By Ayo Eso
CEO, 3 Consulting Nigeria
New Product Launches and the Supply Chain
Innovation is a key competitive weapon in today's marketplace. And yet, companies have trouble getting their products to market.
Prominent failures highlighted in the recent press include delays in the launch of Airbus 380 that potentially wiped off five billion euros of the value of its parent company and Sony's struggle to make sufficient Play Station 3 consoles for the holiday season.
In a recent study, Hendricks and Singhal (2006) investigated how product introduction delays affected operating performance. Based on a diverse set of 450 firms that experienced product introduction delays, they reported that delays have a statistically significant negative effect on profitability; in particular they observed an average decline of 5.99%-7.62% on Return on Assets (ROA) and 12.59%-16.65% on Return on Sales.
Despite this, a recent study by the IBM Institute for Business Value finds that on-time and on-budget rates for new products in the consumer products industry have declined by 7%-8% in the past three years.
These studies imply that developing and launching new products is becoming harder. Why is this so? While increased intensity of competition might partly explain this, we believe that the lack of a better understanding of the critical role of supply chain in innovation is one of the key contributing factors.
Traditionally, product launch decisions have been considered a marketing function. The success of a new product and its launch, however, critically depends on all aspects of the supply chain from design to sourcing to manufacturing to distribution. To ensure the success of a product launch, one needs to pay close attention to supply chain design, sales and operations planning, as well as supply chain coordination. The criticality of the various supply chain activities will depend on the nature of the innovation. Finally, companies need to create a launch process, identify key stakeholders (marketing, supply chain, finance, and operations), establish key metrics and develop a dashboard for launch readiness and success technology to make this happen in consumer goods and retail.
Revitalized Supply Chain Command
We are currently moving into the third global supply chain transformation of the past century.
The first era of enterprise supply chain globalization was the era of vertical integration. The Ford Motor Company ran the first truly global industrial supply chain. By the early 1920s, Ford owned the entire production process: assembly plants in the United States (and elsewhere), lumber camps, inter-modal transportation assets such as railroads, steamships lines and airplane fleets.
The second era of enterprise globalization has been the era of 'viral virtualization,' a term borrowed from viral marketing, suggesting that outsourcing increases exponentially.
Contrast Ford's approach with the virtual supply chain model of companies like Sun Microsystems today. Sun never touches 90 per cent of the server computers it sells globally. Rather, a supplier receives a Sun customer order directly and ships back to the global customer via third-party logistics companies.
This business model of outsourced supply chain can drive cost efficiencies and operational flexibility, but it has also led to a heightened perception of eroded strategic command and control and loss of network coherence. A recent survey conducted by the Electronics Supply Chain Association, for example, revealed that sixty-nine per cent of respondents claimed that they now have less control over critical supply chain processes such as order promising, risk analysis and management, inventory management and forecasting than they did previously.
The next era, the era of revitalized command, is already upon us.
The multinational enterprise is becoming more risk-averse and less likely to over-extend itself through alliances; at the same time, it is showing an emerging bias toward more direct absorption and control over assets in its network. This bias is clearly demonstrated in the recent intensification in outward U.S. cross-border merger and acquisition activity as a preferred method of investment. It surged from US$16 billion in 2002 to US$29 billion in 2003 and nearly US $31 billion in 2004 (Deloitte 2005).
Nor are these trends limited to OECD multinational corporations. China's emerging global enterprises are reaching overseas to acquire assets directly.
Another key feature of this corporate search for heightened control in an era of rising transport costs and increased risks of natural and political disruption is an emerging tendency to locate higher value activities closer to regional home markets.
The implications of these shifts in corporate supply chain strategy and design are significant. As enterprises and regions re-position themselves for the next phase of competition, we should expect to see big changes in the logistics/outsourcing industry.
For senior supply chain executives, an imperative will be on employing more sophisticated supply chain "value at risk" models that will not only show the ROI on specific product and service supply chain configurations, but will also enable the calculation of Risk-Adjusted ROI to accommodate for differential asset and value exposures.
Trading off the good and bad of Service Level agreements
A supplier producing and stocking goods for delivery must trade off the negative effect of stocking insufficient inventory (primarily lost revenue of current or future sales) with the negative impact of excess inventory (high inventory holding costs).
If suppliers face high inventory risk and relatively low margin, they may choose a stock level that maximizes profitability but is sub-optimal from the view of the entire system. For example, if a supplier optimizes her own cost-service tradeoff, she may provide poor service to a retailer who then suffers high out-of-stocks. The fundamental problem here is not poor inventory management practices, but misaligned incentives. The supplier bears much of the inventory risk but receives a rather small fraction of the overall margin. If the supplier provided better service, out-of-stocks would be reduced and the entire supply chain would be more profitable.
There are many types of arrangements between supplier and retailer that might help address this misalignment. One common approach is to negotiate and specify a certain level of service with the supplier. For example, a retailer could require a supplier to achieve a certain fill rate (fraction of demand met from inventory) over a specified review period. Such service level measures are often part of a supplier scorecard.
The important question is, are these service level agreements (SLA) effective at resolving misaligned incentives and improving performance?
The short answer is, yes, usually such SLAs do improve performance by providing a supplier incentive to improve service, thus improving the overall performance of the supply chain. If "what gets measured gets done" , then you would expect a supplier facing such an agreement to maximize her own profitability while still meeting the agreed-upon level of service.
To enforce this changing the frequency of the performance review and nothing else can dramatically affect the ideal inventory level for the supplier. This means that changing from conducting supplier performance reviews on a monthly basis to a quarterly basis could significantly alter the inventory cost for the supplier and the service for the retailer. System performance can be quite sensitive to other terms of the service level agreement as well.
For a variety of reasons, longer horizons are usually (but not always) preferable for both parties. In summary, inventory SLAs can indeed be effective at aligning supplier and customer incentives. These agreements will generally help rather than hurt supplier performance but it is worth thinking quite carefully about the terms of the agreement, in particular, the consequences of meeting the target and the frequency of performance review.
Use of Third Party Logistics (3PLs)
Logistics represents a strategic, competitive advantage for their companies, and that 3PLs played a major role in their logistics and supply chain operations.
Among the major findings of a recent study was that future outsourcing practices are likely to continue the use of traditional services such as transportation, warehousing, and customs clearance, which are prevalent today. Additionally, however, value-added services relating to information technology, customized logistics solutions are viewed as growing in terms of contemporary interest.
Additionally, 3PLs are viewed as valuable, and sometimes essential business partners for customers whose logistics needs are evolving to any of the global emerging markets, such as China.
When asked about technology enablement, most customers rated this as an area where the 3PL sector is being counted upon for leadership, functionality, and operational capability, but where the report cards to date are viewed as needing improvement. Thus, the IT capabilities of 3PLs are likely to become even greater differentiators of 3PLs than they are in today's business environment.
Looking to the future, many 3PL-customer relationships are evolving from conventional customer-supplier relationships to true "partnerships." Accomplishing this objective would allay a frequent criticism from this year's survey respondents: 3PL providers many times "react" to situations; they do not anticipate and identify opportunities to improve. To be fair, the study results also suggest that customers sometimes limit their 3PL providers from demonstrating their full set of capabilities. The good news is that upgrading the quality of customer-3PL relationships is an objective of 3PL users in all of the geographies studied.
Overall, it is clear that customers view their 3PLs as valuable resources, whether they are used in a tactical/operational or a more strategic role. While there is a continually-shifting pattern of use of 3PLs vs. the use of in-sourcing alternatives, the 3PLs have a permanent position in the strategic portfolio of resources that are counted upon by corporate logistics and supply chain managers
Structuring High Performance Supply Chain Relationships
Supply chain relationships can take multiple forms and the degree of closeness implemented can reflect various levels of integration across firm boundaries. Maintaining these relationships may require large managerial time and resource commitments. Therefore, managers should strive to identify methods to establish appropriate levels of tailoring in these relationships based on the business situation and the organizational environment.
Management's goal should be to establish the correct amount of closeness in their firm's supply chain relationships, not to just get close for the sake of being close.
The success of any supply chain relationship calibration process will depend on the openness and creativity brought to the table by both parties. Thus, an important first step is to determine who your firm should establish relationships with in the supply chain.
Once this decision is made, the focus should quickly shift to determining the potential of the relationship; identifying possible impediments to achieving this potential; and how best to implement managerial components to capture the relationship's value. Without the security of the business in place, firms tend to be hesitant to openly discuss the relationship and struggle to establish realistic expectations.
When examining your supply chain relationships, ask, "What is in this relationship for us?" It is this selfish perspective that helps to identify the true motivations for committing resources to a relationship.
Likewise, your supply chain partner should be asking the same question. Whoever has the least to gain from the relationship should provide the basis for setting expectations. If you hoping that a company will choose to commit large amounts of resources to working with your firm, they must see appropriate levels of benefits in return.
Another important part of a relationship calibration process is to clearly understand the environmental factors that will either help or hinder the connection between the two firms. Companies should jointly assess how factors such as management philosophy will affect their ability to achieve their relationship drivers. It is the combination of the relationship drivers and these environmental facilitators that establishes the potential for the relationship.
Once the potential is identified, it will be up to the firms to implement appropriate levels of management effort to realize this potential.
Establishing a clear picture of the relationships expectations from both sides is only the first step in a challenging but rewarding long-term effort to tailor your supply chain connections for enhanced business results. Ultimately, like any relationship, time must be spent ensuring that both sides are realizing an appropriate amount of benefit based on the investments they are making in the relationship. Large manufacturing firms will move toward a globally integrated business model.
The Adaptive Process of Operating in Low Cost Regions
Including low cost regions in modern supply chains is now a given. But, determining which regions to access for any particular purpose is still as much art as science. Ongoing discussions with key industry contacts suggest that different locations, countries, and regions have their own specific strengths (and weaknesses) and even more importantly, regional positions shift over time.
How can buyers discover where to source materials, components, subassemblies and finished goods? What makes a particular area attractive and how long before the next "hot" region appears on the horizon? How does a region structure itself to join the world economy in a mode that means sustainable growth and improvement for its citizens for years to come? These issues are on the agenda (or destined to be so) of supply and logistics managers all over the world.
Extracting more value from interactions
Companies have increasingly automated or off-shored transactional and routine interactions. Thus, what is increasingly left is employees involved primarily in negotiations and personal interactions internally and with suppliers, customers, etc.
The Impact of Reduction in Supply Chain Variation on Shareholder Value
In today's global economy, companies are expected to provide competitive returns to shareholders. For publicly traded companies, the total return to shareholders is measured by the increase in stock price plus the dividends paid.
Clearly, a company's stock price is impacted by a variety of factors. However, in the long-term, stock prices tend to be driven by company profits as measured by EVA (Economic Value Added). EVA defines the true profit a company generates after deducting the total cost of doing business (i.e., operating costs, taxes, and cost of capital) from the revenues.
There are three basic drivers of EVA: revenue growth, cost reduction, and asset reduction.
Supply chain management should be viewed as a powerful tool affecting all three drivers of financial performance/shareholder value. While holding the right mix of inventory could result in revenue growth, providing the same level of service with a lower amount of inventory (safety stocks) would result in shorter cash-to-cash cycle time and higher liquidity, allowing firms to grow faster and create shareholder value.
Variation in demand, supply and lead times is a critical, but widely unrecognized, driver of inventory costs. Unfortunately, many managers are trained to think in terms of averages and do not fully appreciate the importance of the variation around those averages.
It is such variation that causes many of the costly supply chain disruptions and forces companies to keep excessive amounts of safety stocks. As the supply chains become longer and more complex, it is even more important for companies to measure and control supply chain variation to improve their financial performance and maximize shareholder value.
Expanding the frontiers of automation
We need in this part of the world to automate the basics. Beyond this systems are becoming interconnected through common standards for exchanging data (EDI) and representing business processes in bits and bytes. What's more, this information can be combined in new ways to automate an increasing array of broader activities, from inventory management to customer service. There are still many islands of automation out there that will open up new opportunities for process automation when connected with other systems – and RFID in the end can be a key.
Putting more science into management
Technology is helping managers exploit ever-greater amounts of data to make smarter decisions and develop the insights that create competitive advantages and new business models. While analytics and decision-support systems are as advanced in supply chain as in any area of the corporation, we've still probably only scratched the surface here. The holy grail of deep customer insight—more granular segmentation, low-cost experimentation, and mass customization—becomes increasingly accessible through technological innovations in data collection and processing.
Transforming Supply Chain IT Into 'Business Technology'
• IT organizations will accelerate spending on collaborative decision environments and incubate multi-enterprise business networks.
• IT spending in the supply chain area will focus on fulfillment execution.
• Product management software investments will be geared to integrating processes, not automating tasks.
• For RFID, forget technology; vendors must demonstrate business value now.
• For environmental compliance and corporate responsibility, your supplier's problems will become your problems.
• Manufacturing firms will tackle the challenges of aging/emerging workforces with investment in organic knowledge management.
• Machine-to-machine technology will emerge as a key enabler to enhanced service delivery. e.g. of M2M
Oil & gas
A manufacturer of instrumentation for producing well sites may use M2M to enable its customers to remotely collect data on flow rates, pressures, temperatures, tank levels and equipment status as an alternative to manual, on-site data collection.
Manufacturing
• A manufacturer of machinery for preparing shipping packages may use M2M to remotely monitor its equipment to detect failures, to schedule optimal preventive maintenance, and to track consumption of packaging chemicals as an alternative to manual inspection by its field service technicians or the customer's equipment operators.
Facility Management
• A building operator can use M2M to monitor equipment operation, energy use and maintenance. This data can then be used to optimize operations and reduce energy costs.
You can't just add IT to mediocre supply chain processes and expect results. But savings are stellar when the project's done right.
As long as there is a disconnect between IT and business processes, returns on investment will be poor. This generally leads to skepticism on the path of executives.
The difference between success and failure in using It to revamp the supply chain lies not so much in what you do as in how you do it.
Build a better case
Building and supporting a business case itself for supply chain management has, traditionally, been one of the biggest stumbling blocks to the success of any IT project When the supply chain decides to upgrade its IT systems, however, "there is a lack of the same level of rigor" as compared to if it was a new piece of machinery. Why not?
It often comes down to the fact that logistics and supply chain operations aren't comfortable vetting IT projects, citing a lack of technological expertise.
Consequently, the business case for a project involving IT changes often is developed by the IT department—which can never know supply as well as the supply chain execs. And, regardless of who develops the case, it isn't necessarily aligned with market realities (like infrastructure conditions), which can significantly impact results. But, on the other hand, the dilemma is that if the business case is developed by the logistics department or other business units, they're likely to overlook technical solutions that could significantly enhance operations.
Not only have execs recognized there is a real communications gap, but the function of IT itself is changing from managing information to managing business. In the past five years, IT has come much closer to business, so much so that Forrester is calling for renaming information technology (IT) to business technology (BT).
Be results oriented
Six Sigma, lean manufacturing, CoBIT (developed for IT) and other frameworks that aid in the decision-making and prioritization process can help can lend dispassionate analysis to ensure that the supply chain project is doing the right things the right way. Any method will yield benefits, because they all complement each other.
Those frameworks all point to the fact that, "you can't just add technology to an existing process,"See if the process makes sense first, and if technology can improve it." Think in terms of function. What do you want the system to accomplish? Do you still need the existing processes? Can some processes be combined? Has the supply chain changed since these systems were put in place?
Rather than implement huge projects, companies should focus more tightly on key pain points.
Visibility
The visibility of the entire supply chain in real time is one of today's overarching goals, and automation plays a big role in that. Nonetheless, more than half of supply chains are still managed manually with phone, fax and paper, making it virtually impossible to have visibility into the overall supply chain.
Connections range from very simple to quite complex, depending upon users' needs, and integrate to manufacturers' ERP or production systems through such connections as a Web portal for example.
The system can take specific actions based on predefined rules. For example, materials can be ordered, certain orders can be cancelled or supplies rerouted to optimize existing materials according to prevailing conditions. Benefits include dealing with more current information, thus deploying materials and people more effectively, managing inventory more efficiently and therefore better meeting downstream demand.
Supply is more visible than human resources, so any supply chain project has to have very precise control. There are no second chances, so the supply chain isn't where one introduces unproven technology. You want rock-solid, predictable performance here.
Quantify results
IT should not calculate the value of these projects. Instead, the financial group should be involved closely to ensure the veracity of such claims. This is a way to stay honest—to ensure that claimed savings or opportunities are real, quantifiable and accurate. Its one thing to say a project saved N20 million, and another to have the director of finance certify that it did, in fact, save N20 million.
Unless a project is segmented to a function, there's little review of benefits and information is anecdotal. This is changing, though, as companies realize they need to more tightly manage projects. Consequently, the most proactive companies are developing meaningful metrics to measure the success or failure or specific projects. It's not enough to simply count, for example, the number of sales calls or the average time spent per call. It's better to know what percentage of those calls results in sales, or whether fewer but longer calls result in better problem resolution or more sales, or just more time on the phone.
- CEO, 3 Consulting Nigeria, Ayo Eso made this presentation at Technology Times Outlook 2008 held February 27, 2008 in Lagos.
