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Evolved Operations Enable Progressive Supply Chain Management

  • Michael D. Ford
September/October 2017

Most professionals will agree that a standardized approach to supply chain management should produce high volumes of a standardized product. However, this often results in localized optimization, where a particular node in the internal or external supply chain is driven toward behavior that causes pain upstream or downstream. This method also fails to address customers’ desires for flexibility in terms of product variety. Companies and consumers alike expect special treatment, but a historical high-productivity business model is too rigid to accommodate this. To best meet market demands, the supply chain field needs a more evolved operations tactic.

Customers first 

In today’s high-customization marketplace, the main objective of each employee, department, division and corporate entity needs to be customer satisfaction. Although the approach to this will differ based on industry segment, organizations should strive to provide the nine R’s:

  • The perfect shipment includes the right quantity and right quality of the right item.
  • The perfect delivery arrives at the right time to the right person at the right place.
  • The perfect customer experience includes the right price, the right documentation and the right level of customer service.

Achieving the nine R’s likely will require changes in workplace culture as well as how each functional area operates and measures performance. Consider the following examples:

Production activity

Traditional approach:
Production floor activity strives for high productivity, typically defined as high utilization rates. This approach results in overproduction, lack of attention to the production schedule and an indifference to quality. For example, operators may cherry-pick the easier orders, such as projects that have a quick setup process or include long production runs, to improve piece-count performance. Workers also may delay machine maintenance to avoid downtime, which often leads to breakdowns that result in longer, more expensive, unplanned periods of downtime.

Evolved approach:
Instead, production employees should focus on adhering to the production schedule, producing quality items and satisfying the needs of downstream operations. If a work center is inactive, then operators there should concentrate on preventive maintenance, activities related to the five Ss or quality initiatives — or offer assistance to centers with too much work.

The Nine Rs

Production control

Traditional approach:
Many of the traditional metrics used to measure production control are dysfunctional. For example, the number of exception messages is believed to gauge how well a planner handles emergency situations. The reality is that this may reflect that a planner ignored a planned order release message, resulting in an expedited order in the material requirements planning (MRP) system. Similarly, evaluating planners in terms of the number of MRP order releases could create a disincentive to reclassify items as floor stock and more easily control them via order point, kanban or the two-bin system.

Evolved approach:
Allow planners to do their job: planning (not expediting). In addition, planners should strive toward lean approaches, such as pull systems, that do not require the excessive administrative efforts associated with documented work orders.

Inventory management

Traditional approach:
One dysfunctional metric associated with warehouses is space utilization. This metric merely drives an incentive to fill up the stockroom with excess inventory. Another is number of items outsourced, which encourages planners to outsource as many items as possible. Without seeing the total picture, this metric can drive up lead times and result in a warehouse stuffed with inventory.

Evolved approach:
Inventory management has opportunities to streamline stockroom operations while improving customer service and reducing costs. Instead of focusing on pick rates, companies should work toward delivering the perfect order. In addition, improvements in record accuracy, or the right quantity of the right item in the right location, will enable a business to reduce stock levels, as planners and buyers can be assured that the system quantity is correct. This also will reduce the need for just-in-case inventory.

Marketing and sales

Traditional approaches:

 

  1. The historical tactic of marketing and sales professionals is to have everything available for sale: infinite quantities, options, colors, packaging sizes and so on. The customer promise is that every item is available for immediate shipping. However, the reality is that 100 percent customer service is an unrealistic objective. The costs associated with such a target could drive a company out of business.
  2. Sales teams usually focus on generating revenue.
  3. The optimal sales approach is to work toward beating the forecast. However, companies that reward salespeople for doing this are providing a financial incentive to create low-ball forecasts, which could result in not enough supply of purchased goods, floor capacity, cash flow and other assets.

Evolved approaches:

  1. A more reasonable goal recognizes the trade-offs associated with 100 percent customer service versus inventory holdings, overtime, air freight expediting and other costs.
  2. Sales teams should focus on generating profit.
  3. The goal for sales teams should be focused on meeting the forecast, as there are drawbacks to being over or under forecast.

Procurement

Traditional approach: The traditional metric of number of vendors per buyer is thought to measure a purchasing agent’s workload. However, this instead provides a disincentive toward reducing the supplier base. Similarly, measuring the number of purchase orders placed or the number of purchase order line items is a disincentive toward blanket releases or annual purchase agreements. Third, purchase price variance is a metric that can inspire volume when the solution is to purchase in bulk to obtain a lower price. However, this can result in excessive inventory holdings, which may incur revision change, technical obsolescence or shelf-life depreciation. In the end, any so-called savings from a bulk purchase result in a higher total cost.

Evolved approach: Procurement should focus on strategic partnerships and long-term relationships with a focused supplier base. Rather than beating up vendors, purchasing professionals should view them as partners and work with them. In addition, an emphasis should be put on satisfying internal customers, such as the receiving department and colleagues on the shop floor, by ensuring that the right goods arrive at the right time. Happy internal customers create happy external customers.

Engineering

Traditional approaches:

  1. The engineering department typically focuses on product inspection and working with the shop floor to develop statistical process control. This sometimes results in focusing on quality during the inspection stage, rather than earlier in the process.
  2. The tradition is to set time standards on engineering, but this encourages employees to speed up their work and does not recognize the wide variability of working paces among employees.

Evolved approaches:

  1. Engineers should focus on building quality into a process. In addition, they should avoid excessive design changes. Engineers also should employ the house of quality method to ensure that all product attributes are directly translated from customer requirements. A concurrent engineering team with cross-functional representatives from purchasing, finance, production and sales could help reduce time to market for new product introductions and ensure that products are designed for efficient sourcing, manufacturing, assembly, transportation and reverse logistics.
  2. Companies should move toward an enhanced approach that focuses on attaining a rate-based schedule tied to marketplace demand, rather than one centered around standards and utilizations.

Accounting

Traditional approach: Accounting teams have a tendency to apply a number of financial metrics to manufacturing operations. The financial concept of full costing or absorption costing is one such self-defeating metric, although it still is considered a generally accepted accounting principle. This technique amortizes all overhead costs — both fixed and variable — among the items produced within an accounting period, resulting in overproduction to reduce overhead per unit cost.

Evolved approach:
For internal decision-making, the lean approaches of ABC, throughput or variable accounting allocate variable costs to units produced but consider fixed overhead to be an expense in the time period. This recognition of fixed costs as occurring regardless of production levels eliminates the incentive to overproduce.

Management

Traditional approach: Management traditionally follows a top-down structure filled with layers of bureaucracy. This often results in

  • costly middle management activities that do little to add value
  • decision delays due to excessive meetings and committees
  • a disconnect between management, operations and the marketplace
  • communication barriers among functional areas. 

Evolved approach: A flat, horizontal management structure can empower employees. Managers then adopt a bottom-up philosophy of supporting workers by ensuring they have the resources they need. A sign that this approach is successful is when a manager can take a two-week vacation without needing to check his or her email every five minutes. Although some people could feel threatened by this, enlightened professionals recognize that they have followed the right path. Allowing employees to handle their own workloads enables managers to focus on higher-level strategic activities.

The evolving world of supply chain management will result in a more holistic, integrated focus on serving customers profitably while reducing overall costs. The best approaches ensure that employees, departments and organizations are rewarded based on their contributions to the performance of the entire supply chain, rather than adherence to seemingly arbitrary metrics.

Michael D. Ford, CFPIM, CSCP, CQA, CRE, CQE, CPSM, is principal of TQM Works Consulting and an adjunct professor at Penn State University. He specializes in delivering training that he describes as “edu-taining” and has presented more than 5,000 hours of training via classroom instruction, workshops, seminars, webinars and conference sessions across the United States, Canada, Nigeria and South Africa. Ford may be contacted at michaeldford@earthlink.net.

To comment on this article, send a message to feedback@apics.org.

Want more? Read a case study about a company's struggle with an outdated approach to operations. 

Comments

  1. Mark September 29, 2017, 03:10 PM
    Thanks for creating this excellent summary!
  2. Jarrod H. Smith, CLTD, MBA October 17, 2017, 03:11 PM
    Yes, excellent article.  Thanks for sharing!

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