Start your company on a journey to competitive excellence
Today's consumer marketplace operates at breakneck speed, blazing an array of goods to customers through a host of different channels. In the past, companies offered a limited product line through a single channel that was delivered by one shipment method. No more. Today's supply chain copes with scores of new product introductions, alternate forms of delivery, changing government regulations and varying customer packaging needs. Complexity, variability and transitions are ever increasing, to the point that the traditional way to conduct forecasting — which largely depends on history — is no longer working.
Industry leading companies finding success in today's climate have a common feature: agility, an exceptional nimbleness and effectiveness in responding rapidly to change. In high-tech, of course, the stellar example is Dell. Some people believe their success comes from the direct sales model, some people think it's low inventory. Others believe it's due to their tremendous commitment to a philosophy of execution, centered around speed and agility. In consumer goods, Frito-Lay stands out, largely based on their focus on agility. They've been able to differentiate themselves to a point where they have 60 percent market share of salty snacks.
How do top companies maintain their agility, even while using many of the same tools used by less successful companies? Following are the seven best practices that are key in agile supply chain enterprises.
Best Practice 1 — Know Your Customer Well
Top performing companies pay close attention to their customers. They know which products customers are buying and when. They keep watch on competitors and world events that affect customer behavior. Armed with this intelligence they are better equipped to move an optimum amount of product.
Companies that excel even pay close attention to the terminology they use. By replacing the traditional "sales forecast" with "sales plan," they subtly transform that tool from a quarterly gamble into a no-excuses team commitment. This is an important philosophical shift. With a sales forecast, a company sits back and waits for the end of the period to see how accurate the crystal ball was. With a sales plan — just like a game plan in a basketball or football game — the enterprise takes a dynamic role in making results happen.
Sales plans are built on key leading indicators. During execution of the plan, the real world is constantly monitored to detect deviations from the plan, and immediate corrective action is taken. This continuous, closed-loop of plan-do-check-act is a defining trait of leading firms.
Every plan is subject to variability. No business professional is a magician who can flawlessly anticipate market share, weather, or competitor promotions. That's why a closed loop plan-do-check-act methodology makes a big difference. Excellent companies track customer point-of-sale data daily and know if only five units were sold on the first day when the plan called for 10. They ask themselves, "What do I need to know to make better decisions?" Perhaps it's real-time inventory data. Perhaps it's access to competitors' pricing.
Staying alert to customer behavior also expands opportunities. If your plan was to sell 10 units a day but you now see that orders are coming in at 15 a day, you might learn that the competitor's production line is broken and you have a unique revenue opportunity.
Agile companies are so committed to fine-tuning customer knowledge that they conduct post-mortems and share performance scorecards with their customers for added feedback.
Best Practice 2 — Know Your Supplier Well
It's impossible to meet a plan without having command over supply. When a best-practice company asks a supplier to ship 200 units they expect a confirmation and a commitment. What happens if the supplier is unable to meet that commitment? The first question to ask is, "What happened, and when did you know?" Supply chain leaders know that being kept in their suppliers' plan-do-check-act loop increases agility.
One way of knowing suppliers well is to go onsite and inspect their processes, and confirm that they actually have a plan behind them. This is similar to total quality management (TQM), where an original equipment manufacturer (OEM) needs confirmation that the supplier has the necessary quality processes in place. Smart businesses require a plan behind a supplier's commitment so that when things go wrong — and you know that something could go wrong — they learn about it themselves and advise you promptly, so you can take immediate action.
In the electronics industry, flex agreements are common. These agreements outline what happens when the real world deviates significantly from the plan, ensures that a supplier can adequately serve your needs, and protects the supplier from excessive capacity and cost. A variance of up to 10 percent may be acceptable, but beyond that specified measures may be implemented. For example, some companies don't expect a supplier to be stuck with excess, so they will promote a lagging product or share some of the damage.
Often, suppliers are chosen strictly on cost, not on their capacity to support agility. This can end up being more costly in the long-run. The trade-off for low price may be long, inflexible lead times. If short-term demand for one of your products spikes upward, the long lead time can become a lost revenue opportunity. You need more than attractive costs from a supplier — you also need reliable order fulfillment and flexibility that supports agility.
Most companies resist doing post-mortems with their suppliers for fear of revealing how flimsy their own company's demand plan is and how much it actually fluctuates. But good companies want to know if their forecast was wrong, because they understand that ultimately it's their product and their delivery that is becoming inefficient. Sharing scorecards can be extremely valuable, as no learning comes without measurement.
Best Practice 3 — Live and Die by the Plan
The truth is, most plans are dead on arrival. They're based on outdated and inadequate information, and owned by teams that don't have full accountability for their execution. Second- and third-tier companies make excuses, saying planning is unimportant because there's so much variability. That's not so. Instead, planning needs to become faster and more constraint-sensitive.
We expect plans to experience variability. Say a company develops a reasonable plan to sell 300 units a month. But then competitors begin promotions and there are snowstorms that shut down shipments and there are supply issues. Suddenly you're plan is in jeopardy. Just like in TQM, critical success of the plan is based on implementing the full plan-do-check-act loop.
If there's variability, you must do root cause analysis — quickly. If it takes a week to figure out why you didn't sell 10 units on the first day as planned, but instead sold five, it's no help. You've lost one week of the planning period and corrective options shrink.
Abandoning a plan can be costly due to the affect it may have on many other interrelated plans. Corrective actions may seem expensive locally, but often create value globally, because they maintain stability. In the end, best-practice companies do their utmost to make the original plan work.
Best Practice 4 — Synchronize Across the Enterprise
In a typical enterprise, discrete departments or divisions each have their own metrics and focus. I call these separate islands of activity "silos," because each one stockpiles and tracks information in its own area. Shipping, warehousing, sales, marketing, design and finance often operate in silos. For example, a regional sales manager focuses on overall revenues and margins in his specific region, and is less interested in which individual item or brand sells there. A brand manager, on the other hand, is focused on how flat panel TVs sell throughout the world.
If you don't know how to synchronize with departments and divisions within your own company, it's impossible to synchronize with suppliers. Best practice supply chains reduce the silo effect, making sure that everyone within the enterprise is driving toward the same goal, and that commitments to internal partners are honored.
Without cross-silo synchronization, someone might decide to run a product promotion before coordinating internally. When sales for the promoted product go up, sister products suffer. One of the world's largest computer manufacturers gains success by closing the loop through a plan-do-check-act process within its sales and operation activities. This company knows that creating a promotion for one product will impact other items, and each group takes responsibility to execute its plan. If the promotion isn't working, the company develops an action plan that allows it to continue to sell products to meet customer demand, while ensuring they are not left with excess inventory in another product category.
Most companies have unidirectional planning that starts with a demand plan, then a distribution master plan, factory plan and supplier plan. In this environment, when shortages occur it's difficult to strategically allocate available inventory. For example, if your suppliers can't provide enough microprocessors, do you make laptops or servers? And how will those finished machines be allocated to different sales regions? Better strategic decisions are made when there is communication and synchronization across the enterprise.
Best Practice 5 — Fulfill Rapidly and Reliably
In most enterprise resource planning (ERP) systems, when a sales transaction is handled well you know that the product was built, shipped and billed. Each step is handed off to the next for a smooth flow. But this type of process integration is not the same as efficient fulfillment. The ERP process is often slow, inflexible and opaque. Even at the point of billing, you just can't know for sure if the customer's needs were effectively met.
Agile corporations rely on the plan-do-check-act cycle in their transactions. They seek synchronization, which often involves negotiation. For example, if your customer submitted an order for 600 six-packs of beer and you deliver it three weeks late, that's usually not as good as delivering 300 12-packs earlier. Although it is the same quantity of product, because of the difference in packaging, the customer might not have room for 300 12-packs of beer. Additionally, it's possible that 6-packs are in more demand and 12-packs end up sitting on store shelves.
Companies with leading supply chains make an immediate commitment to a customer's request based on a firm, optimized execution plan. In a best practice environment, sub-plans are pegged to the customer request and progress is tracked against a fulfillment plan. When a deviation from the fulfillment plan occurs, compensating actions are quickly taken.
Best Practice 6 — Design for Supply Chain Agility
Traditionally, companies focus on network design, such as how many warehouses they have and where to locate them. While those are important issues, it's more important to design for rapid response to shifts in demand or supply. An agile corporation keeps channels open so they can share updated demand information rapidly with suppliers, and identify and promptly implement the best alternative option when supply is disrupted.
Benchmarking often reveals that it can take anywhere from one to four weeks before a company lets a supplier know about a forecast change. Companies with top performing supply chains, on the other hand, convert customer demand quickly into supplier requirements. One of the world's largest providers of mobile communications decided that its design goal was one-hour visibility. As a result, the company has implemented a system that offers the ability to inform its suppliers within one hour from the moment demand shifts.
There are other factors to consider in designing an agile supply chain, like complexity of your components. If you need 700 suppliers to build the same product that a competitor can build with 70 suppliers, you're going to be less agile. You can overcome this by establishing regular "gaming" processes to evaluate external forces, identify opportunities and determine optimal responses to the business climate.
Best Practice 7 — Manage IT to Support Change
An ERP system intended to handle sales transactions and financial controls typically doesn't manage planning or sourcing. It won't optimize visibility and decision making, nor will it necessarily ensure clean data. For the professional who is trying to close the supply chain loop with plan-do-check-act, the question becomes how quickly can the IT environment mirror the real world and react. Often a tool that was supposed to be helpful turns into a hindrance to achieving agility.
Best practice companies know that multiple ERP systems, legacy systems and spreadsheets need to be synchronized and flexible. They demand agile models that reflect today's physical reality.
CEOs often ask me. "Why can I go to Google and in half a second get so much visibility on the Web, but if I ask my IT department a question, it takes four weeks if I'm lucky and costs me $175,00 for them to create a report for visibility?" Often, reports are hardwired to a specific way of doing business. Companies with rigid IT platforms and business systems fall behind and lose competitive opportunities, because they can't respond promptly and effectively to real world demands.
You need the ability to detect events, and you need the ability to determine what's really happening. It's possible to pursue agility using a collection of reporting tools and long nights of analysis and customized reporting, but top performers build flexibility and power into their IT operation. They pursue an agile business platform that lets them reconfigure their business processes rapidly.
Your Next Step
Look closely at each of these seven best practices, and consider how your company measures up on each point. Where is there room for improvement? Where can you start taking incremental steps to make changes?
Become an agility evangelist in your company. Be a champion for faster planning, for putting into place not just tools but processes that speed up the plan-do-check-act cycle.
These seven best practices represent a journey that will take a few years to fully implement, but offer exciting opportunity for very fast near-term results. Just by educating others in these concepts and putting in manual agility processes, your company can be well on its way to realizing tremendous benefits and increased competitiveness in the marketplace.
About the Author: Sanjiv Sidhu is the chairman and founder of i2 Technologies, a Texas-based supply chain optimization company. Sidhu holds an undergraduate degree in chemical engineering from Osmania University in Hyderabad, India, and a graduate degree in chemical engineering from Oklahoma State University. In addition, Sidhu has done graduate work in systems and control engineering at Case Western University in Cleveland, Ohio.
Today's consumer marketplace operates at breakneck speed, blazing an array of goods to customers through a host of different channels. In the past, companies offered a limited product line through a single channel that was delivered by one shipment method. No more. Today's supply chain copes with scores of new product introductions, alternate forms of delivery, changing government regulations and varying customer packaging needs. Complexity, variability and transitions are ever increasing, to the point that the traditional way to conduct forecasting — which largely depends on history — is no longer working.
Industry leading companies finding success in today's climate have a common feature: agility, an exceptional nimbleness and effectiveness in responding rapidly to change. In high-tech, of course, the stellar example is Dell. Some people believe their success comes from the direct sales model, some people think it's low inventory. Others believe it's due to their tremendous commitment to a philosophy of execution, centered around speed and agility. In consumer goods, Frito-Lay stands out, largely based on their focus on agility. They've been able to differentiate themselves to a point where they have 60 percent market share of salty snacks.
How do top companies maintain their agility, even while using many of the same tools used by less successful companies? Following are the seven best practices that are key in agile supply chain enterprises.
Best Practice 1 — Know Your Customer Well
Top performing companies pay close attention to their customers. They know which products customers are buying and when. They keep watch on competitors and world events that affect customer behavior. Armed with this intelligence they are better equipped to move an optimum amount of product.
Companies that excel even pay close attention to the terminology they use. By replacing the traditional "sales forecast" with "sales plan," they subtly transform that tool from a quarterly gamble into a no-excuses team commitment. This is an important philosophical shift. With a sales forecast, a company sits back and waits for the end of the period to see how accurate the crystal ball was. With a sales plan — just like a game plan in a basketball or football game — the enterprise takes a dynamic role in making results happen.
Sales plans are built on key leading indicators. During execution of the plan, the real world is constantly monitored to detect deviations from the plan, and immediate corrective action is taken. This continuous, closed-loop of plan-do-check-act is a defining trait of leading firms.
Every plan is subject to variability. No business professional is a magician who can flawlessly anticipate market share, weather, or competitor promotions. That's why a closed loop plan-do-check-act methodology makes a big difference. Excellent companies track customer point-of-sale data daily and know if only five units were sold on the first day when the plan called for 10. They ask themselves, "What do I need to know to make better decisions?" Perhaps it's real-time inventory data. Perhaps it's access to competitors' pricing.
Staying alert to customer behavior also expands opportunities. If your plan was to sell 10 units a day but you now see that orders are coming in at 15 a day, you might learn that the competitor's production line is broken and you have a unique revenue opportunity.
Agile companies are so committed to fine-tuning customer knowledge that they conduct post-mortems and share performance scorecards with their customers for added feedback.
Best Practice 2 — Know Your Supplier Well
It's impossible to meet a plan without having command over supply. When a best-practice company asks a supplier to ship 200 units they expect a confirmation and a commitment. What happens if the supplier is unable to meet that commitment? The first question to ask is, "What happened, and when did you know?" Supply chain leaders know that being kept in their suppliers' plan-do-check-act loop increases agility.
One way of knowing suppliers well is to go onsite and inspect their processes, and confirm that they actually have a plan behind them. This is similar to total quality management (TQM), where an original equipment manufacturer (OEM) needs confirmation that the supplier has the necessary quality processes in place. Smart businesses require a plan behind a supplier's commitment so that when things go wrong — and you know that something could go wrong — they learn about it themselves and advise you promptly, so you can take immediate action.
In the electronics industry, flex agreements are common. These agreements outline what happens when the real world deviates significantly from the plan, ensures that a supplier can adequately serve your needs, and protects the supplier from excessive capacity and cost. A variance of up to 10 percent may be acceptable, but beyond that specified measures may be implemented. For example, some companies don't expect a supplier to be stuck with excess, so they will promote a lagging product or share some of the damage.
Often, suppliers are chosen strictly on cost, not on their capacity to support agility. This can end up being more costly in the long-run. The trade-off for low price may be long, inflexible lead times. If short-term demand for one of your products spikes upward, the long lead time can become a lost revenue opportunity. You need more than attractive costs from a supplier — you also need reliable order fulfillment and flexibility that supports agility.
Most companies resist doing post-mortems with their suppliers for fear of revealing how flimsy their own company's demand plan is and how much it actually fluctuates. But good companies want to know if their forecast was wrong, because they understand that ultimately it's their product and their delivery that is becoming inefficient. Sharing scorecards can be extremely valuable, as no learning comes without measurement.
Best Practice 3 — Live and Die by the Plan
The truth is, most plans are dead on arrival. They're based on outdated and inadequate information, and owned by teams that don't have full accountability for their execution. Second- and third-tier companies make excuses, saying planning is unimportant because there's so much variability. That's not so. Instead, planning needs to become faster and more constraint-sensitive.
We expect plans to experience variability. Say a company develops a reasonable plan to sell 300 units a month. But then competitors begin promotions and there are snowstorms that shut down shipments and there are supply issues. Suddenly you're plan is in jeopardy. Just like in TQM, critical success of the plan is based on implementing the full plan-do-check-act loop.
If there's variability, you must do root cause analysis — quickly. If it takes a week to figure out why you didn't sell 10 units on the first day as planned, but instead sold five, it's no help. You've lost one week of the planning period and corrective options shrink.
Abandoning a plan can be costly due to the affect it may have on many other interrelated plans. Corrective actions may seem expensive locally, but often create value globally, because they maintain stability. In the end, best-practice companies do their utmost to make the original plan work.
Best Practice 4 — Synchronize Across the Enterprise
In a typical enterprise, discrete departments or divisions each have their own metrics and focus. I call these separate islands of activity "silos," because each one stockpiles and tracks information in its own area. Shipping, warehousing, sales, marketing, design and finance often operate in silos. For example, a regional sales manager focuses on overall revenues and margins in his specific region, and is less interested in which individual item or brand sells there. A brand manager, on the other hand, is focused on how flat panel TVs sell throughout the world.
If you don't know how to synchronize with departments and divisions within your own company, it's impossible to synchronize with suppliers. Best practice supply chains reduce the silo effect, making sure that everyone within the enterprise is driving toward the same goal, and that commitments to internal partners are honored.
Without cross-silo synchronization, someone might decide to run a product promotion before coordinating internally. When sales for the promoted product go up, sister products suffer. One of the world's largest computer manufacturers gains success by closing the loop through a plan-do-check-act process within its sales and operation activities. This company knows that creating a promotion for one product will impact other items, and each group takes responsibility to execute its plan. If the promotion isn't working, the company develops an action plan that allows it to continue to sell products to meet customer demand, while ensuring they are not left with excess inventory in another product category.
Most companies have unidirectional planning that starts with a demand plan, then a distribution master plan, factory plan and supplier plan. In this environment, when shortages occur it's difficult to strategically allocate available inventory. For example, if your suppliers can't provide enough microprocessors, do you make laptops or servers? And how will those finished machines be allocated to different sales regions? Better strategic decisions are made when there is communication and synchronization across the enterprise.
Best Practice 5 — Fulfill Rapidly and Reliably
In most enterprise resource planning (ERP) systems, when a sales transaction is handled well you know that the product was built, shipped and billed. Each step is handed off to the next for a smooth flow. But this type of process integration is not the same as efficient fulfillment. The ERP process is often slow, inflexible and opaque. Even at the point of billing, you just can't know for sure if the customer's needs were effectively met.
Agile corporations rely on the plan-do-check-act cycle in their transactions. They seek synchronization, which often involves negotiation. For example, if your customer submitted an order for 600 six-packs of beer and you deliver it three weeks late, that's usually not as good as delivering 300 12-packs earlier. Although it is the same quantity of product, because of the difference in packaging, the customer might not have room for 300 12-packs of beer. Additionally, it's possible that 6-packs are in more demand and 12-packs end up sitting on store shelves.
Companies with leading supply chains make an immediate commitment to a customer's request based on a firm, optimized execution plan. In a best practice environment, sub-plans are pegged to the customer request and progress is tracked against a fulfillment plan. When a deviation from the fulfillment plan occurs, compensating actions are quickly taken.
Best Practice 6 — Design for Supply Chain Agility
Traditionally, companies focus on network design, such as how many warehouses they have and where to locate them. While those are important issues, it's more important to design for rapid response to shifts in demand or supply. An agile corporation keeps channels open so they can share updated demand information rapidly with suppliers, and identify and promptly implement the best alternative option when supply is disrupted.
Benchmarking often reveals that it can take anywhere from one to four weeks before a company lets a supplier know about a forecast change. Companies with top performing supply chains, on the other hand, convert customer demand quickly into supplier requirements. One of the world's largest providers of mobile communications decided that its design goal was one-hour visibility. As a result, the company has implemented a system that offers the ability to inform its suppliers within one hour from the moment demand shifts.
There are other factors to consider in designing an agile supply chain, like complexity of your components. If you need 700 suppliers to build the same product that a competitor can build with 70 suppliers, you're going to be less agile. You can overcome this by establishing regular "gaming" processes to evaluate external forces, identify opportunities and determine optimal responses to the business climate.
Best Practice 7 — Manage IT to Support Change
An ERP system intended to handle sales transactions and financial controls typically doesn't manage planning or sourcing. It won't optimize visibility and decision making, nor will it necessarily ensure clean data. For the professional who is trying to close the supply chain loop with plan-do-check-act, the question becomes how quickly can the IT environment mirror the real world and react. Often a tool that was supposed to be helpful turns into a hindrance to achieving agility.
Best practice companies know that multiple ERP systems, legacy systems and spreadsheets need to be synchronized and flexible. They demand agile models that reflect today's physical reality.
CEOs often ask me. "Why can I go to Google and in half a second get so much visibility on the Web, but if I ask my IT department a question, it takes four weeks if I'm lucky and costs me $175,00 for them to create a report for visibility?" Often, reports are hardwired to a specific way of doing business. Companies with rigid IT platforms and business systems fall behind and lose competitive opportunities, because they can't respond promptly and effectively to real world demands.
You need the ability to detect events, and you need the ability to determine what's really happening. It's possible to pursue agility using a collection of reporting tools and long nights of analysis and customized reporting, but top performers build flexibility and power into their IT operation. They pursue an agile business platform that lets them reconfigure their business processes rapidly.
Your Next Step
Look closely at each of these seven best practices, and consider how your company measures up on each point. Where is there room for improvement? Where can you start taking incremental steps to make changes?
Become an agility evangelist in your company. Be a champion for faster planning, for putting into place not just tools but processes that speed up the plan-do-check-act cycle.
These seven best practices represent a journey that will take a few years to fully implement, but offer exciting opportunity for very fast near-term results. Just by educating others in these concepts and putting in manual agility processes, your company can be well on its way to realizing tremendous benefits and increased competitiveness in the marketplace.
About the Author: Sanjiv Sidhu is the chairman and founder of i2 Technologies, a Texas-based supply chain optimization company. Sidhu holds an undergraduate degree in chemical engineering from Osmania University in Hyderabad, India, and a graduate degree in chemical engineering from Oklahoma State University. In addition, Sidhu has done graduate work in systems and control engineering at Case Western University in Cleveland, Ohio.
