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Four Steps to Take Now to Prepare for the Recovery:
Strategic Supply Chain Management Strategies to Maximize Operations Performance Over the Long-Term

Oddly, it is difficult to remember when these curious and tumultuous economic times were not with us; when the business world turned with expected precision, when the Dow wouldn't surprise us with a 4% drop in a single day, when 17,000 people wouldn't be losing their jobs during a single month, and when receiving your monthly 401k (RRSP for Canadians) statements in the mail would not send you running for the "pink bottle" for relief. It was only this past December when the National Bureau of Economic Research declared publicly that we were in a recession; and yet, a great deal has been written about the global condition in this relatively short period of time.

The internet serves as the world's on-demand bibliotheca where new authors emerge every minute generating endless opinion and analysis for public viewing. There are countless blog debates where comparisons are made from days bygone and where open court is held for those who stand publicly accused as accountable. And there is equally open conjecture in social forums on how to regain our footing.

There is one common belief however, and it is that we will recover, as we always have. Every downturn precedes an upturn. Indeed, there seems to be a chip on every square of the 'roulette-to-recovery' table, and those companies that prepare themselves now stand to win big when the upturn begins.

Like any macro event such as the one we are all experiencing, no one comes out of the other side completely the same. While some may cower for cover in hope to survive the storm, the bold and brave are hard at work establishing new and innovative ways to operate during, and more importantly, following the recession. This paper will focus on strategies to prepare for a more prosperous time ahead.

Handling unpredictable cycles

For the past 30 years most manufacturing companies employed some form of well established best-practice for how they operated. Sure, there are an abundant number of variances, but most would agree they follow something that looks like the following (diagram available in the PDF version of this white paper).

Core to this process is establishing the operating plan which can both fulfill the shareholders expectations, as well as fit the capability and capacity of the given enterprise and its extended supply chain and distribution network. Complex supply chain models based on many assumptive parameters are established to project expected sales, margin, cash flow, capacity, and earnings per share, among other things. Highly-skilled and educated individuals deliberate and collaborate over what will become a company's marching orders. Under stable and predictable business conditions, such exercises would yield what practitioners would call 'acceptable precision' (results would reach an acceptable precision of an established objective function). For some businesses, this precision can be trusted without rigorous inspection. For many others however, the assumptive parameters (that drive the model) can vary unexpectedly at any moment, thus increasing the risk of generating, and subsequently following, misguided plans. For these companies, unexpected shifts in market conditions can result in particularly difficult times.

Traditional processes and tools did little (or nothing at all) to provide early warning of a shift in business conditions, and even less so in anticipating the negative side-effects this shift in business conditions would cause. Carrying massive amounts of the wrong inventory and suffering diminished customer service levels is all too common today while manufacturers scramble to regain their footing. Why is that? With the maturity of ERP, and the sophistication of many supply chain planning solutions, what makes today's fragile market uniquely challenging? What is missing?

Are traditional approaches and tools failing you?

The truth is, traditional approaches and tools have been failing many companies for quite some time, well before the recession hit. Our current economic climate simply served to exacerbate and accelerate the problems—shining a bright light on the inadequacies of current and accepted wisdom. Notwithstanding the recession, manufacturers have been hit with an unprecedented number of unavoidable and undeniable macro level trends, each driving their own unique and impactful side-effects. To name but a few:

• Global and pervasive outsourcing has put critical supply chain information just out of reach from the key decision makers, ultimately both slowing down a company's ability to react, and increasing the error of supply chain related decisions.
• Product life-cycles have been contracting steadily with both improvements in design and manufacturing technologies. Consumer expectations for innovation coupled with their search for fashion in all things—phones, cameras, clothing, drinks, faucets, furnaces (yes, you can order a new furnace in a color of your choice)… you get the picture—will mean further shortening of product life-cycles.
• New Government Regulations are being introduced or are changing each year. Producing and selling goods has never been more scrutinized by local governments as they are today. Whether for safety reasons, for preservation of the environment, or taxation requirements—compliance is being closely monitored and companies are being held accountable, whether they outsource or not.
• Characteristics of competition are changing as consumers become increasingly empowered to get what they want, when they want it, and from where they want it. The internet, and especially the emergence of social media, has given the average consumer more information about the quality of goods, fair price, and availability than ever before. Within days (sometimes hours) of a new product introduction, social networks are a buzz about pros, cons and costs, thus adding pressure and risk to the success of any new product launch.

Add the speed and ferocity at which the recession hit us to the above stress points, and you get a perfect storm driving some companies to dodge for cover, while others stand frozen and hesitant to do anything.

Traditional processes and tools in place today were never designed to absorb the degree of volatility companies are facing today, and this is one of the reasons so many companies were caught off guard when the recession hit. Running batch-based optimization analytics based on assumptive parameters attached to complex and fixed supply chain models does not provide for flexibility, nor do they purposely take into account the kind of human judgement required when decisions must be made between varying compromises. New competencies and tools are required to avoid being caught off guard during the next downturn, and more importantly, to capitalize when the boom returns.

Embrace the chaos

With the increased complexity of today's supply chains as a given, and recognizing that it would be unwise to rely solely on legacy tools and processes to manage your business under what can best be described as an unpredictable and turbulent economic climate, leading organizations are developing new competencies to embrace the chaos with confidence and consistency.

While many large enterprise systems providers are pointing to new and emerging improvements in optimization arithmetic, visionary executives stained with failed projects of this sort are turning away, and looking for innovative ways to leverage the people working on the front-line. This is where all the action is— where the rubber meets the road, and where day-to-day decisions are made that can either bring a company closer to success or further away.

We are emerging from an age where computer software has played a leading role governing supply chain activity (and people were trained to trust, almost without question, the actions being computed by the software model), to an age where teams of people are trusted and expected to exercise their creativity and judgement in a collaborative fashion based on what is actually happening in real-time. Software is still necessary, but is moving to a supporting role rather than a leading one. Becoming increasingly sensitive to the actual day-to-day state of the supply chain, coupled with a dramatic increase in the organization's ability to respond appropriately and consistently to change are becoming the new competitive advantages.

Step 1:
Get your Data—the Integrator's Dilemma

A key step in preparing for a breakthrough in supply chain operations performance involves regaining control over the availability and accuracy of supply chain data. While ERP systems continue to serve as the enterprises system of record, it is well known by now that much of the data required to operate in the 'virtualized' supply chain resides in disparate systems often owned and controlled by other partnering enterprises.

The likelihood that all participants within a given supply chain are leveraging a unified and common ERP platform is nil. So while the instinct of IT departments is to use a single ERP vendor for all supply chain needs under the misguided belief that this reduces the need for integration, business leaders are now challenging their IT departments to find a way to pull all relevant data from their various disparate locations (along with the associated behaviours of that data) into one version of the truth for inspection and analysis. Much of the needed data not only resides outside of the ERP system of choice, but also outside of the enterprise. This is the integrator's dilemma.

Integrating Demand

Establishing one version of the truth across a virtual multienterprise supply chain is not a trivial task, but if tackled in phases, is a perfectly reasonable and attainable goal. Most companies start with synchronizing and fully integrating their demand, which is a key step towards driving an enterprise to a pull-based or demand-driven model. It is worth noting that in today's global marketplace, the sources of demand have also grown substantially with an associated increased complexity in the collection, aggregation and analysis of that data. Many companies have recognized the futility of relying exclusively on a statistical forecast as a predictor of future demand, especially in the current economic climate in which historical demand patterns are a poor predictor for current demand. Instead, progressive companies are seeking collaborative inputs and monitoring other market indicators to facilitate a consensus forecast development process. There is strong evidence that where companies have invested in improving their demand forecasting process, the rewards are substantial. In an AMR Research article they reported that, across industries, companies

• 32% less finished goods inventory
• 18% stronger order fulfillment
• 25% shorter order cycle times
• 6% better supplier on time

Synchronizing Supply

Still, demand is only half the picture. While somewhat more challenging, the second phase would introduce the synchronization of supply into the same system.

There are several multi-enterprise supply chain visibility tools available today to choose from that can accelerate this integration. Key attributes to look for include:

• Multi-enterprise structure, supporting inter-site connectivity
• Any-time refresh of any portion of data without interruption to users inspecting it (e.g. volatile data, such as demand orders or customer forecast, can be refreshed multiple times per day while non-volatile data can be refreshed less frequently)
• Time stamping of data records, with the ability to view previous states of the data (e.g. yesterday)
• Ability to import multiple data formats, including XML and structured Excel
• Data validation tools to capture and alert individuals of misrepresented or erroneous data
• Alert mechanisms to warn administrators when data is either corrupt or scheduled feeds are missing
• Robust data security profiling support restricting data visibility from a group, or a single individual perspective
• Powerful and flexible reporting on-line, and on-demand reporting and filtering mechanisms

Step 2:
Establish a Robust Supply Chain Surveillance System

If your company was caught off guard, and still suffering the impacts of the current economic crisis, it is very likely due to lack of an early warning system—what some executives call "accelerated insight." Knowing sooner of an impending impact to one's business is critical to ensuring adequate runway to course correct. In the late 1990's, several start-up companies made attempts at creating a Supply Chain Event Management market—which ultimately failed. At the time, the motivation for this capability was certainly right on the mark; however, the implementation and design would drive most organizations to shut off the alerts. Of primary concern was the lack of the following capabilities:

• Individuals must be self-empowered to identify what they would like "watched" within their prescribed level of tolerance, and how/ when they are to be notified. The key here is selfempowerment— no need for IT departments to take calls every time someone wishes to add a watch-condition.
• Unexpected events are not all created equally. The same event could be benign one day and critically urgent the next. Establishing a surveillance system that can alert individuals on the impending impact of unexpected change (not just the change itself) is what business leaders are starving for. For example, material that fails inspection is only urgent if that same material is gating delivery of an order.

Such a surveillance system should be capable of monitoring, prioritizing and alerting the right people to the following conditions:

• Avoidable period-ending inventory balances
• Demand order delivery moving from 'safe' to 'at risk' inside a reporting period
• Supply chain policy misalignment (e.g. BOM, part policy, scheduled receipts, etc.)
• Excess inventory avoidance—inventory on order with no visible demand
• Inventory shortages/excess caused by misaligned engineering change orders
• Shortages with inventory transfer opportunities across otherwise disconnected nodes in the network
• Planned production releases which are 'clear' or 'blocked'
• Released orders at risk of seizing on the floor

Step 3:
Empowering People to Collaborate

As mentioned, thriving in the future will require a greater degree of human involvement and intervention than what we see today. This is not to say that today's software solutions will be obsolete, however they will be forced to improve in direct correlation to the changing business challenges. While it may be a contentious posture, and some may disagree, many executives have come to believe that we have exhausted the purely mathematical/ optimization approach to improving supply chain management (SCM), and the problems have changed in such a way as to require tools that support multi-enterprise collaborative compromise. As Sean Rollings points out in his blog post titled "The Human Side of SCM", "...the world needs to focus more on the community of people, because we won't see a great leap forward in SCM until the people are empowered." This implies the need to make collaborative technologies pervasive and broadly adopted.

The great flaw in optimization-based approaches to today's business challenges is that they distinctively take humans out of the equation (save the few responsible for setting up the model), and apply mathematical models to derive decisions. It would be highly unusual for front-line individuals to be part of the planning process.

Having a fully integrated view of the supply chain is an important factor to enabling effective collaboration, as all stakeholders must be aligned around the same state of the data. With that in place, extended communities involved in maximizing value out of the supply chain can become aware (in near real-time) of changes that affect them, and thus, can quickly formulate course corrections. To be clear, a course correction does not necessitate a new plan, but rather a decision that brings an organization in a direction closer to their goals.

One of the key innovations where software can provide a dramatic and necessary value is in managing the relationships between the people involved in the supply chain, and managing their individual responsibilities as players in the process. It is vital that an individual, or team of individuals, clearly know who is being impacted by course corrections they are contemplating. Accountability and responsibility must be a core capability of the software application. Collaboration and trust will fail if decisions are made without regard to the impact they have on other parts of the supply chain; and therefore, there must be a deterministic approach to this requirement. Software can provide the necessary analytics to provide for it.

Step 4:
Merging Supply Chain Planning and Execution

The first three steps are foundational to achieving this fourth step—tighter integration between planning and execution. Achieving this state has long been talked about, yet often dismissed as impossible to achieve, or impractical given the current state of technology and the cultural differences among all the players within a global supply chain.

Dan Gilmore and Robert Nardone, from CSCO Insights, are predicting that the time is right, and the technology is ready. According to their research paper titled "Next Generation Supply Chain Management, The Integration of Planning and Execution," 92% of 300 respondents surveyed said it was important to better integrate supply chain planning and execution in the next 2-3 years. At the heart of this transformation is a complete rethink of how Sales & Operations Planning (S&OP) processes are designed and executed. Current and traditional methods of running S&OP procedures as governed by the clock and calendar are no longer considered best-practice. Leaders are looking for 'continuous S&OP' where the type of supply chain surveillance systems described previously can play a key role in automating the involvement of sub-teams to review and repair portions of the S&OP at precisely the time they go out-of-kilter.

Organizations will need to implement a tightly integrated and collaborative S&OP process involving individuals from Sales, Marketing, and all Supply Chain functions. There must be transparency and alignment to financial goals from the top down. As Gilmore and Nardone have discovered, there are significant barriers to achieving this end state, but they are not insurmountable. Key factors of success include:

• amalgamating demand into one shared and synchronized
• version for all stakeholders
• establishing multiple layers of data visibility of your supply chain
• establishing organizational alignment around common goals
• rationalizing and integrating supply chain tools and processes

Those that embark on this journey are sure to reap significant benefits, including improvements in customer service levels, lower inventories while reducing inventory stock outs, and an overall reduction in supply chain operating costs.

Summary

Recessionary times, while painful to live through, often work as a catalyst to conceiving breakthrough innovations. If you are one of those companies caught off guard, it is a sign that you are ready for new methods and tools.

Integrating and synchronizing your extended supply chain data is the first step and is necessary to establish one version of the truth to connect all supply chain processes. Implementing a robust sense-and-respond surveillance system will give the extended supply chain community the necessary runway to implement course corrections with confidence—knowing sooner is the key to empowering people. Responsibility and accountability must be an integral part of the decisions made by the community. Technologies exist today that would allow individuals to selfdeclare their areas of responsibility, thus allowing the system to determine who is impacted by any change in the supply chain, regardless of function. Lastly, and perhaps the most potent of the steps, prepare to merge supply chain planning and execution.

It is highly unlikely that large ERP vendors will be the innovators of such a state—rather it will likely be a combination of best-of- breed vendors focused on collaborative technologies and tight integration that will succeed first. With these fundamental building blocks in place, a new and compelling best-practice bar will be established for S&OP, supplier collaboration, perfect order promising, inventory management, and many more key supply chain processes.

The market upturn is in front of us, and there is sure to be another downturn at some point beyond that. Will you be ready?

Additional Resources

• Grace Y. Lin, Robert E. Luby Jr. and Ko-Yang Wang. "New Model for Military Operations," OR/MS Today. December 2004.
• Stephan H. Haeckel. "The Premise and Promise of Sense-and-Response," Harvard Business Press. June 1999.
• Jeff Woods, Alexander Drobik. "Development of Chaos-Tolerant Processes Is Key to Supply Chain Optimization," Gartner Research, ID #: G00138252. March 2006.

ABOUT KINAXIS

Kinaxis™ RapidResponse is a single on-demand service that empowers multi-enterprise manufacturers with integrated demand-supply planning, monitoring, and collaborative response capabilities. RapidResponse embraces human judgment to enable planners and front-line responders to handle unpredictable changes. Global leaders such as Casio, Honeywell, Jabil, Qualcomm, and Raytheon use RapidResponse to achieve breakthroughs in sales and operations planning (S&OP), demand management, supply management, and supply chain risk management. The results are superior customer service, improved operations performance, and a competitive market advantage. For more information, visit the Kinaxis web site at www.kinaxis.com or the company's blog at blog.kinaxis.com.

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