Executive Briefings

Customers Share Some Blame for Waste in Their Value Chains

As the economy continues to struggle in its recovery, a lot of attention is being paid to cost reduction and waste elimination. Although not a new topic, it continues to be center stage globally, particularly in the area of government spending. In the U.S., the budget deficit is front-page news every day, with healthcare and defense spending hotly debated. In Europe, austerity programs abound, as the U.K. and other nations look for ways to cut expenditures, and the International Monetary Fund reviews bailouts for countries already under water. Squeezing costs from suppliers will always remain a focus, but perhaps it's time for customers to share some blame for inefficiencies in the supply chain.

There are many obstacles to achieving supply chain performance goals. However, Gartner studies indicate that demand variability is the No. 1 challenge. Although there may be no such thing as a perfect forecast, there are plenty of opportunities for improvement and managing demand in support of a more cost-effective supply response. Better collaboration between trading partners is the necessary next step toward waste elimination in the value chain. In fact, a separate Gartner study listed "collaboration with partners on demand and inventory placement" as the No. 1 practice impacting inventory performance during new product introduction. Still, the complaint we continue to hear is that poor collaboration between customers and suppliers remains a barrier to the demand insights necessary to maximize value.

National defense spending represents approximately 20 percent of the proposed 2012 U.S. federal budget, making it a popular cost reduction target. I've recently had a number of conversations with defense manufacturers in both the U.S. and Europe that are struggling under the pressure from their defense department customers to reduce the cost of new programs and the cost to sustain assets over time. This is of particular concern as they are pushed toward contracts where they are paid according to the performance and availability of the asset they support for the customer. One of the greatest challenges these manufacturers highlight is the poor quality of demand data shared with them by their customers, which results in excess inventory and inefficiencies.

For aerospace companies, a primary source of demand variability comes from engineering requirement and design changes, which contribute to poor program performance. This issue was highlighted in a study by the Government Accountability Office a few years ago that identified poor requirements management as a contributor to defense program cost and schedule overruns. When the asset moves into the sustainment phase, contractors complain that poor demand data has many causes, ranging from inaccurate technical documentation to insufficient access to customer demand data sources. Even the various military services disagree among themselves on the appropriate level of data access they should provide to a supplier.

Healthcare represents roughly 23 percent of the 2012 proposed U.S. federal budget, making it a top priority for improvement as well. Much of the waste can be found in the healthcare supply chain, which also suffers from demand variability and poor visibility. In some cases, the issue is that a healthcare provider won't share demand information because it's seen as an advantage during negotiations. In other cases, the culprit is an industry culture allowing physicians to insist on excessive variants of medical devices, driving demand variability from unnecessary stock-keeping unit complexity. Health Insurance Portability and Accountability Act  regulations present some challenges as well - patient confidentiality may limit the customer demand data that can be shared. Regardless, there is plenty of opportunity to improve demand management in healthcare through reduced complexity and sharing of demand.

The consumer products (CP) industry has seen the most progress in this area, but it still has an opportunity to improve, too. Kraft Foods and PepsiCo are among the companies that have seen the benefits of using retailer downstream data to help them add value. However, Gartner studies indicate that few retailers share detailed downstream data with all their trading partners. Some of the blame lies with retailers that are unwilling to invest in sharing this data, and some of it rests with the CP manufacturers that are unable to demonstrate the value they'll deliver if they're provided with this data.

Maximizing value from the supply chain won't be reached without improved collaboration between trading partners. It's time for customers to take responsibility for their contributions to waste when they don't share demand insights, or when they otherwise contribute to excess variability through unnecessary complexity.

Suppliers bear the responsibility as well. They must demonstrate the value they'll deliver when this demand information is provided. This requires conducting upfront analysis that demonstrates the impact on the current and future supply chain if the access to demand changes. They also bear responsibility for sharing information with their own suppliers. By closing gaps between partner nodes in the supply chain, there's an opportunity to address the unnecessary waste across the value chain.

As always, I can be reached at michael.burkett@gartner.com.

Source: Gartner

As the economy continues to struggle in its recovery, a lot of attention is being paid to cost reduction and waste elimination. Although not a new topic, it continues to be center stage globally, particularly in the area of government spending. In the U.S., the budget deficit is front-page news every day, with healthcare and defense spending hotly debated. In Europe, austerity programs abound, as the U.K. and other nations look for ways to cut expenditures, and the International Monetary Fund reviews bailouts for countries already under water. Squeezing costs from suppliers will always remain a focus, but perhaps it's time for customers to share some blame for inefficiencies in the supply chain.

There are many obstacles to achieving supply chain performance goals. However, Gartner studies indicate that demand variability is the No. 1 challenge. Although there may be no such thing as a perfect forecast, there are plenty of opportunities for improvement and managing demand in support of a more cost-effective supply response. Better collaboration between trading partners is the necessary next step toward waste elimination in the value chain. In fact, a separate Gartner study listed "collaboration with partners on demand and inventory placement" as the No. 1 practice impacting inventory performance during new product introduction. Still, the complaint we continue to hear is that poor collaboration between customers and suppliers remains a barrier to the demand insights necessary to maximize value.

National defense spending represents approximately 20 percent of the proposed 2012 U.S. federal budget, making it a popular cost reduction target. I've recently had a number of conversations with defense manufacturers in both the U.S. and Europe that are struggling under the pressure from their defense department customers to reduce the cost of new programs and the cost to sustain assets over time. This is of particular concern as they are pushed toward contracts where they are paid according to the performance and availability of the asset they support for the customer. One of the greatest challenges these manufacturers highlight is the poor quality of demand data shared with them by their customers, which results in excess inventory and inefficiencies.

For aerospace companies, a primary source of demand variability comes from engineering requirement and design changes, which contribute to poor program performance. This issue was highlighted in a study by the Government Accountability Office a few years ago that identified poor requirements management as a contributor to defense program cost and schedule overruns. When the asset moves into the sustainment phase, contractors complain that poor demand data has many causes, ranging from inaccurate technical documentation to insufficient access to customer demand data sources. Even the various military services disagree among themselves on the appropriate level of data access they should provide to a supplier.

Healthcare represents roughly 23 percent of the 2012 proposed U.S. federal budget, making it a top priority for improvement as well. Much of the waste can be found in the healthcare supply chain, which also suffers from demand variability and poor visibility. In some cases, the issue is that a healthcare provider won't share demand information because it's seen as an advantage during negotiations. In other cases, the culprit is an industry culture allowing physicians to insist on excessive variants of medical devices, driving demand variability from unnecessary stock-keeping unit complexity. Health Insurance Portability and Accountability Act  regulations present some challenges as well - patient confidentiality may limit the customer demand data that can be shared. Regardless, there is plenty of opportunity to improve demand management in healthcare through reduced complexity and sharing of demand.

The consumer products (CP) industry has seen the most progress in this area, but it still has an opportunity to improve, too. Kraft Foods and PepsiCo are among the companies that have seen the benefits of using retailer downstream data to help them add value. However, Gartner studies indicate that few retailers share detailed downstream data with all their trading partners. Some of the blame lies with retailers that are unwilling to invest in sharing this data, and some of it rests with the CP manufacturers that are unable to demonstrate the value they'll deliver if they're provided with this data.

Maximizing value from the supply chain won't be reached without improved collaboration between trading partners. It's time for customers to take responsibility for their contributions to waste when they don't share demand insights, or when they otherwise contribute to excess variability through unnecessary complexity.

Suppliers bear the responsibility as well. They must demonstrate the value they'll deliver when this demand information is provided. This requires conducting upfront analysis that demonstrates the impact on the current and future supply chain if the access to demand changes. They also bear responsibility for sharing information with their own suppliers. By closing gaps between partner nodes in the supply chain, there's an opportunity to address the unnecessary waste across the value chain.

As always, I can be reached at michael.burkett@gartner.com.

Source: Gartner