TALENT INNOVATION DIRECTION RESPONSE INCLUSION

10 New Ideas

for Generating VALUE

By Sumantra Sengupta

Running low on ideas on how Innovation is the lifeblood of your supply chain can bring all companies. This could be in the form of new products, services or even new value to the business and to new operating models. In the absence of your trading partners? Looking for innovation, a company will face the certain innovative concepts that will capture “death by commoditization” effect over a period of time. Yet where the supply chain is management’s attention and drive concerned, innovation seems to be lacking in future investment in the supply chain? all too many cases. It is rare to fi nd an orga- The ten ideas presented here nization thinking about—let alone investing in—supply chain innovation. However, they can help on both counts. will readily spend hundreds of millions of dollars on product and service innovation. Sumantra Sengupta is a vice president at Why is this the case? Why does investment in sup- Hitachi Consulting, based in the firm’s ply chain process innovation lag so far behind the growth Los Angeles office. He can be reached at and strategic importance of the function? To fi nd some [email protected]. answers, I revisited an article that I wrote for Supply Chain Management Review in 2004 titled “The Top Ten Supply Chain Mistakes.” Five years later, it’s evident that many companies across industries are still making those

20 Supply Chain Management Review · May/June 2009 www.scmr.com

SCM090501TenIdeas 20 5/7/2009 12:37:26 PM mistakes. They remain slow to adopt even basic best prac- EXHIBIT 1 tices to leverage the supply chain’s power. So if they are still struggling with the fundamentals, it’s not surprising Impact Areas of the Ten Ideas that they haven’t given much thought to innovation. But by not embracing innovation companies foreclose on an important opportunity to add value to their busi- ness and to their supply chain. This article sets forth ten innovative supply chain ideas that can add value. They can lead to positive outcomes in any economic environ- Cost Sustainability ment. Applied aggressively during turbulent economic Management Ideas Ideas times like these, however, they can yield powerful results 3,6,7,8 that will position companies well for the upturn we hope 1,2,3,4,7,9,10 and expect to come. Revenue Ten Innovative Ideas Enhancement Ideas 1,2,4,5,6,7,8 The ten value-adding ideas presented here will be refl ect- ed in different parts of the P&L and balance sheets, as we describe below. Exhibit 1 groups the ideas, some of into the current commodity cost structure. They were which overlap, into three broad impact areas—revenue spending less of their time and innovation budget look- enhancement, cost management, and sustainability. ing into alternate sourcing models for current products While management buy-in and cross-functional coordi- and more on exploring alternate design materials that nation are essential to making these ideas work, they all would also positively impact post-production support, reside squarely in the domain of the supply chain func- including parts and spares management. tion and its managers. The whole concept of design-driven manufactur- ing and alternate bill of material structure, though long Idea One: overlooked, is capturing new attention these days—and Shift the focus from order-to- with good reason. Shifting the focus to design-to-sup- delivery to design-to-support port will enable companies to fully explore their inherent We’ve all spent endless months (and sometime strengths in product design and innovation while con- years) focusing supply chain management on tinuing to drive down supply chain costs. However, this the order-to-delivery (OTD) process. This made shift will necessitate the adoption of lean and agile man- inherent sense since OTD represents 15 to 25 percent of ufacturing principles that emphasize rapid prototyping the supply chain variable cost in the typical company. Over and speed to market. And that means achieving the right the years, many companies have developed strong compe- mix of agility with stability that we have always strived tencies in the traditional activities of Plan, Buy, Make, and for in our supply chain practices. Move, which are geared to planning and delivering with sustained excellence. In the face of constantly escalating Idea Two: commodity pricing and a decrease in immediately available Look for hidden values in substitute sources of supply, however, many companies reverse logistics. have found that the cost drivers have shifted to the product The reverse value chain has traditionally been design and bill of material structures. treated as more of a compliance and regulatory Recently, we were engaged in two fairly lengthy dis- issue than a generator of value or competitive cussions with the heads of global operations for a con- advantage. Yet reverse logistics costs as a percent of revenue sumer health care and a medical device company. Both can range between 3 and 6 percent, depending on the type companies are global in their customer and supply base. of industry and product. Returns can range widely—from In addition to sharing common supply chain challenges, 4 percent all the way up to 50 percent in the publishing both these executives had one common goal: To change industry, for example. Obviously, returns represent a prime the product design process to adapt to the shifting com- source for discovering signifi cant value that can immedi- modity pricing market. The two executives both were ately drop to the bottom line. focused on driving their entire design and research team Some cellular network providers, for example, have to explore alternate materials that would not lock them gained sustained startup cost advantages by offering

www.scmr.com Supply Chain Management Review · May/June 2009 21

SCM090501TenIdeas 21 5/7/2009 12:37:32 PM Ten Ideas

refurbished or remanufactured phone sets at a fraction and manufacturing planning; new product commercial- of the cost of the new equipment. These efforts have ization cross processes; customer service and sales cross been driven by a well-executed return and manufactur- functional processes. ing process for equipment that is not at end of life. 2. Specify the lead times required to perform the pro- As corporations increasingly adopt green initiatives as cesses and elapsed time necessary to perform the asso- a core part of the value chain, they fi nd that component ciated tasks. This suggests that all associated tasks are refurbishing and reuse can be a source of additional value. performed to add specifi c value for the product or the This approach, coupled with the right set of controls for services that the company is providing. reusable products such as wooden pallets that are tradi- 3. Find logical breakpoints in the process. With tionally considered disposable, can positively impact the demand planning, for example, these breakpoints could cost basis by a factor of 1 to 3 percentage points. be process mapping and analysis, data analysis, data A well-constructed reverse logistics framework socialization and realignment based on inputs from cross includes the following components: a dedicated returns functional groups, and commitment to plan. Each of the network that is separate from the company’s forward net- task segments listed above has a logical breakpoint and, work; processes designed specifi cally for the reuse and hence, can be treated as a self contained segment. reverse logistics activities; incentives for the dealer/retail 4. For the various task segments, create a “right shore” network to perform value-added services such as effi - map that is balanced against the associated lead time ciently sending back damaged product or incorrect orders; boundaries. This will lead to extracting the best use of and predictive tools and technologies to accurately predict global skills that are available within the company or with inventory velocity needed to ensure customer satisfaction. partners that can provide the required process services. As a competitive lever, appropriate cost drivers for the Utilizing the simple four-step approach will ensure reverse logistics effort also must be in place. that the company is globalizing the supply chain func- tional processes as well as utilizing the talent pools that Idea Three: are available across the world. This will enable creation of Globalize the functional processes functional centers of excellence across the organization’s and adopt a “follow the sun” geographic span while freeing up overburdened resources model for skill deployment. to now execute the required supply chain process. Information technology outsourcing has become mainstream over the past 15 to 20 Idea Four: years. The global delivery model for outsourced IT ser- Manage the supply chain using vices has migrated from on-site to “right-shore” —based the concept of floor-and-surge on cost, skills and technology availability. It is common- to deliver with increased agility place to have a U.S.-based company’s help desk call andless waste. answered in Philippines with a back up agent in Ireland In the Supply Chain Management Review and remote services for desktop support coming from article mentioned earlier, we discussed the concept of India. This taps into the English speaking skills in the having multiple supply chains within a company. Today, Philippines, the tax advantages of a location like Ireland, that concept may be more relevant than ever as compa- and the technical skill base and good bandwidth avail- nies balance the need to be market responsive against able in India. ever escalating total landed supply chain costs. We have not seen the application of similar think- Companies still tend to operate one supply chain and ing applied to supply chain processes such as planning, manage all end-to-end activities using the same level procurement, customer service, and innovation. These of rigor—or lack thereof. Decisions are made primarily resource-intensive activities could benefi t from a care- using manufacturing cost as the primary determinant, ful analysis of what might outsourced or “right shored”. with the major tradeoffs typically between lead times There are four simple steps to accomplish this. and safety stock. Yet in today’s dynamic, consumer-driv- 1. Create the “task pyramid”. Every supply chain pro- en market, where forecasting is always risky, lead times cess can be segmented into the following task hierarchy vary widely, and safety stock is extremely costly, this tra- and assigned a percentage of time spent on each: admin- ditional approach may not be best. istrative, analytical, innovative and cross functional. We suggest using the fl oor-and-surge capacity model Take normal supply chain planning functional processes, as a more responsive alternative. Through this approach, which include demand management activities; supply the company invests in load leveled (“fl oor”) capacity for

22 Supply Chain Management Review · May/June 2009 www.scmr.com

SCM090501TenIdeas 22 5/7/2009 12:37:38 PM the stable and fast-moving products, also known as high with a real-time dynamic planning horizon, it leads to a fl ow-through products. These are products that move much higher degree of agility. Additionally, the tendency very quickly and repetitively through the supply chain in to focus on snap shots of monthly demand numbers often extremely cost advantaged locations since lead times can leads to high levels of dampening of the “within week and be buffered by setting appropriate safety stock policies. within month” customer order variations. We would pro- For the products that have more variable demand pose that companies think about the total demand that patterns, are candidates for postponement techniques would be consumed within a certain time period (lifecy- (pack size variations, color variations, or other variations cle) and use the dynamic predictability concept to project that does not disturb the basic confi guration), or are sea- the entire lifecycle (amount that will be sold or shipped sonal or promotion-intensive, we recommend a “surge” during a certain time period such as a holiday program) approach. These products are planned and produced sep- to augment the baseline static forecast. Done on a weekly arately from the more stable demand products. In many basis, such augmentation will prevent the high error levels instances the surge manufacturing is co-located with the and variations often found in many industries. fl oor manufacturing arena; however, it is managed in a The agricultural produce industry offers a great more agile manner. Depending on the product’s charac- example of the dynamic nature of demand management. teristics, one may consider deferring end production of The normal modes of demand planning are almost irrel- surge products as near to the end channel/consumer as evant because of the huge impact of the weather on the possible (for example, in postponement centers). produce that is harvested. Complicating this are yield The fl ow-and-surge approach allows the corporation issues, and size and color variations of the produce. The to benefi t from the longer production run economics as end result is that predicting demand beyond a week well as the labor arbitrage that many seek. becomes almost impossible. This industry uses daily demand and supply management to ship product across Idea Five: the country to the various retail channels. The industry Focus on real-time updates and leaders exhibit the ultimate agility in adapting and shap- adjustments to increase agility and ing demand patterns based on available product. shape responsiveness. (Traditional static forecasting without dynamic Idea Six: updates is passé.) Redefine the traditional supply Senior manufacturing executives frequently ask, “Is fore- chain silos and culture to make casting necessary? Is it relevant in a day when product it value chain-centric and hence life spans are getting shorter and consumer preferences ensure a more successful product are becoming even more fi ckle? Is the traditional view of launch. demand planning dead?” Our view is that planning and The supply chain function in most corporations is initi- forecasting is still necessary. Yet it now needs to be con- ated and integrated at the time of new product commer- ducted in near-real time. cialization and continues until the product is shipped. What does it mean to be near-real time? It’s the mini- This is a huge step from even a decade earlier when the mum time required to provide supply chain stability with functions of manufacturing, procurement and shipping respect to necessary manufacturing lead time and the were mainly viewed in isolation. Integration of the sup- necessary transportation lead time. In today’s dynamic ply chain functions, which is fast becoming common- environment, you need to dynamically adjust the plan place, has delivered huge benefi ts in both COGS and based on real-time market signals such as point-of-sale income statement measures for many companies. data, purchase order activity, and competitive market Two key critical activities, however, have been left out factors. Many fi nd it hard to think through the imple- of this integrative process: product design planning and mentation of the concept because of the deep-rooted direct relationships with channel partners and customers. notion that planning horizons are monthly and required In most cases today, the supply chain function picks up to provide manufacturing stability. This traditional think- when the product design is completed and initial costs ing has led to continued higher-than-necessary inventory have been approved. However, the supply chain should levels across the entire extended supply chain (including be involved right after the initial idea-generation process the suppliers) as well as customer service levels that are has been completed. This will allow the company to more still stagnating in the mid-80 percent. effectively assess alternate design specifi cations in light of However, if you couple Idea Four (fl oor-and-surge) availability and location of supplies. It would also enable

www.scmr.com Supply Chain Management Review · May/June 2009 23

SCM090501TenIdeas 23 5/7/2009 12:37:47 PM Ten Ideas

the supply chain management to identify potential supply costs). We are not advocating the re-emergence of B2B channels and identify alternate materials as well as supply exchanges. Instead, we’re saying that companies should networks. In the end, this involvement would result in a continually seek to manage their commodity spend by better cost platform for the new product. exploring means of partnerships and participation in The second area that supply chain management pro- concepts such as pooling and spend leverage. fessionals needs to expand into is in dealing with and forging direct relationships with channel partners and Idea Eight: customers. The traditional supply chain function typi- Shift the focus of supply chain cally ended when the product was shipped and again management from product only to picked up if there were issues with missed shipments product and services management. or product returns. However, as the supply chain has Our traditional focus, particularly in the become strategic to both the manufacturer and the chan- manufacturing environment, has been on nel partner, it needs to proactively plan for and address the various aspects of product excellence. Now, more operational issues vs. reacting to them. Forging the direct and more companies are adding an element of value- relationships to augment the existing ones typically held added services to create “stickiness” with their channel and nurtured by the sales function will yield a smoother partners. The supply chain should take note. This does product positioning (for new products); greater agility to not mean that the supply chain should become a direct deal with out-of-stock situations; and the ability to work provider of value-added services into the marketplace. jointly to reduce total landed costs as well create value in Instead, we’re suggesting that the function adopt a innovating in category management type of activities. strong element of a service in its mindset and day-to-day execution. This includes all components of the supply Idea Seven: chain—planning, sourcing and procurement, transporta- Create demand and supply pools tion and logistics, and so forth. for commodity products and This service orientation also should be extended to services that extend the normal the channel partners as well as strategic suppliers. The span of enterprise focus. aim here is to optimize the end-to-end supply chain pro- We were recently speaking with the senior cess. This could involve the establishment of value added management teams from three different corporations services like CPFR (collaborative planning, forecasting ranging in annual revenues from $400 million to $3 bil- and replenishment); VMI (vendor managed inventory); lion. None of these companies had competing products, and collaborative and joint business planning. It could either existing or planned. However, each of the compa- also entail the creation of best-practice sharing centers nies was spending large amounts of effort, personnel and of excellence. Joint educational programs that address associated technology in managing demand and supply the signifi cant value of working together would be valu- for what could be considered commodity products and able in this regard as well. services (i.e., those not differentiating from a product or This mindset and cultural shift required to imple- company value). These included MRO spend; non-stra- ment this idea is easier said than done. It involves a fun- tegic marketing spend; non-strategic product spend like damental migration from a internally focused mindset shrink wrap and corrugated, and so forth. to one that is more consultative and collaborative. This As the discussion progressed, my thoughts went back type of shift often calls for a signifi cant change manage- to 2001, when many of us were discussing the entire con- ment effort among personnel as well as augmentation of cept of B2B exchanges. The aim of B2B exchanges was to current skills with external resources. The payoff associ- lower the spend level in these commoditized areas. The ated with making this shift, however, will be evident in problem was that results too often fell short of expecta- increased customer service levels and marked improve- tions, and the B2B exchange idea largely fell out of favor. ments in product fl ow-through. Yet today many companies are once again beginning to work with members of the extended value commu- Idea Nine: nity in pooling their spend and in systematically driv- Utilize on-demand processes ing greater consolidation across the supply chain while and associated supporting improving service and in many cases lowering total cost technology to complement existing of ownership (this includes not just the piece price investments. but also associated personnel, process and technology Many companies have invested in the tra-

24 Supply Chain Management Review · May/June 2009 www.scmr.com

SCM090501TenIdeas 24 5/7/2009 12:37:56 PM ditional people, process and technology aspects of the responsiveness that is required to satisfactorily serve all business. Where the supply chain is concerned, there’s constituents profi tably. Hitachi Consulting has devel- been a particular emphasis on the so-called enabling oped a concept called Building the Market Responsive technology. Yet none of us need or want another study CompanySM, which demonstrates how ultra-lean organi- that is based on the clever use of analytics and huge zations miss out on viable market opportunities for lack spread sheet-based models that is not followed up with of fl exibility. (A video of this concept can be viewed on a robust implementation plan. We all know that any the fi rm’s website at www.hitachiconsulting.com.) implementation plan will have large elements of tech- Responsiveness as a measure should use the con- nology. However, we are also entering an era in which cepts of fl oor-and-surge; lead time agility; and cus- large capital investments will be scrutinized extremely tomer service and reverse logistics fl exibility. These closely due to the tightening of the credit markets and all are useful inputs to determine the right level of expenditures for other areas of investments like property, responsiveness that is required to survive and thrive plant and equipment (PP&E). in a fi ckle, consumer-preference driven world that is We suggest that companies take a closer look at using always changing. on-demand processes and technologies across the value We often fi nd that companies use the marketplace as chain. This approach will allow for the optimal usage an excuse to not offer any stability in their supply chain of capital expenditures while leading to higher than and are forever fi ghting fi res. It’s as unacceptable as not average adoption rates of the process in order to derive considering customer/consumer preferences in your maximum benefi t. On-demand enablers are now widely business and supply chain strategy.. We encourage com- available from most Tier 1 and Tier 2 technology vendors panies to take a hard look at the required level of agil- and have been gaining signifi cant ground in recent years. ity in the end-to-end supply chain and then to innovate Such solutions are no longer limited to the well-known their processes using techniques such as lean to extract on-demand technology for sales called salesforce.com. an additional 3 to 5 percent year-over-year improvements Many companies are beginning to utilize this approach (the “Rule of 5 percent”). At some point, all companies for advanced processes like detailed analytics that may will reach a ceiling of agility and improvement. The hope not be required on a regular basis or for advanced capa- is that with continued innovation and growth on the top bilities like network and warehouse design. Several pro- line, it will be a very long journey. viders have made available on-demand models for these types of activities (as opposed to the traditional project Driving the Next Idea based offering). A number of companies (including ours) As our discipline continues to gain importance as a provide deep analytical services using a follow-the-sun strategic enabler for competitive advantage, we have to model from cost advantaged locations like India and demonstrate innovative ideas that will continue to drive emerging areas like Latin America. Expect to see these increased levels of investment. The entire supply chain types of services becoming more mainstream in the next management ecosystem (academics, practitioners, tech- few years as the focus continues on cost restructuring nology providers, consulting fi rms, and so on) all have and “doing more with less.” distinct roles in continuing to drive the agenda forward. To achieve that end, all of us need to become much Idea Ten: more cross functional and “extra enterprise” focused. Decide on the right level of value Cost pressures are making this a necessity and not a chain responsiveness, then apply luxury, and the group that is able to extract value where the “Rule of 5 percent.” none was expected will truly become the supply chain Responsiveness is critical to the market suc- master. We hope that the ten ideas offered here will help cess. One recent survey found the difference supply chain organizations deliver on that value proposi- between market leaders and laggards was tion—and in the process drive the next new idea. ࠗࠗࠗ their ability to respond to ever-changing market condi- tions. Responsiveness should be viewed as complement Author’s notes: Read more about this topic at www.hitachi- to lean. In a recent discussion I had with an automotive consulting.com/responsiveness. executive, he made the comment that his company had I would like to acknowledge several Hitachi colleagues from become too lean and could no longer be as responsive. the Supply Chain Group, Products Industry Group and Corporate Marketing for their helpful comments on earlier Every organization should take stock of the degree of drafts of this article.

www.scmr.com Supply Chain Management Review · May/June 2009 25

SCM090501TenIdeas 25 5/7/2009 12:38:08 PM