Solutions start with design
It takes virtually an Act of Congress to correct problems once products move into production.
By Doug Smock -- Purchasing, 6/3/2004 6:00:00 AM
The collapse of the economy in 2000 uncovered many ugly spots in American supply chains, particularly those serving the telecommunications and electronics sectors. One of the most notable examples was Lucent Technologies. Devastated by the implosion of business in 2000 and 2001, it experienced a negative cash flow of $2.2 billion and was buried in almost useless, highly customized inventories. Cisco Systems in 2001 wrote off $2.2 billion in inventory. Motorola risked supply chain problems because design engineers specified a capacitor that could only be made by a single producer in France.
Working toward standard designs is a major undertaking, but it has a big payoff in expanded buying power, reduced testing costs, leaner inventories and a more nimble supply chain. In this report, PURCHASING presents the results of a reader survey on supply chain complexity and an interview with John Trush, a partner in the business consulting practice at IBM. Earlier, he created the purchasing/supply management practice at Coopers & Lybrand and at PricewaterhouseCoopers. He also held procurement and general management responsibilities for various manufacturing companies.
PURCHASING: John, do you see increased focus on efforts to reduce supply chain complexity?
TRUSH: It's interesting as you go to different business sectors, each think they are complex. Some, such as automotive, electronics and telecommunications, have invested a lot of resources into supply chain improvement. Others, such as pharmaceutical, life sciences, consumer packaged goods and chemicals, have been somewhat sporadic in their approach. When we look at inventory, it is a symptom of overall effectiveness. If you're talking about speed, flexibility, capacity and synchronization of demand, inventory is usually what gets focused on because it's the easiest thing to be measured. Progress in those areas needs to be carried over to indirect goods and services. And finally to those products that are outsourced. The other piece that needs to be leveraged is e-sourcing. A critical prerequisite to e-sourcing is specification development.
Q: Why is supply chain simplification important?
A: When it comes to mproving total cost and speed to market, the key elements are working on simplification and creating new strategic options to consider. A lot of people think of it solely in terms of cost. The major issue is to create strategic options.
Q: Does this issue receive adequate attention in corporate America?
A: In the corporate suites, yes. Most CEOs are focused on top line growth. In order to capture their attention you need to develop the business case. New executives—and especially those who have new roles in acquisition—are much more likely to look at supply chain processes.
Q: Can you cite any successful implementations?
A: Many. My experience is primarily in pharmaceutical and consumer products industries. The efforts are usually in total supply chain process. They all need to be linked in a very cohesive manner. Examples include Quaker Oats, Unilever, Avon, and Campbell Soup. The programs usually started under the banner of supply integration that worked as a business alignment and communications between their firms. Progress depends on their initial starting point. Many started with the size of their supply base and reduced it to a smaller size and then applied techniques to optimize. Journeys were planned to go three years and they went five or more. A lot of people want to know how much they can save on their total buy. Savings on just this approach can be 1%-3%.
Q: What is required?
A: Hard work is needed across many functions.
Q: What are the engineering issues?
A: When you go back to suppliers it depends on the culture of the company involved. If you want to make a change on a declining product, it's not worth the investment to make that change. Many companies have rigorous processes for change and specification. Often customers have submitted products they have custom designed and then those specifications are built into the formula. While in many cases their intent is to optimize performance, this approach can also limit other suppliers. What we found in going back is that it is important to make sure that new product development is one of those processes you look at in supply chain optimization, to see if there are existing stock products that fit the bill. It becomes much more difficult after a product becomes established. It's difficult to ascertain who has the responsibility at that point to determine that we should substitute a product and stop SKU proliferation.
Q: How should companies deal with corporate cultural issues?
A: It's a question of demonstrating what we are trying to achieve. A lot has been written about change management techniques. When approaching a research chemist or engineer, you have to make sure that what you are asking is going to make their life easier. And then make sure they get credit for the benefit.
Q: Who is the quarterback of that process?
A: You need to pick a category and a specific item and then establish a cross-functional team. The purchasing team usually structures the process. And then there is a cross-functional team which includes R&D/engineering, quality, manufacturing, a financial person who is the scorekeeper, and then most importantly a supplier representative. But the team members themselves determine the leader of the team once it is kicked off. Procurement professionals make good team leaders.
Q: What do you do when you hit specific roadblocks?
A: Everyone is looking for a short-term solution to meet a business need. If a supplier causes you problems with downtime or scheduling problems, that's a good place to start. Sometimes specifications get blamed. You need to identify root causes instead of just putting it off on a specific reason.
Q: When you see a carton line go down, how do you know if it is spec or variability of the process?
A: A lot of problems are driven by the equipment they have in their facilities. There can also be a lot of variability in a material even if it is specified correctly. A polypropylene listed as an 8-melt flow can have variability from five to 20 and still be acceptable based on producer guidelines.
Q: What savings can you expect from a supply chain simplification?
A: A minimum of 1%-3% savings. Normally I would say 5%-9%. Consolidating your supply base and getting it down to the right number is the right first step. You can only do a handful at one time. It's very important to create a way to capture and share learning. Teams will have a great deal of success in a short period of time, and it's important to leverage those successes to help others. Use a center of excellence approach.
Q: What else do you need?
A: You need some type of technology enablement. Visibility to the specification is really important. But you also need visibility into processes to create specs and the ability to collaborate. And then the last piece has to deal with some way to track metrics. Make sure you clearly establish the date by which you want to have the work done. In general, I wouldn't be surprised if two to three years later there is 90% completion.
Q: Can you go overboard on supply base reduction?
A: You should never be sole sourced. You ought to have at least two in every category. The right number is a function of the dynamics of the market and what your requirements are in the future. Most companies have too many suppliers. They can find out from specification review how suppliers produce to specs.
John Trush can be reached at john.trush@us.ibm.com
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