Capitalizing on complexity within supply chain ecosystem
By Douglas Kent, global vice-president, Avnet VelocitySupply Chain
Today’s supply chain ecosystem is more complex than ever. Supply chains are a complex network of nodes, most evolving to a globally dispersed, multiple owner network, each holding their own view of the world and disparate desires for how they wish the supply chain would operate. The problem worsens with the impacts of limited coordination and collaboration with the other key players in this increasingly difficult game we play.
According to most analysts, the forward-looking view remains consistent – this complexity is in fact the new ‘norm’. Rather than exercising expensive attempts to reduce the complexity, many organizations are accepting the fact that the opportunity resides on capitalizing on it rather than attempting to reduce it, which has proven limited in its impact. Many of the efficiency contributors introduced have become risk generators therefore achieving the opposite goal for which they were initially intended.
Let’s focus on understanding the complexity that exists and applying three techniques & technologies to capitalize on it:
1. Fully understanding the cost-to-serve across the entire supply chain in order to make tough decisions regarding suppliers, products, customers.
2. Extending the S&OP process through multiple tiers to ensure the critical information transparency is provided and the feedback loops are solid.
3. Building a multi-echelon control tower approach in order to not only command and control the supply chain – but provide predictability by sensing and responding to how the market conditions change.
Cost-to Serve – A deceptively simple calculation
Cost-to-Serve is the analysis and quantification of all the activities and costs incurred to fulfill customer demand for a product through the end-to-end supply chain. Accurate Cost-to-Serve calculations are developed by modeling all the supply chain activities in the network, as well as accumulating and properly allocating fixed and variable costs. Using this information you can make the right business decisions and look for opportunities to financially optimize the supply chain whilst also maintaining or increasing the service levels to your customers.
“Cost to serve provides the required insight to distinguish profitable business from unprofitable business”
So, why is this so difficult? Remember that CTS is the determination of the total cost of servicing each individual customer at an SKU level, and at a designated level of service recognizing that each product and customer combination are different and therefore will have different costs. CTS analysis is a crucial element for any potential outsourcing of processes. This baseline of comparison is required in order to validate any cost proposals from potential partners. “Cost to serve provides the required insight to distinguish profitable business from unprofitable business”
Extending the S&OP processes and participants
Today, S&OP is a prolific process embedded in the heart of most organizations. However, it continues to evolve – extending to be more inclusive of supplier and customer inputs, as well as morphing into an even more comprehensive integrated management process, often referred to now as Integrated Business Planning (IBP).
Now, IBP/S&OP is an integrated business management process through which the executive team continually achieves focus and alignment between all the functions of the organization and across the entire ecosystem. While S&OP in its simplest form evolved from best practice to standard practice – it has further evolved from what was once known as production planning to an ecosystem – wide management process moving beyond just a supply chain management only focus. Research has shown that such a migration is starting to yield considerably more benefits as a complexity capitalizing capability that improves company performance. Those who plan better – execute better and beat out the competition.
Gaining visibility from your ‘Control Tower’
According to Gartner, the aim of end-to-end supply chain visibility is providing access of accurate, timely and complete data — transactions, content and information — within and across organizations operating supply chains. The most mature companies orchestrate their end-to-end supply chains and amount of supply chain visibility and risk mitigation capabilities among other critical factors.
Yet we find that many organizations have little or no upstream/downstream visibility. In a supply chain ecosystem with so much complexity, how can anyone compete effectively without gaining multi-tier supply chain even if just for updated supply/demand schedules, product delivery status, or current inventory?
Recent events such as the Japan earthquake and Thailand floods brought home the importance of direct visibility beyond the first tier to many in the auto and electronics industries.
A lack of visibility on the supply side will most certainly:
1) Inflate Iinventory costs.
2) Inflate process costs.
3) Result in lost customers / lost revenue.
Risk management includes the development of continuous strategies designed to control, mitigate, reduce, or eliminate risk. SC Visibility allows for the required visibility and quantification of the identified risk so that we can properly choose whether or not it should be mitigated. Without visibility into and through our supply chain – any associated risk mitigation techniques utilized would never yield the potential positive impacts it could. Simply said, visibility is a platform element for both risk management and mitigation and to achieve the desired level of supply chain sustainability (see diagram below).
In summary, attempting to reduce complexity is admirable. However, it’s not enough. It will provide some efficiencies, but, if companies want to leap frog the competition, they must combine such efforts with the real game-changers. These include: understanding your true cost-to-serve, extending the best practice of S&OP into an integrated business planning process across the ecosystem, and demanding full multi-tier visibility from all partners. Together these create a sustainable competitive advantage.