Sometimes it's all about Priorities

Focusing on what's Important

Because your products and customers vary, your business strategies and therefor your supply chain focus must vary as well.  Depending on your product and type of customer, you need to focus on different things because your customer requirements are very different.  Let's say, for example, you manufacture tires.  You surely have many different types of tires for different uses.  There are tires designed for automobiles (probably many different kinds of them too) and tires for 18-wheelers, tires for construction vehicles, even tires for race cars and airplanes.  Your customers range from automobile manufacturers to tire retailers, gas stations, municipalities, logistics companies, airlines, etc.

As you might expect, different customers have different requirements and you will need to design your supply chains differently to meet those requirements.  Supply chains can be prioritized based upon reliability, responsiveness, flexibility, cost, and asset management.  For the auto manufacturer we would probably want to focus first and foremost on supply chain reliability.  We need to send the perfect order in full on the date that we promise.  Failure to deliver can have disastrous effects on the customer forcing him to shut down his line.  On the other hand, racing tires are manufactured to customized specifications.  For these customers, the priority is more likely flexibility, being able to adapt your process to the customers specific requirements.

How am I doing?

Ed Koch when he was mayor of NYC in the 1980's was famous for constantly seeking feedback from his constituents by asking that question every time he was out in public.  In the supply chain world, we use benchmarking to compare our performance with others in our industry.  Our objective is to be 'best-in-class' in the areas that we have identified as our priorities for a particular supply chain.  Being 'best-in-class' doesn't mean that you are perfect.  In fact, perfection is seldom necessary or even possible.  To be the best, you just need to be better than all the other guys.

Watch the Gap

The 'gap' between our performance and how the 'best-in-class' is performing, indicates the area(s) where we need to apply our resources and energies.  Needless to say, this is not a one time activity.  Supply chain leaders are constantly reviewing their priorities, measuring their performance, and constantly monitoring the 'gap'. 

The Delicate Balance

As business people we are constantly trading risk for cost.  When we remove cost from our businesses we can watch our risks increase dramatically.  Conversely, mitigating risk by necessity will involve some increase in cost. 

Examples of this phenomenon are plentiful.  Managing inventory is a constant struggle for this balance.  If we cut back on our on-hand quantities to lower our carrying costs, we will suddenly find ourselves at increased risk of stock outs.  Depending on your type of business, this can mean anything from lost opportunity costs (not having the item when the customer wants it) to shutting down the production line.  If we increase our on-hand quantities to reduce the stock out risk, our costs rise to pay for it. 

Just to make matters worse, even were we to find the perfect balance, conditions change quickly and dramatically.  Effective management requires constant review and frequent adjustments.

Leveraging the supply chain is a way to obtain significant cost savings while sharing the risks with your partners.  One of the easiest ways to handle this is to share information with your suppliers.  Consider the fact that some portion of your inventory is a defensive mechanism.  You keep that additional inventory as a hedge against your lack of information about what and when your customers will be ordering.  This, as I pointed out above, will by necessity increase your costs.  By the same token, your suppliers suffer from the same lack of information and are forced to take the same defensive posture.  The same is true for the suppliers your suppliers buy from, and so on, all the way back to the very beginning of the supply chain.  Clearly, this significantly magnifies the costs of your components and impacts your price or your profitability or both.

It isn’t too great a leap to suppose that if your customers are willing to share their projected purchasing, and you could communicate that information back up the supply chain, then everyone would require less ‘defensive’ inventory therefore lowering costs for each and every partner along the way. 

The most common objection to doing this is that your customers will not cooperate.  However, your leverage is your ability to offer them a lower price.  The longer and more complicated the supply chain, the greater the potential for cost savings and therefor the more the opportunity to offer a lower price.

Of course, your customers’ requirements will inevitably change.  When this happens, everyone in the supply chain will need to step up to meet the demand.  The relationships and good will that you build by sharing information tightens the integration with your suppliers  and makes the entire supply chain work more efficiently.  

Managing Risk

Last weekend on 60 Minutes there was a story about mountain climber Alex Honnold.  As if climbing a mountain isn't risky enough, Alex climbs without a rope up shear mountain faces, often higher than the Empire State Building,  hanging on by just his fingertips.  Most of us would never consider undertaking such a risk, however, in our companies, we are constantly faced with decisions that surely effect the health and well being of our business.

You must be prepared, as much as possible, to address whatever Murphy (see Murphy's Law) throws your way.  In the last couple of years, we have seen unprecedented disasters both natural and man made.  From the destruction of New Orleans from the flooding caused by Katrina, to earthquakes in Haiti, Japan, and the Northeast US.  The Japanese quake caused a devastating tsunami wiping out whole cities and causing what may very well be a nuclear melt down.  The recent visit of hurricane Irene to the east coast of the US left many without power for 4 or 5 days.  In the meantime, we have Somali pirates hijacking ships off the east coast of Africa, wars in Iraq and Afghanistan, and revolutions throughout the Arab world.  Even if your company is not directly in harms way, every one of us have suffered some consequences.  In this globally connected world, your suppliers or your supplier's suppliers or someone up the supply chain had their business impacted.

As businessmen, we need to manage the risks to insulate ourselves as much as possible.  The traditional approach to covering risk involves inventory.  Managers would weigh the costs of being out of stock against the cost of keeping 'safety stock' on hand.  Leaving aside for the moment the risk of inventory becoming outdated, (anyone interested in my collection of VHS tapes?), if we can keep enough inventory, a 6 month interruption in our supply from Japan will not bring our production line to a screeching halt.   The cost of taking this defensive posture is enormous.  The more uncertainty in the world, the more defensive inventory we are forced to maintain.  If in addition, you glance over your shoulder at your suppliers, you will notice that they are in the same situation, building inventory as a defense against uncertainty.  This drives up their costs and I can assure you they will eventually need to pass those higher costs on to you.  In fact, if you were to follow this path all the way back to the guy who pulls the raw material out of the ground, you will find that everyone in the entire chain is doing the same thing.  So how do we protect ourselves while at the same time bleeding all of this excess cost out of the process?

The key to managing this risk is information.  You must understand what goes into your products and where it comes from.  You need to see the entire supply chain as far back as you can and share your requirements with all involved.  Tom Collins , VP of Supply Chain Management at Motorola told me that prior to the crisis in Japan he had a very good understanding of his first level suppliers.  He was relieved to find that none of them were directly impacted.  To his dismay, however, he learned that he didn't have a handle on his supplier's suppliers and some of them were shut down for an extended period of time.  Ultimately, this had the potential to severely impact his business.

So how do we begin?  When asked, most companies can produce a complete bill of materials for every product they sell.  From that bill, you need to separate 'commodities' from specialty components.  A commodity item is one that has many sources and can be sourced easily and quickly if your primary supply becomes unreliable.  For these items, a secondary and/or tertiary source should be identified and a relationship established (usually by purchasing some portion of your requirements from this supplier even at a higher cost if necessary).  For example, let's say that your manufacturing process requires 10 tons of salt per week.  You might continue to order 8 tons from your primary supplier and order 1 ton each from two alternate suppliers so you can establish a relationship.  You would look to identify alternate suppliers who could, if necessary, combine to replace the volume from the primary.

This activity is much more difficult for specialized components.  For these, the primary supplier may be the only possible source or the cost to certify a new supplier may be prohibitive.  In this case, you need to go to extraordinary lengths to tightly integrate with your supplier.  You need to understand his production process, at least to the extent that you have a handle on his supply risks and how he is addressing them.  If you can develop a confidence that he is mitigating those risks, then you can reduce your internal defensive costs.  By driving this process back to the ultimate sources, you can reduce your costs while ensuring an uninterrupted supply.