projects require billions of dollars of investment and long time horizons, without some additional certainty on their viability they become almost impossible to fund.
I know there are several more facets and trade-offs to this debate, but let us move forward with a solution that is transparent, easy to administer, and removes uncertainty to clear the way for additional investment.
In a recent letter to their suppliers (full letter here courtesy of ARC), Wal-Mart outlined a new policy about the enforcement of the MABD (must arrive by date). The gist of the policy is that all purchase orders (POs) must arrive within a four day window preceding the MABD. If a supplier is out of compliance over a period of time, they will be subject to a fine which equates to 3% of the cost of goods sold (COGS). How is that for a chargeback? While it is common place for retailers to have some chargebacks in place if certain conditions are not met (labels, timing, packaging, etc.), this new program raises the risk and cost exposure to shipping to Wal-Mart. Wal-Mart’s go to market strategy is largely competing on price, and to achieve their price superiority they lean heavily on suppliers to lower their COGS so they can pass some of that savings onto consumers. Many suppliers will have no choice but to accept these terms since Wal-Mart represents so much of their business, but this new policy will make it less profitable to sell their wares to Wal-Mart.
I wonder if Wal-Mart cannot see the proverbial forest for the trees when it comes to their extended supply chain costs? Anytime we chose to measure/manage/incent on a metric it is quite likely to improve. I have no doubt that the number of POs that arrive within the MABD window will increase, but at what cost? Just last Spring when Best Buy was reporting their Q1 financials they stated they lost potential sales because some vendors had simply not supplied the expected merchandise. I can see a similar situation unfold in the case of Wal-Mart. The more constraints that are introduced into a situation, the less the situation can be optimized. If the supplier has these strict delivery windows they might be less inclined or dis-incentivized to consolidate loads. This could result in out-of-stock conditions on the store shelf, something that clearly costs Wal-Mart money. To the degree this new policy raises the overall cost for the suppliers the less they will be able to work with Wal-Mart on additional price concessions or Wal-Mart could push them to the brink of bankruptcy, neither of which is a good outcome for Wal-Mart.
While I am all for management of key metrics, it is always important that the metrics enforced in one division/department support the overall corporate strategy otherwise a sub-optimal result is likely. This new policy is now in effect as of February 1, 2010. It will be interesting in the coming months to see the impact this has on Wal-Mart’s extended supply chain and if it goes the way of the RFID mandates…
Just when we thought we could call the Green Bay Packers playoff chances dead and anoint the Vikings as the class of the NFC….things change.
With Wal-Mart’s quiet back peddling on their initially aggressive RFID initiative or attempted Tiger Woods-esque call for privacy on the potential benefits from their investment, RFID has gradually slid into the trough of despair. Many technologies become over-hyped as service providers and consultants proclaim they can solve virtually any problem with the latest and greatest technology. Within the supply chain world no technology capability has been more hyped in the last ten years than RFID. But as is the case with many technologies that do not live up to the hype, companies start to shun them and become instantly dismissive of the potential benefits the technology could provide. Should companies put a stake in RFID? Is it dead?
I would argue that RFID will come out of the trough of despair and provide real/tangible value to companies….if they deploy it correctly. In the past companies have done one-off/point solution projects that provided little or no benefit, other than fulfilling a compliance requirement. A recent study by four university professors entitled “Empirical Evidence of RFID Impacts of Supply Chain Performance” offers hope to RFID enthusiasts. One of the study’s key findings was that for an organization to realize significant value from RFID required that the technology be deployed across the entire business operations or supply chain. A key point this study highlights is even deploying RFID throughout your company is unlikely to deliver significant value unless you are working closely with your extended supply chain (suppliers, manufacturers, logistics service providers, etc.). In order to remain competitive companies will be required to collaborate and work more closely with their supply chain partners. This will be a pre-requisite for companies looking to really leverage the value of RFID (in a non-closed loop scenario).
I recognize that I just advocated for deploying RFID throughout your entire extended supply chain but a key caveat: don’t apply it blindly. It is important that you consider the complete spectrum of data capture and communication options. There are several different technologies that can be used for data capture. Starting at the most simplistic pen and paper have been used prior to the adoption of barcodes. In most cases, companies have advanced beyond that to use one-dimensional barcodes, two-dimensional barcodes, multi-part barcodes, voice technology, etc. You need to evaluate if RFID (passive or active) is the right data capture and communication solution for the use case(s) you are considering. If you determine RFID is the right technology for the use case, per my earlier point above, make sure you examine the touch points of the process throughout your extended supply chain.
One last note that supports RFID’s return from the dead is the fact that the cost of the technology is becoming cheaper. As more RFID tags are produced, manufacturers gain additional economies of scale and can pass along those savings to buyers. In addition there have been several advancements in reading the RFID tags which in some cases have dramatically lowered the hardware costs. While this trend still needs to advance significantly to open up more potential use cases, it is trending the right way for greater adoption of RFID.
All in all, RFID has hit a sizable bump in the road like the Vikings did last week, but I don’t expect it to derail its long term prospects (or playoff chances).
When reviewing supply chain best practices, visibility to inventory levels throughout the different nodes in your supply chain should be one of the practices your company has embraced. This allows your company to be more nimble and still meet customer service levels when supply chain disruptions and exceptions occur. RSM McGladrey recently released their 2009 Manufacturing and Wholesale Distribution Survey (registration required) which interviewed 923 leaders of United Sates manufacturing and wholesale distribution companies. Over 80% of the respondents held a C-Level position at their company. This report uncovered some interesting opportunities for improvement across the different functional areas of the company but I will focus on the supply chain and information technology responses.
An overall theme of the report is the global structure many of the respondents have established as two thirds of the companies source products internationally and 62% export products to at least one foreign market. However, the study notes:
“Approximately 25 percent of companies indicate information flow
and inventory management information from their company’s supply chain consistently meets their business needs only some of the time or not at all.”
This is a fairly large percentage of companies that do not have the necessary inventory visibility to run their business. As has been stated many other places the largest cost in virtually every supply chain is the amount of working capital that is tied up in raw materials, work-in-process, and finished goods. If a company does not have good visibility to inventory levels, that generally drives up the amount of inventory required to continue to meet desired customer service levels. This is a clear area where modern supply chain logistics software can add significant value by providing more accurate and real-time visibility to inventory levels throughout the supply chain.
Another area of focus about the study was on the topic of information technology. Just like in the area specific to supply chain, there are several areas for improvement:
The above statistics show the rigidity of many legacy systems that hinder rather than enable process improvements and do not provide easy and effective ways to make data available for internal or external consumption. If your company is like the companies above, this provides a key list of criteria to evaluate solutions against when you are upgrading your information technology infrastructure to make sure you can meet the needs of today but easily adapt to the new requirements of tomorrow.
When you hear a news story about a supply chain issue at your favorite retailer, you might think that it is not your problem, but you might want to reconsider. According to the recent 2009 Global Retail Theft Barometer Report from the Center for Retail Research, United States retailers lost an astounding $42.2 billion last year due to retail crimes such as shoplifting, employee theft and supply chain fraud/errors. The $42.2 billion breaks out into the following main categories:
That $6.8 billion a year translates to over $70/year of additional cost the average family pays because your retailers do not have the appropriate technologies and processes to reduce these errors and catch instances of fraud. All of the costs above translate into higher prices for consumers since the retailer needs to cover the costs to stay in business. The report estimated that the cost of store crimes to consumers is over $435 for the past year. These are meaningful amounts for most families and might warrant the question: what are you (retailer) doing to make your supply chain more secure from source to consumption at the retail shelf?
While I am sure many retailers are painfully aware of the statistics, these numbers should be a wake-up call for many retailers about the need for additional investment in track and trace technologies and supply chain logistics software. An important fact this study highlights is that not only is shoplifting a major issue but having your own employees steal from the company is a problem that needs a better solution than many retailers have today. With improved supply chain visibility and a movement toward real-time inventory availability on the store shelves, retailers will have better information to start uncovering areas that merit additional investigation. At these levels of loss many companies will have a compelling ROI case.
Next time you speak to a friend who works at one of your favorite retailers, you might want to ask if they are investing enough in supply chain technology and visibility from store shelf to purchase. It could end-up saving you some money.
I know most sequels don’t live up to the original (Lord of the Rings: Return of the King, being a recent exception) but there was a lot of interest from the first post I thought it warranted another chapter.
One question I was asked was: what are the other game changers that Vitasek and Dittmen have identified? You cannot have a top ten list and only talk about one. While I encourage you to read the full report, the top ten are (in no particular order):
What struck me about several of these game changers is the need to embrace technology permeated throughout many of the themes. Whether it is a collaborative planning and forecasting (CFPR) systems, interlinked execution software, network optimization tools or risk management models; there is a need to invest in supply chain logistics software. Companies cannot be best in class and in some industries will not be able to survive without having a strong technology backbone that captures the necessary information and provides the tools to make important strategy decisions.
I encourage every company to take a hard look at their supply chain technology infrastructure and domain knowledge of these solutions so they can identify gaps and the action plan to address. Then your company won’t get surprised like the orcs did when the king/economy returns…
Some of you might ask: what is InterBev 2010? InterBev is the largest North American conference for non-alcoholic beverages put on by the American Beverage Association (ABA). Due to HighJump Software’s leadership position in the direct store delivery software market, I recently took part in the InterBev Advisory Committee. This committee is comprised of the industry leaders throughout all facets of the beverage industry.
After attending I came away very energized by the prospects for an excellent conference. It is clear that the ABA is committed to creating an innovative event with a lot of thoughtful consideration to making the event valuable for attendees. We have all probably been to more conferences and tradeshows than we would care to remember but they are looking to change the traditional recipe. While I don’t want to give away the secret sauce, I think you will see a lot more interactive sessions and targeted ways for you to network with specific companies in your sphere of the beverage ecosystem. Just like many companies supply chains that decide to leverage technology to take their operations to the next level, the ABA has some exciting projects underway to deploy technology that will allow the attendees to maximize the value of an onsite event.
Save the date. The conference is September 22-24, 2010 in Orlando Florida. See you there!
A recent report was released by Kate Vitasek and J. Paul Dittman at the University of Tennessee about ten “game changers” companies need to consider as they begin executing on their post-recession plan (full report here, registration required).
One quote really struck me was by Dittman who is a former supply chain executive at Whirlpool: “Firms who continue business as usual, rather than fundamentally altering or at least updating their supply chain strategy are truly playing dice with their future.”
Over the past several months we have seen a broad focus on cost reduction and companies “getting lean.” I have seen several cases where deploying technology could further assist in reducing costs, but because of the initial investment that was required the projects were put on hold. I think the above report is a good call to action for supply chain executives to take a step back and start to think beyond the micro-cost management of today and what they will really need to succeed in tomorrow’s environment. In some cases your company might already find themselves falling behind your competitive set. There are other companies that have already been investing during the downturn because they knew their peer group could not so that as soon as the global economy turns they could capitalize.
One of the game changes Vitasek and Dittman focus on is “The Mandate for Measurement.” They stress the need for well thought-out supply chain metrics that tie to corporate strategy as well as give a good view into the health and performance of your supply chain operations. Just as we did with our HighJump Performance Advantage product; they recommend incorporating industry benchmarks into your key performance indicators (KPIs) so you can understand your relative performance. Key metrics to consider are: on-time shipments, order picking accuracy, order fill rates, and back orders percent (of total orders).
Hopefully your company has already looked at how the supply chain can and will be required to change the game for your business.
As with any new technology offering, new terminology runs rampant and leads to confusion. Before we tackle the question above, a quick refresher about cloud computing. Cloud computing is defined by the Burton Group as “The set of disciplines, technologies, and business models used to deliver IT capabilities (software, platforms, hardware) as an on-demand, scalable, elastic service.” Now that we have level-set on that definition; let’s dive into the above terms for some clarification.
Private Cloud – if you already run VMware, Xen or another virtualization technology then you are already familiar with one of the key technology enablers of cloud computing. If you have virtualized your server farm to get better utilization out of existing servers and scale applications as needed then you could be considered to running a private cloud.
Public Cloud – I have already discussed the different types of public clouds available in a previous post. These are clouds outside of your corporate network and can be used for excess computing capacity, direct access to operating systems, development environments or on-demand business applications.
Hybrid Cloud – now that we have tackled the two easiest definitions, what is a hybrid cloud? As you might guess a hybrid cloud is a mix of the above. You might want to interlink your private network and public cloud if you needed additional computing capacity and could tap a hardware infrastructure public cloud as needed. This concept of handling spikes in computing capacity is known as ‘cloud bursting’. There are some technology considerations such as running the same hypervisor on both environments and matching-up server chip sets that can make this challenging, but improvement is expected in this area. Another reason to consider a hybrid cloud approach is to move new applications to the cloud while keeping legacy applications internal. For older systems that have several components and touch points to other systems it can be very tricky to successfully move that to a public cloud. In addition security is still a big concern with many companies, and some will opt to move certain pieces of an application to a cloud while keeping all the sensitive data behind the company’s firewall.
Hopefully that helps give you a little better understanding of which cloud is right for you. As you start to look at it in the context of your organization you will probably find that all of the above could be applicable depending on the specific business problem you are trying to solve. As a reminder our user conference is next week in sunny Orlando, and I would welcome the chance to sit down and discuss your company’s approach to cloud computing.
I recently visited one of HighJump’s manufacturing customers in Iowa. Their shop floor makes up several product lines, is very complex and spans over 900,000 square feet. They run our manufacturing execution system software (MES) to manage the shop floor and direct over 600 employees. While their throughput is down due to the macro-economic conditions, it was refreshing to see complex manufacturing alive in the United States.
Every time I read an article about manufacturing, the drum seems to get louder about manufacturing getting outsourced and its inevitable departure from the United States. A recent Business Week article postulates that we might have entered into a permanent ‘invented here, industrialized elsewhere’ environment. While I do not necessarily disagree for industries that have already completely left the cost to bring them back will be too high; I think there are other factors to help mitigate the transfer of industries that still have manufacturing in the United States:
Regulations and Protectionist Policies
Increasing regulations and risk of protectionism will drive up the costs of manufacturing elsewhere. Contrary to the promises of the G-20 about commitments to free trade, we recently slapped a 25-35% duty on tires from China. As the economic recovery starts, if countries resort to more protectionist policies this will need to be factored into an outsourced manufacturing decision. In addition we see additional regulations around imports; 10+2 being the most notable regulation scheduled to go live early next year. While there could be long-term savings from automation, the data collection effort can be significant and difficult depending on the technology infrastructure of companies in the supply chain so the corresponding upfront cost is not insignificant.
Demand Variability
Many companies moved manufacturing to Asia because of the significant cost benefits. One of the common trade-offs was the long lead times to ship the product to the United States. For companies that have a hard time predicting future demand (I am guessing there are a few out there) this creates a situation of either losing out on sales or loading up more inventory at different points in the supply chain. The more working capital tied up in inventory; the less money there is for the rest of the business. I think you will see more companies move toward a ‘near-shore’ strategy where they move non-strategic manufacturing to lower cost countries that are closer to the target market. In the case of the United States, Mexico fits the bill. Our customer has done exactly that by opening up a manufacturing plant in Mexico for the lower-end product lines while keeping the strategic product lines in the Midwest.
Government Incentive
One factor that has been absent up to this point but that I would greatly applaud would be for the US government to perform a review of our manufacturing capabilities and determine which are of strategic importance from a national security and ability to innovate standpoint. Then provide the right incentives to keep/enhance our core competencies in these areas, it sure beats the short-term incentive to pay people to pick up a shovel to build a road.
Hopefully our customer is not the only company that can make the proper assessment of what is strategic and what is not when it comes to manufacturing capabilities.
As an environmental engineer at Duke University, I studied different types of clouds and the mechanics of their movement in the sky. At that time I could just look at a cloud and tell the type of atmosphere and weather conditions that were present. While the science that went into that analysis is now far beyond me, it appears clouds are again a hot topic! If you read anything in business technology you are likely to see several mentions of cloud computing. Currently there is not a more over-hyped and thus confusing term. Several companies are offer cloud based solutions; well what are they really providing?
I recently attended a wonderful seminar by the Burton Group (http://www.burtongroup.com/) on the topic of cloud computing. I found their classification to be very crisp and straightforward. They classify cloud offerings into one of four categories:
I think the above classification is extremely useful before your company goes rushing into the cloud. Take the time to understand what your real goals are for pursuing a cloud based solution and then find the right sub-set of vendors that can meet your requirements; otherwise you will spend a lot of time, like I did in college, just looking at the clouds.
As the war rages between best-of-breed ISVs such as ourselves and the ERP companies, a key battle is always how the two systems communicate? I have heard many corporate CIOs dictate to their team that they will deploy the ERP’s WMS because it is “pre-integrated.” While this is more or less true depending on the ERP company, it is also true for companies such as ourselves that also have pre-built integration to many of the leading ERP solutions. In addition you don’t run the risk of ending up in ‘vendor hell’ (a topic for another day).
The question that one of our readers asked (we do listen and appreciate the feedback) was: how do you typically interface to various ERP systems? I don’t have the space to dive deep into the technical minutia, but let’s cover the basics. While there is other optional information the ERP generally must pass down to a WMS solutions: item master information, inbound ASNs, sale orders, kits, etc. The WMS in turn passes up: receipt information, shipped orders, inventory adjustments and inventory snapshots.
This information can be passed any number of ways. In the past flat-file interfaces and table based interfaces were common. While these are still the right choices depending on the system requirements we are seeing more and more XML interfaces and companies leveraging our SOA architecture for web-services communications. There is no wrong answer if you can move the information back-and-forth but for our pre-built integration we build according to the ERP preferred transport protocol. Rather than relying on a 3rd party EAI solution, we build the interfaces directly to ensure optimal performance for high through-put facilities.
The next time your CIO pushes a unilateral strategy take the time to explore if there are any real differences in the integrations and speak to Ray Wang at Forrester Research about getting trapped in ‘vendor hell’.
My purple people eaters rolled the dice last week and came to terms with future HOF quarterback Brett Favre. While I do take some issue with the way in which the Vikings organization handled the courtship, I cannot deny that I am more excited about this season’s prospects and that it clearly makes the Vikings a better football team.
Another reason I am excited is the official release of HighJump’s Performance Advantage! HighJump Performance Advantage is our supply chain dashboard visibility product. We have incorporated over 30 industry recognized best practice metrics with the capability for people to build their own dashboards with company specific metrics. This is an important step in executing on HighJump’s business intelligence vision and offering more actionable data to our customers. Below is a sneak peak at one of the dashboards.
I look forward to discussing this new product with customers just as I and the rest of Minnesota hopes the Viking’s dice don’t show seven at the end of the season.
I am a frequent reader of Logistics Viewpoints by Steve Banker and Adrian Gonzalez, an excellent blog on supply chain news and trends. In recent posts they mention that several retailers such as Wal-Mart and Kroger are undertaking programs to reduce the SKUs available in stores. They cite this as a positive supply chain improvement with less SKUs flowing through all the levels of the supply chain. After reading this post, a few questions jumped to my mind:
On the first question, my initial reaction was anything that reduces choice is bad for consumers. Sure the companies are not taking their best seller off the shelves, but they are removing items that presumably get bought occasionally and now a buyer is going to come into that store looking for these items only to leave frustrated. On the other hand lower supply chain costs could result in lower overall costs for other items in the store which would be a benefit for consumers. Given Wal-Mart’s corporate strategy and low pricing approach, I would surmise this is where they are headed with this SKU rationalization program. For the average consumer the net-net of this is probably a slight benefit whereas consumers looking for the “fringe” SKUs will be hurt.
On the second question, I think SKU rationalization in brick and mortar stores will lead to SKU expansion in online retailers. While these products might not be on anyone’s “A mover list” they still are needed by certain segments of consumers. I think this could be a boon for niche retailers (to the degree walmart.com does not simply add these SKUs to their offering) since they will have more products that only they carry. The carrying cost for an online retailer is much smaller than a brick and mortar store because they can have one unit in stock for viewing by the entire internet populace to make a sale whereas the brick and mortar store has to ship a unit to each store and then have it take up valuable retail shelf space. In the online world the incremental cost of online shelf space is minimal, just a few pixels and voila. This shift has supply chain implications as e-commerce fulfillment is very different from traditional retail/distro fulfillment. As we saw in the dot com boon several warehouses had difficulty managing the different fulfillment challenges that each type of fulfillment posed. For large retailers that plan to increase their SKU selection online, they should plan to optimize their e-commerce capabilities or risk reducing cost of one order type only to watch it increase for another.
There has long been debate about off-shoring or near-shoring manufacturing capabilities and whether this is good for the United States. While I will not delve into the heart of that lengthy debate, “Made in the US” has long been an important buying criteria for large segments of the American population and has become even more important in the economic downturn as a renewed emphasis has been made on buying American, albeit with protectionist risks.
However, a recent study by the American Small Manufacturers Coalition (ASMC) states “over a quarter of American manufacturers – representing over 90,000 firms – are at risk because they are not at or near world-class in any of the six strategies.” So what exactly are Americans buying if a product is “Made in the US”? The ASMC study details six strategies that are required for global competiveness:
This is particularly concerning as companies in China, Eastern Europe and elsewhere continue to build out more robust manufacturing capabilities. Of specific concern are our deficiencies in Supply Chain Management and Collaboration. A key component of world-class supply chain infrastructure is an investment in modern technologies such as manufacturing execution system software or manufacturing data collection. If our manufacturing companies, due to macro economic factors or industry specific dynamics are under-investing, it is unlikely they will be able to compete in an increasingly global marketplace. While this is concerning, we need to heed the warning bell that the ASMC raises and use this as a catalyst for action, rather than let it become a leading indicator to a decline in the “Made in US” moniker.
You can read the full report here.
Image via Flickr user shawdm.
Okay, I admit it is highly unlikely your metrics turn into a diabolical Lex Luther or another super hero nemesis, but it is quite possible you might rue the day a metric was deployed to the field. In many organizations it is common to develop metrics, deploy them to the field and then tie some form of variable compensation to successful metrics attainment. I believe many would consider this is an example of supply chain management best practices.
However when it comes to incentives, humans take on the role of lemmings. Whatever a person gets more compensation for, they are likely to exert a little more effort to achieve. Herein lies the beauty and evil of deploying metrics-based compensation. An example of this is the metric ‘Average Warehouse Capacity Used.’ According to a recent study by the Warehousing Education and Research Council this metric was one of the top 10 most popular metrics used by member companies. The more warehouse capacity used (i.e. 90% vs. 80%) in theory the better you were performing on this metric. While I agree a higher percentage means you are better leveraging your fixed asset, but what is also happening at the same time? To go from 70% to 80% or 80% to 90% you are buying more product. More product means you are likely tying more money up in working capital. In addition to negatively affecting other metrics in the business, much of supply chain best practices and deployment of technologies are aimed at reducing the amount of working capital tied up in the supply chain. In certain instances, like a new product launch or seasonal rush, it makes sense to increase inventory to meet expected demand, but as a general rule it is not advisable to stock inventory for inventory’s sake. Can you imagine if this metric was deployed to a company’s entire supply chain organization including the purchasing department? The more they ordered, the fuller the warehouse, the more compensation for that specific metric. I am sensing the need for Superman.
When rolling out a compensation plan tied to metrics carefully consider human nature to avoid creating your own personal Lex Luther.
Image via Flickr user Xurble.
There are hundreds of metrics that you could use to manage your supply chain, but what are the right ones for your company? When deciding what metrics to use, it is important that you take a step back and look at your corporate strategy and corresponding corporate metrics. To select metrics for your WMS solutions or supplier enablement in a vacuum would be a common mistake. While it is quite likely the metrics you select will be valid, it is also likely they won’t help the company advance its corporate strategy.
The need for company specific metrics is apparent after looking at two different retailers. As we all know Wal-Mart has invested heavily to develop a world class supply chain. They attempt to optimize every facet of the supply chain in attempt to bring the lowest price to the consumer. They have been pioneers in supply chain innovation as evidenced by their previous RFID project and now their product sustainability initiative. The majority of Wal-Mart’s supply chain metrics should measure cost reduction/cost containment. Successful results in these metrics reinforce Wal-Mart’s corporate goal of providing the lowest competitive pricing to their customers.
In sharp contrast to this is Zara, a European fashion retailer. Zara strives to have their fingers on the pulse of what trends/fashion are selling well in a given locale and then design, manufacture, and deliver to the stores in time to take advantage of the current market trends. For Zara’s supply chain, speed and time-to-market are paramount. In many instances they might be willing to go with a higher cost option if it means they can capitalize on a current market trend. The supply chain best practices that Zara uses are likely to be very different than Wal-Mart’s and the corresponding metrics should be different as well.
When deploying new metrics, significant time and investment are potentially needed to capture the data, develop effective dashboards, and communicate metric goals to the team. Hopefully the above illustrates the importance of taking time to analyze your corporate strategy and validating that your supply chain metrics and incentives positively reinforce the company goals.
At HighJump Software we are working on a new performance dashboard for our WMS Warehouse Management System. This is a very exciting project which will allow customers to view key metrics throughout their distribution center operations. While ensuring the dashboards are esthetically pleasing is a key element of the process, the more important part is determining what are the right metrics to include in each dashboard. In addition to relying on industry associations such as the Supply Chain Council and the Warehousing Education and Research Council, we evaluate potential metrics according to the “SMART” criteria:
S – Specific
Is the metric detailed enough to be meaningful? A metric like ‘Outbound Order Progress’ sounds interesting, but probably lacks the specificity to be useful. Metrics like order pick accuracy or number of cases shipped are more specific and tangible.
M – Measurable
There are a lot of interesting metrics, especially in supply chain, but many companies do not have the data to actually measure the metric. Total landed cost is one that comes to mind as challenging for many companies. Before selecting a set of metrics, make sure you validate your supply chain management software solutions have the data needed to calculate the metric.
A – Actionable
If the user looks at a metric and finds it interesting but is unable to take action to improve the metric, then it will not be very useful. When a metric falls below a goal or a certain tolerance, the user of the metric should be able to determine the root cause and take corrective action to improve the metric.
R- Relevant
The metric has to be relevant to the user. It would not be relevant to display outbound order metrics to the inbound receiving manager. This is why it is important to have multiple dashboards so that only relevant metrics are presented to the user. While there will be some overlapping metrics between the DC manager dashboard and the customer dashboard, it is important that only metrics that are relevant are displayed to the targeted user.
T – Time Based
The metric perfect order fulfillment sounds like a good metric, but if I just said the value was 98% that would prompt a series of questions: for what time period, is it trending up or down, how it compares to last year at this time, etc. Metrics need to have a specific timeframe associated with them and depending on the metric that timeframe could be hours, days, weeks, months, etc.
Hopefully this is helpful when you evaluate what metrics to use in your supply chain operations. More to come as our dashboard product nears completion.
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