The Agile Supply Chain
and
Business Success
Michael Hugos
CIO at Large
Center for Systems Innovation
www.MichaelHugos.comWhat is a Supply Chain?
"A supply chain is a network of facilities and
distribution options that performs the functions of
procurement of materials, transformation of these
materials into intermediate and finished products, and
the distribution of these finished products to
customers."
Ganeshan and Harrison, "An Introduction to Supply Chain Management",
1995
© 2008 Michael Hugos 2Old Supply Chains vs. New
Vertically Raw
Integrated Materials
Conglomerate
Company
VERTICAL
Raw Materials
INTEGRATION Transportation
Company
has given way to
Transportation
"VIRTUAL
Manufacturing
INTEGRATION"
Manufacturing
Company
Companies now focus on Distribution
Independent
their core competencies, Distributor
and partner with other Retail Show
Room
companies to create supply
Independent
Retailer
chains for fast moving
markets.
Fragmented,
Slow Moving,
Fast Moving
Industrial Mass
Markets
Markets
© 2008 Michael Hugos 3Supply Chain Structure
Simple Supply Chain
Supplier Company Customer
Producers
Distributors Extended Supply Chain
Ultimate Supplier Company Customer Ultimate
Retailers Supplier Customer
Customers
Service
Providers
Service Providers
- Logistics Example of an Extended Supply Chain
- Finance Product Market
Designer Research
- Market Research
- Product Design
Raw Mat'l Manufctr Distributor Retailer Retail
- Information Producer Customer
Technology
Logistics Finance Business
Provider Provider Customer
© 2008 Michael Hugos 4Major Supply Chain Drivers
1. 2.
RESPONSIVENESS PRODUCTION1. INVENTORY 2.
PRODUCTION INVENTORY
vs. What, how, and What, how, and How much to make How much to make
when to producewhen to produce and how much to and how much to
EFFICIENCY storestore
"Increase throughput
5.
while simultaneously INFORMATION
The basis for
reducing inventory and making these
operating expense." decisions
Goldratt, The Goal,
4. 3.
1984 TRANSPORTATION4. LOCATION3.
TRANSPORTATIONHow and when to LOCATIONWhere best to do
How and when to Where best to do
move productmove product what activitywhat activity
© 2008 Michael Hugos 5Responsiveness vs. Efficiency
Supply Chain Responsiveness Efficiency
Drivers
1. Production -Excess capacity -Little excess capacity
-Flexible manufacturing -Narrow focus
-Many smaller plants -Few central plants
2. Inventory -High inventory levels -Low inventory levels
-Wide range of items -Fewer items
3. Location -Many locations close to - Few central locations serve
customers wide areas
-Frequent shipments -Few large shipments
4. Transportation
-Fast & Flexible mode -Slow, cheaper modes
5. Information - Collect & share timely, - Cost of information drops ,
accurate data other costs rise
© 2008 Michael Hugos 6What is Supply Chain Management?
"Supply chain management is the coordination of
production, inventory, location, transportation, and
information among the participants in a supply chain to
achieve the best mix of responsiveness and efficiency
for the market being served."
nd
Hugos, Essentials Of Supply Chain Management, 2 Edition, 2006
© 2008 Michael Hugos 7Markets & Required Performance
MATURE STEADY
• Customer Service • Customer Service
• Internal Efficiency • Internal Efficiency
• Demand Flexibility
S DEVELOPING GROWTH
U • Customer Service • Customer Service
P
P • Product Development
L
Y
D E M A N D
© 2008 Michael Hugos 8Performance Measures
Build to Stock CUSTOMER SERVICE Build to Order
• Order & line item fill rate • Quoted lead time & completion rate
• On time delivery rate • On time delivery rate
• Return rate • Warranty returns & repairs
INTERNAL EFFICIENCY
• Inventory value • Return on sales
• Inventory turns • Cash-to-cash cycle time
DEMAND FLEXIBILITY
• Activity cycle times • Outside flexibility
• Upside flexibility
PRODUCT DEVELOPMENT
• % of sales from new products • Cycle time for new product
• % of SKUs as new products development/introduction
© 2008 Michael Hugos 9The "Bullwhip Effect"
1200
900
Customer Demand
600
For Product
300
0 4 8 12 16 20 24 Mo.
1200
900
Retailer Orders
600
To Distributor
300
0 4 8 12 16 20 24 Mo.
1200
900
Distributor Orders
600
To Manufacturer
300
0 4 8 12 16 20 24 Mo.
© 2008 Michael Hugos 10Why The Bullwhip?
• Demand Forecasting -Based on orders received not end user
demand
• Order Batching -Companies place periodic orders based on EOQ,
etc
• Product Rationing -Allocation of available supply as % of
amount ordered
• Product Pricing -Promotional pricing causes distortions in demand
• Performance Incentives -Qtrlyand yearly quotas and sales
bonuses
© 2008 Michael Hugos 11Benefits of Data Sharing
• Company A may have High
high levels of customer
service Inventory
• But success may be short- Levels
lived if its customer is not
the end use customer of
the supply chain
Low Service Levels High
© 2008 Michael Hugos 12Benefits of Data Sharing (cont.)
• Company A may be part High
of Supply Chain X
which has to hold more Supply Chains 'X' & 'Y'
inventory than Supply Inventory
Chain Y to deliver Levels
similar levels of
customer service.
• Bullwhip distortions
drive up inventory
Low Service Levels High
© 2008 Michael Hugos 13Supply Chain Collaboration
PLAN
• Companies perform PLAN
" Demand
" Demand
operations in one or ForecastingForecasting
" Product Pricing
" Product Pricing
more of these supply " Inventory
" Inventory
Mgmt.
Mgmt.
chain activities
• Entire supply chains are DELIVER SOURCE
DELIVER SOURCE
" Order " Procurement
more efficient if each " Order " Procurement
Management " Credit &
Management " Credit &
company improves their " Delivery Collections
" Delivery Collections
Scheduling
Scheduling
performance
• Collaborative Planning,
MAKE
MAKE
Forecasting & " Product Design
" Product Design
" Production
Replenishment (CPFR) " Production
Scheduling
Scheduling
" Facility
" Facility
Management
Management
© 2008 Michael Hugos 14RFID & EPC Global Network
RFID tags on incoming
pallets and cases are scanned.
• Company receiving
system sends scanned
GS1
EPC numbers to GS1 ONS
EPC Nbr.
System
and gets web address of
Company
Application
Product description &
manufacturers System
manufacture date
Manufacturer
EPC Nbr.
• Manufacturer systems EPC-IS
Interface
ERP MES SCM
send back product
description and
manufacture date Logistics
Provider
Product
EPC-DS
movement
Interface SCM
data
• Company may contact
other companies who
Distributor
handled the product as
EPC-DS
Interface
it moved through supply SCM
chain
© 2008 Michael Hugos 15GDSN - Global Data Synch Network
1. Seller or
manufacturer uploads
item and location data
GS1 Global
to a GS1 data pool Registry
3.Request 3.Request
for for
Subscription Subscription
2. Data pool registers Data 2. Register Data
Data
data with GS1 global
1. Load
registry Item and Source Recipient 4. Publish
Data Pool 4. Publish Data Pool
Location Requested Requested
Data Data Data
3. Buyer or retailer
subscribes to a data Seller 3.Request Buyer
Or for Or
pool and requests Manufacturer Subscription Retailer
Data
item data
4. Data pool sends
requested item data
© 2008 Michael Hugos 16The Synchronized Supply Chain
"Drum - Buffer - Rope"
Sales & Forecast
Data
Raw
Market
Manfctr Distr Retailer
Mat'l
Demand
Buffer Buffer Buffer Buffer
Flow of Inventory
Market demand sets the drum beat or pace. Manage uncertainty with a buffer of
inventory or capacity. Reduce uncertainty and keep buffers low by sharing market data.
Data is the rope that ties the supply chain together
© 2008 Michael Hugos 17Network1Services1Company's
Business1Agility
Real Life Examples from Personal Experience
(I was CIO here from 1999 - 2005)
© 2008 Michael Hugos 18A Network of Distributors
© 2008 Michael Hugos 19Distribution Is A Tough Business
• Members have their own local customers and work together
through Network Services to serve our national account
customers
• Gross margins are under constant pressure - they average 10 -
13% and are heading lower
• Must differentiate or else simply participate in a grim "race to
the bottom"
• Need to develop a suite of supply chain offerings then mix and
match to meet unique customer needs - find customers who
will pay for these value added services!
© 2008 Michael Hugos 20Business Strategy
Create the low cost and highly responsive supply chain needed to
be the distributor of choice in the markets we serve
- Automate routine processing of common transactions
(purchase orders, invoices, etc.) so as to increase
productivity and decrease errors
- Focus our people on exception handling and value
added activities such as customer service, inventory
management, and sales
© 2008 Michael Hugos 21Sell an "Evolving Offer"
Do not sell just product-surround the product with value added
services requested by customers and manufacturers
- Product training & support - Joint Marketing Programs
- Credit Management
- Credit and Financing
Manufacturer
Customer Distributor
- Usage Reporting - Sales Reporting
- Supply Chain Services - Supply Chain Services
© 2008 Michael Hugos 22Customized Supply Chain Offerings
• Electronic connectionsto lower transaction costs involved in
ordering, receiving, and paying for products
• Package of products, delivery options, and credit
termsto meet customer business requirements
• Daily updated web-based usage reportsto monitor product
consumption, control operating costs, and do planning and budgeting
• Spot opportunitiesto employ more cost effective or appropriate
products and consolidate purchasing with key suppliers so as to enjoy
better volume pricing and maximize rebates
© 2008 Michael Hugos 23National Account Customers
• Big customers are consolidating their purchasing under
national account contracts
• National account revenue is currently $600+ and planned to be
$1 billion by 2008 if all goes well
• Look for $10+ million accounts to build long term strategic
alliances
• Restaurant chains, grocery stores, industrial and property
management companies are growth markets
• Negotiate contracts to provide a unique mix of products and
supply chain services to meet specific customer requirements
© 2008 Michael Hugos 24Keep IT Super Simple (KISS)
• ASCII Flat Files -every computer system can read & write these
files, great format to exchange data (easy upgrade to XML)
• Internet & FTP -these two technologies make data transfer easy and
cheap
• Batch Interfaces -batch data transfers every hour, every ½hour,
every 10 minutes…approaches real-time at a fraction of the cost of true
real-time
• Relational Databases -provide powerful means to store, retrieve,
and display data and are easily interfaced to spreadsheets and web pages
• Web Pages/Email/Spreadsheets-common user interfaces that
everyone can access and operate
© 2008 Michael Hugos 25Network's Supply Chain Systems
NSC Virtual Private Network
S
U
Web-Based
NSC
NSC P
E-Commerce Systems Member NetLink
Member P
Company
CUSTOMER Company L
Sales
I
History
E
R
Order
CUSTOMER Data NSC Data
Entry NSC
Whse Member Whse S
Member
Company U
Customer Company
P
Service
P
CUSTOMER
L
Product I
NSC
Catalog NSC E
Member
Member
R
Company
CUSTOMER Inventory Company
Status
S
Order
U
Status
P
NSC
CUSTOMER
NSC P
NetLink Head
Head L
Office
Office I
E
R
© 2008 Michael Hugos 26Timely Data Enables Collaboration
Strategic Market
The data warehouse View
provides different views Tactical
Company View
of the data to support
senior executives, line Operations
managers, and staff. It View
also facilitates sharing
of data with customers
and supply chain
partners. Data
Warehouse
Reports to
Reports to
Customers Suppliers
© 2008 Michael Hugos 27Case Study: Supply Chain Visibility
• Big customer wanted to reduce excess inventory
• Customer, suppliers, and Network members all use different
ERP systems
• We had 90 days and could not spend a lot of $$$
• How to operate in an agile, real-time world?
What would you do?
• Decline to start a project that could not succeed
• Say you would try but make no firm commitments
• Assemble a system from simple IT components
© 2008 Michael Hugos 28Case Study: Supply Chain Visibility
Assemble a robust system from simple IT components
Network
Member
Company
Existing
• Web Pages
Process for
added to
Invoice Files
Network web
site NetLink System Network
Member
• Spreadsheet FTP Company
opens in Inventory Process for
browser Database Inventory Files
• Display logic
Network
defined in
Member
spreadsheet
Company
E-Mail
Process for
E-Mail
Spreadsheets
S
System created by combining: S
S U
U
U P
P
- Spreadsheets - Small Java pgms P
P
P
P L
- E-Mail - Relational DB
L
L I
I
- Text Files (CSV) - Web Pages I
E
E
E R
- FTP - Web Browsers
R
R
© 2008 Michael Hugos 29Case Study: Power of Real Time Visibility
Real time
visibility
creates
peer
group
pressure
for all
members
to perform
to a high
standard!
© 2008 Michael Hugos 30Case Study: A Parable About Payables
• A big new customer is showing up on our slow pay list
• To get their national contract we came in with good prices
for them and tight margins for us
• We need to run our business with them very efficiently if
we are going to make the profits we desire
• Customer's receiving and payables process is slow and at
times they lose our invoices
What would you do?
• Put them on notice -send a letter
• Put them on hold -no more product until they pay up
• Put up with them -do nothing
• Other
© 2008 Michael Hugos 31Case Study: A Parable About Payables
• If you want to call yourself agile or resourceful the correct
answer is Other
• Strengthen relationship with the customer through a broad
base of working contacts
• Who better than IT and Accounting to do this? This is how
to go from being a cost center to a profit center
• The controller and I made a visit to customer's HQ and
shared ideas about how to improve receiving and paying
process
© 2008 Michael Hugos 32Case Study: A Parable About Payables
Other - This is the agile, value oriented choice
Store Portal
- Paying
- Receiving Send Invoice before
- Ordering delivery truck arrives
- Usage Rpt Data Network
Whse Member
Company
POs Invoices
Invoices
Customer Invoices NetLink Network
Portal System Member
System
POs Company • We'll start by sending
electronic invoice.
POs
Invoices • Then go to receiving
from invoice
Network
Our Member • Then go to electronic
Customer Bank Company customer ordering
A/P ACH $$ • Already providing usage
System reports to customer
© 2008 Michael Hugos 33Competitive Analysis of Company
• Company serves Steady
and Mature markets that Competitive LAG EQUAL LEAD EXCEL
Analysis:
value customer service,
demand flexibility and Customer
internal efficiency Service
X
• This is how company
compared with its Internal X
Efficiency
biggest competitors
Demand X
• What would you do to Flexibility
strengthen company's
competitive position? Product X
Development
© 2008 Michael Hugos 34Leverage Strengths to be Competitive
• Company serves Steady
and Mature markets that Competitive LAG EQUAL LEAD EXCEL
Analysis:
value customer service,
demand flexibility and Customer
internal efficiency Service
X
• This is how company
compares with its Internal X
Efficiency
biggest competitors
Demand X
• What would you do to Flexibility
strengthen company's
competitive position? Product X
Development
© 2008 Michael Hugos 35Roll Out New Systems Quickly
Quarter 1 Quarter 2 Quarter 3 Quarter 4
DEFINE Agree on
projects
•Project 1 - Expand data Projects and
Budgets
DESIGN data
warehouse for SLA
warehouse Project 1:
Expand
reporting and better BUILD data warehouse
Data
version 1.0
responsiveness Warehouse
DESIGN
interfaces
Project 2:
•Project 2 - Interface BUILD demand
Interface
forecasting interface
Software
selected packages for
Packages BUILD delivery
scheduling interface
better forecasting and
DESIGN inventory
deliver scheduling Project 3:
training & bonuses
Inventory
IMPLEMENT
Management
training & bonuses
•Project 3 - Better Training
DESIGN error
training on existing
handling for NetLink
systems
BUILD customer
service error modules Project 4:
Improve NetLink
BUILD credit and
Error Handling
•Project 4 -Improve billing error modules
and Reporting
NetLink error handling BUILD other needed
error modules
© 2008 Michael Hugos 36Lessons Learned
• Best profits exist in customized offerings of products and
supply chain services to meet needs of individual customers
• Longer term (3 - 5 yr.) contracts are needed to realize
significant benefits in alliances
• Electronic connections and personal connections are both
required to deliver top notch service - people solve problems,
not computers
• Use Key Performance Indicators (KPIs) to track delivery on
Service Level Agreements (SLAs) - Internet dashboards
updated daily so everyone knows the score and knows what to
do
© 2008 Michael Hugos 37Lessons Learned (cont.)
• Money is made or saved in a 100 small adjustments every
month - like compound interest
• Data about the product (descriptive data and usage data) is
almost as valuable as the product itself
• Best practices developed for one customer can be used to
attract other customers
• Those who learn to act in real-time will thrive!
© 2008 Michael Hugos 38Learn More…
This
presentation
excerpted from
two of my
books:
Join the conversation about supply chains, IT and business at my
CIO Magazine Blog: Doing Business in Real Time
Computerworld Column: IT Leadership Insights
© 2008 Michael Hugos 39