Executive Briefings

Industrial Manufacturers--How To Improve Supply Chain Agility

Results from a recent survey on collaborative initiatives show that in their quest to optimize overall supply chain costs, industrial manufacturers are focused on streamlining the order management process as well as reducing inventory in the supply chain. This, however, is only one side of the agility equation. To achieve true supply chain agility, an outside-in view of demand should be a fundamental capability of the supply chain organization. This article will look at the survey results, highlight some considerations for collaboration with customers, channel partners, and suppliers, and list four best practices for improving demand management.

1. Supply chain agility--improving profitability through velocity and flexibility. From our discussions with manufacturing organizations across industries, agile supply chains share key attributes:
a. An integrated view of demand across the supply chain
b. Cycle time speed (in manufacturing, end-to-end processes and the ability to ramp volume up or down)
c. The ability to manage variability, with leaders embracing simulation techniques to predict the outcomes of various scenarios
d. Fully understanding constraints and total costs and how they impact supply chain decisions
e. Consistent quality, particularly during demand spikes
For our full definition of agility, please read "Supply Chain Chaos and the Need for Agility."

2. How agile are industrial manufacturers?
Serving diverse channels with complex solutions, industrial manufacturers frequently have an engineering-centric approach to the supply chain and supporting IT capabilities. The demand planning, product configuration, and materials management capabilities tend to be transactional in design and siloed in the functions they serve. Without an end-to-end value chain focus, or a clear understanding of longer term demand, though, this ad hoc approach leads to long cycle times, risks of owning redundant inventory, and supply chains that lack agility. In addition to the agility attributes mentioned above, collaborative capabilities internally and externally are becoming core capabilities of leaders across industries.

3. Build agility off a solid cost base.
A deep dive into the results of a recent collaborative commerce survey of industrial manufacturing respondents supports the benefits of cost optimization and decreasing order-to-delivery cycle times. Automating order management and configuration reduces order fulfillment costs and order errors. Visibility of inventory and order status across the supply chain enables proactive response. This all translates into better, more profitable perfect order performance.

However, if the most important business goal is to optimize supply chain costs, this demonstrates an upstream focus on supply, which is typical of companies with longer product lifecycles. Leaders are reaping greater benefits from a complementary, downstream, outside-in focus and demand management.

When asked about their ability to sense demand through interaction with downstream partners, industrial manufacturing survey respondents fared worse than other industries. The focus on execution, rather than planning, is supported by survey results. Industrial respondents selected the following as the top four order management business processes:

1. Finished goods/final assembly visibility across the distribution network--77%
2. Enhancing customer satisfaction via order/shipment visibility--77%
3. Improving warehouse costs through lower inventories/labor efficiency--74%
4. Adhering to custom customer requirements (packaging, labels, etc.)--74%
Accurate, advanced customer order demand visibility came in fifth.

Our interaction with industrial manufacturers supply chain teams confirms these priorities. In a recent session, we asked about the importance of demand management. The response was, "That's sales and marketing's problem. We are just interested in working on issues from the plants up." Their focus on customer service, logistics, quality, and materials management will continue to provide incremental benefits, they will be unlikely to yield the step change that many leaders in consumer products industries have enjoyed through better understanding of customer demand.

While there are compelling opportunities to reduce cost in labor or capital-intensive industrial businesses, leaders are leveraging better insight into downstream demand to reduce risk more dramatically still. The study also identified the areas industrial manufacturers are struggling with most.

4. IT considerations for collaboration. Collaboration is on everyone's list of initiatives. The vendor landscape is booming, with many best-of-breed specialists looking for and filling the ERP gaps. Because the landscape is fragmented, as always a clear definition of the business goals needs to be translated into the end-to-end business processes, and that into the related collaborative relationships and tools required.

The survey results showed Exostar, Extol, GT Nexus, i2, and Sterling Commerce to be the most popular tools being used or planned to be implemented for collaboration, communication, and information sharing in the order execution cycle.

The most common collaborative processes we see include the following:

Demand and supply planning:
1. Getting a better demand signal of what is likely to be sold, including customer forecasts and point-of-sale (POS) data
2. Defining inventory and capacity policies regarding buffer inventory and capacity reservations (e.g., VMI programs)
3. Demand outreach programs that can help shape demand decisions around excess product or parts, such as trade promotions
4. Providing forecast information to suppliers


Product development: Share product specifications, updates, and engineering changes

Customer order management: Guided selling and order/product configuration capabilities made available to customers; Online order capabilities

Sourcing and procurement:
1.Initial sourcing activities and responses to the request for quotation
2. Contract management teams that agree on initial terms and conditions
3. Ongoing procurement activities, such as catalogs, price adjustments, and an automated P2P cycle.
4. Supplier performance management (SPM)--scorecards and joint continuous improvement programs

Logistics: Shipping--visibility into order or shipment status

Each has different data challenges and technology requirements. More advanced organizations manage true bidirectional collaboration versus data transmission. EDI, portal, and extranet capabilities are available from a multitude of software vendors or developed in-house by IT. Implications for data protocols and transmission methods need to be considered for each, as do deployment options.

The different models (licensed versus SaaS) both have their pros and cons regarding flexibility and scalability. In order to successfully navigate the cons and execute on collaborative processes, IT must be embedded in the project along with the business owners, and not merely in a supporting role. Business and IT will continue to align and merge their strategy and tactics as organizations mature.

With so many organizations relying on contract manufacturing or low-cost country sourcing, a lot more detailed data about as-built quality and product genealogy, as is available capacity and capability needs to be crossing enterprise boundaries. This need for "supply sensing" adds to the data transparency requirements, but challenges such as disparate systems, time zones, languages, cultures, and priorities add to the complexity.

Master data management (MDM) is one of the main obstacles in the ability to share information within or across the extended enterprise. Even organizations with a single ERP instance struggle with MDM both within the organization, and more so when implementing collaborative programs with partners.

Companies implement lean and Six Sigma techniques to improve their ability to react to demand through improving quality and cycle times within the four walls. Better demand visibility will improve forecast accuracy, which is one of three key metrics in assessing supply chain health.

Our research and benchmark data shows a clear correlation between demand insights and supply chain performance. Improving demand visibility by 10% leads to a 20% improvement in perfect order performance. Demand-driven supply network (DDSN) leaders also hold a third less inventory and have lower supply chain costs equal to 5% of revenue. Gathering demand visibility data is not a simple process but requires synchronization of information from market behavior insights and market knowledge, channel movement, and supply chain strategies.

Forecast accuracy and matching demand to supply are the focus of companies in early stages of value chain maturity. Demand sensing, shaping, and orchestrating a profitable demand response are the goals of more mature demand-driven leaders.

Four of the demand management best practices are summarized below. Successful projects require strong leadership to effectively combine organizational design, people, process, and technology.

1. Vendor-managed inventory
Opportunities exist as tools and techniques mature and success stories are showcased, but they are slow to become mainstream. Benefits include increased sales, reduced administrative costs, reduction in inventory while increasing inventory turns, and better customer service.
From our research we find that lack of trust is one of the key obstacles to a truly collaborative VMI relationship. Companies that collaborate well will do the following:

a. Share risk and reward
b. Openly share information
c. Show proven performance and reliability
d. Ensure data security
e. Use the right technologies

2. Make the right tradeoffs

Using demand insights to help make the tradeoff between perfect order performance and supply chain costs continues to be the ultimate goal of the sales and operations planning (S&OP) process. S&OP tops the list as the most important process leaders are focused on to integrate demand information through the organization and make the right decisions for bottom-line value.

3. Segment the channels
Understanding your cost to serve each channel is vital to understanding the profitability of each channel. Cost-to-serve modeling and customer/product profitability analysis are tactics that most companies, even consumer product leaders, are struggling to master in their desire to create profitable demand response. Software vendors like Acorn Systems, Jonova, Equazion, Maxager, and pVelocity are stepping up and providing the tools to cater to this need. However, as is so often the case, gathering and harmonizing the data is still the greatest challenge impeding the success of these projects. We expect to see more focus in the future on channel segmentation tied to profitability of demand response.

4. Demand shaping

This includes a series of focused activities to drive and improve revenue. Activities include new product introductions, price management, marketing, sales incentives, promotions, trade deals, and product runout strategies. Demand sensing is an input to effective demand-shaping activities to monitor and evaluate the effectiveness of these focused activities. Closing the loop is achieved through monitoring the effectiveness of the process.

Industrial manufacturers must start breaking down internal functional silos, and integrate the customer-facing organization with supply chain and operations in order to increase supply chain agility and profitable perfect order performance. In addition, they must identify opportunities for improving external collaborative relationships and carefully consider the options available and associated implications.
http://www.amrresearch.com

Results from a recent survey on collaborative initiatives show that in their quest to optimize overall supply chain costs, industrial manufacturers are focused on streamlining the order management process as well as reducing inventory in the supply chain. This, however, is only one side of the agility equation. To achieve true supply chain agility, an outside-in view of demand should be a fundamental capability of the supply chain organization. This article will look at the survey results, highlight some considerations for collaboration with customers, channel partners, and suppliers, and list four best practices for improving demand management.

1. Supply chain agility--improving profitability through velocity and flexibility. From our discussions with manufacturing organizations across industries, agile supply chains share key attributes:
a. An integrated view of demand across the supply chain
b. Cycle time speed (in manufacturing, end-to-end processes and the ability to ramp volume up or down)
c. The ability to manage variability, with leaders embracing simulation techniques to predict the outcomes of various scenarios
d. Fully understanding constraints and total costs and how they impact supply chain decisions
e. Consistent quality, particularly during demand spikes
For our full definition of agility, please read "Supply Chain Chaos and the Need for Agility."

2. How agile are industrial manufacturers?
Serving diverse channels with complex solutions, industrial manufacturers frequently have an engineering-centric approach to the supply chain and supporting IT capabilities. The demand planning, product configuration, and materials management capabilities tend to be transactional in design and siloed in the functions they serve. Without an end-to-end value chain focus, or a clear understanding of longer term demand, though, this ad hoc approach leads to long cycle times, risks of owning redundant inventory, and supply chains that lack agility. In addition to the agility attributes mentioned above, collaborative capabilities internally and externally are becoming core capabilities of leaders across industries.

3. Build agility off a solid cost base.
A deep dive into the results of a recent collaborative commerce survey of industrial manufacturing respondents supports the benefits of cost optimization and decreasing order-to-delivery cycle times. Automating order management and configuration reduces order fulfillment costs and order errors. Visibility of inventory and order status across the supply chain enables proactive response. This all translates into better, more profitable perfect order performance.

However, if the most important business goal is to optimize supply chain costs, this demonstrates an upstream focus on supply, which is typical of companies with longer product lifecycles. Leaders are reaping greater benefits from a complementary, downstream, outside-in focus and demand management.

When asked about their ability to sense demand through interaction with downstream partners, industrial manufacturing survey respondents fared worse than other industries. The focus on execution, rather than planning, is supported by survey results. Industrial respondents selected the following as the top four order management business processes:

1. Finished goods/final assembly visibility across the distribution network--77%
2. Enhancing customer satisfaction via order/shipment visibility--77%
3. Improving warehouse costs through lower inventories/labor efficiency--74%
4. Adhering to custom customer requirements (packaging, labels, etc.)--74%
Accurate, advanced customer order demand visibility came in fifth.

Our interaction with industrial manufacturers supply chain teams confirms these priorities. In a recent session, we asked about the importance of demand management. The response was, "That's sales and marketing's problem. We are just interested in working on issues from the plants up." Their focus on customer service, logistics, quality, and materials management will continue to provide incremental benefits, they will be unlikely to yield the step change that many leaders in consumer products industries have enjoyed through better understanding of customer demand.

While there are compelling opportunities to reduce cost in labor or capital-intensive industrial businesses, leaders are leveraging better insight into downstream demand to reduce risk more dramatically still. The study also identified the areas industrial manufacturers are struggling with most.

4. IT considerations for collaboration. Collaboration is on everyone's list of initiatives. The vendor landscape is booming, with many best-of-breed specialists looking for and filling the ERP gaps. Because the landscape is fragmented, as always a clear definition of the business goals needs to be translated into the end-to-end business processes, and that into the related collaborative relationships and tools required.

The survey results showed Exostar, Extol, GT Nexus, i2, and Sterling Commerce to be the most popular tools being used or planned to be implemented for collaboration, communication, and information sharing in the order execution cycle.

The most common collaborative processes we see include the following:

Demand and supply planning:
1. Getting a better demand signal of what is likely to be sold, including customer forecasts and point-of-sale (POS) data
2. Defining inventory and capacity policies regarding buffer inventory and capacity reservations (e.g., VMI programs)
3. Demand outreach programs that can help shape demand decisions around excess product or parts, such as trade promotions
4. Providing forecast information to suppliers


Product development: Share product specifications, updates, and engineering changes

Customer order management: Guided selling and order/product configuration capabilities made available to customers; Online order capabilities

Sourcing and procurement:
1.Initial sourcing activities and responses to the request for quotation
2. Contract management teams that agree on initial terms and conditions
3. Ongoing procurement activities, such as catalogs, price adjustments, and an automated P2P cycle.
4. Supplier performance management (SPM)--scorecards and joint continuous improvement programs

Logistics: Shipping--visibility into order or shipment status

Each has different data challenges and technology requirements. More advanced organizations manage true bidirectional collaboration versus data transmission. EDI, portal, and extranet capabilities are available from a multitude of software vendors or developed in-house by IT. Implications for data protocols and transmission methods need to be considered for each, as do deployment options.

The different models (licensed versus SaaS) both have their pros and cons regarding flexibility and scalability. In order to successfully navigate the cons and execute on collaborative processes, IT must be embedded in the project along with the business owners, and not merely in a supporting role. Business and IT will continue to align and merge their strategy and tactics as organizations mature.

With so many organizations relying on contract manufacturing or low-cost country sourcing, a lot more detailed data about as-built quality and product genealogy, as is available capacity and capability needs to be crossing enterprise boundaries. This need for "supply sensing" adds to the data transparency requirements, but challenges such as disparate systems, time zones, languages, cultures, and priorities add to the complexity.

Master data management (MDM) is one of the main obstacles in the ability to share information within or across the extended enterprise. Even organizations with a single ERP instance struggle with MDM both within the organization, and more so when implementing collaborative programs with partners.

Companies implement lean and Six Sigma techniques to improve their ability to react to demand through improving quality and cycle times within the four walls. Better demand visibility will improve forecast accuracy, which is one of three key metrics in assessing supply chain health.

Our research and benchmark data shows a clear correlation between demand insights and supply chain performance. Improving demand visibility by 10% leads to a 20% improvement in perfect order performance. Demand-driven supply network (DDSN) leaders also hold a third less inventory and have lower supply chain costs equal to 5% of revenue. Gathering demand visibility data is not a simple process but requires synchronization of information from market behavior insights and market knowledge, channel movement, and supply chain strategies.

Forecast accuracy and matching demand to supply are the focus of companies in early stages of value chain maturity. Demand sensing, shaping, and orchestrating a profitable demand response are the goals of more mature demand-driven leaders.

Four of the demand management best practices are summarized below. Successful projects require strong leadership to effectively combine organizational design, people, process, and technology.

1. Vendor-managed inventory
Opportunities exist as tools and techniques mature and success stories are showcased, but they are slow to become mainstream. Benefits include increased sales, reduced administrative costs, reduction in inventory while increasing inventory turns, and better customer service.
From our research we find that lack of trust is one of the key obstacles to a truly collaborative VMI relationship. Companies that collaborate well will do the following:

a. Share risk and reward
b. Openly share information
c. Show proven performance and reliability
d. Ensure data security
e. Use the right technologies

2. Make the right tradeoffs

Using demand insights to help make the tradeoff between perfect order performance and supply chain costs continues to be the ultimate goal of the sales and operations planning (S&OP) process. S&OP tops the list as the most important process leaders are focused on to integrate demand information through the organization and make the right decisions for bottom-line value.

3. Segment the channels
Understanding your cost to serve each channel is vital to understanding the profitability of each channel. Cost-to-serve modeling and customer/product profitability analysis are tactics that most companies, even consumer product leaders, are struggling to master in their desire to create profitable demand response. Software vendors like Acorn Systems, Jonova, Equazion, Maxager, and pVelocity are stepping up and providing the tools to cater to this need. However, as is so often the case, gathering and harmonizing the data is still the greatest challenge impeding the success of these projects. We expect to see more focus in the future on channel segmentation tied to profitability of demand response.

4. Demand shaping

This includes a series of focused activities to drive and improve revenue. Activities include new product introductions, price management, marketing, sales incentives, promotions, trade deals, and product runout strategies. Demand sensing is an input to effective demand-shaping activities to monitor and evaluate the effectiveness of these focused activities. Closing the loop is achieved through monitoring the effectiveness of the process.

Industrial manufacturers must start breaking down internal functional silos, and integrate the customer-facing organization with supply chain and operations in order to increase supply chain agility and profitable perfect order performance. In addition, they must identify opportunities for improving external collaborative relationships and carefully consider the options available and associated implications.
http://www.amrresearch.com