Gary A. Smith, CPIM, CSCP | May/June 2011 | 21 | 3
A window into real supply chain improvement
Excuses. Everyone has heard them, and everyone has used them. Whether real or imagined, excuses are barriers to accomplishing goals and objectives.
Since 2004, the New York City Housing Authority (NYCHA) has been eliminating excuses and barriers through a positive, collaborative, and creative process that has changed the rules of the game and achieved results beyond expectations. We have removed barriers within departments, between departments, and among NYCHA’s vendors and customers. We call this process “no-excuses supply chain management.”
NYCHA is the oldest and largest public housing authority in the United States. It owns and manages 178,000 apartments in 338 developments for New Yorkers with low or moderate incomes. Approximately 1 out of every 20 New Yorkers lives in an NYCHA development. My department, supply chain operations, is responsible for the sourcing, purchasing, warehousing, and delivery of materials used for the ongoing maintenance of developments and offices. In 2010, the department purchased more than $55 million in materials—from electric, elevator, heating, appliance, and plumbing parts to janitorial products, tools, computer equipment, tractors, and trucks.
As with any organization, NYCHA faces many challenges. One major issue throughout the past decade has been the chronic underfunding of public housing in the United States. And in addition to the funding decline, NYCHA also faces rising costs. Unfunded mandates—programs the organization is required to operate but which lack specifically allocated cash—and higher energy and nondiscretionary costs surpass rent increases, putting tremendous pressure on NYCHA to spend less and find new avenues for revenue.
The job of supply chain operations is to address these challenges by making the supply chain more efficient and removing barriers that impede improvement and success. Such advancements can have far-reaching impact. While our direct customers are the housing developments requesting the material we provide, our customers’ customers are the 400,000plus residents of NYCHA developments. Thus, the department has the opportunity to make a real difference in the quality of life for hundreds of thousands of New Yorkers.
A vision for improvement
NYCHA’s supply chain consists of the supply chain operations department, our vendors, and our customers—primarily 338 housing developments. Information, orders, materials, and funds move from vendors to supply chain operations to customers; alternatively, movement is from vendors directly to customers, with supply chain operations providing management. In many ways, our supply chain resembles one in the private sector. And, just as in the private sector, our department must manage internal operations, vendors, and customers as efficiently and effectively as possible.
In 2007, supply chain operations created a three-year operating plan for improving NYCHA’s supply chain, which we called “vision 2010.” We identified four operating principles, which were
ensuring all processes were quality- and customer-focused having a bias toward action maintaining a keen dedication to accuracy prioritizing cost containment and cost reduction.
With vision 2010, supply chain operations set in motion nearly 20 different initiatives for lowering operating costs and improving inventory accuracy. We then discovered the need for a mechanism for change, as the initiatives required eradicating excuses and changing processes, procedures, and paradigms within our department, NYCHA, and our partners. This mechanism for change evolved into no-excuses supply chain management.
No-excuses supply chain management can be summarized in six steps:
- Create a supply chain vision and plan.
- Identify the excuses preventing performance improvement.
- Enlist stakeholder support.
- Determine, with stakeholder input, possible solutions, and agree on a course of action.
- Implement the solution that best meets the needs of the business.
- Review, revise, and improve as necessary.
No-excuses supply chain management differs from other project management methodologies in its focus on identifying and removing the excuses that impede performance improvement. Project management has roots in information technology. Its method is to identify the current state (the “asis”) and the future state (the “to-be”), recognize the gaps between them, and develop processes to eliminate the gaps. It is, by nature, problem-focused.
But supply chains are not computer programs. They are distinct entities made of materials; information; funds; fixed assets, such as buildings; mobile assets, such as vehicles; and—most importantly—people. What project management fails to address is this human factor. Behind every excuse to performance improvement are human beings who created the processes. The truth is that emotional attachments can form among people and the processes they helped create: When we ignore the human factor, we do so at our own peril.
No-excuses supply chain management finds problems using as-is and to-be methods, but then shifts focus to identifying excuses and barriers with the help of all stakeholders (some of whom even may have created the excuses). But instead of marginalizing people and creating an us-versusthem environment, no-excuses supply chain management makes everyone a stakeholder and thus part of the solution. When a team is comprised of all groups that need to be involved in a decision, the issue of blame is eliminated. The team members can focus on improvement that benefits the entire organization.
When supply chain operations began to leverage no-excuses supply chain management, the initial focus was on internal department improvements. The first step was to get our own house in order and eliminate some of our excuses before stepping outside. As our processes improved, we engaged other departments to help remove excuses. Finally, our vendors and customers became stakeholders in performance improvement. Because we had developed a reputation for excellence within NYCHA, we were able to work well with other groups and bring people together.
Another approach to improvement adopted by supply chain operations took the form of “crawl, walk, run.” We intentionally limited our scope on large projects so we could adjust programs more easily during implementation. In doing so, we changed the rules of the game, and our results improved many times over. Through working with no-excuses supply chain management, we discovered five “game changers” that propelled us to greater success.
Game changer 1: mastering inventory accuracy
Inventory accuracy is the keystone of supply chain management. Unfortunately, our lack of inventory control impeded customer service and forced us to maintain high inventory levels. Also, we relied on annual physical inventory counts as our primary means of adjusting inventory balances.
Our internal audit team worked with warehouse staff to implement cycle counting in the first quarter of 2004. Supply chain operations set up the program and developed its procedures. We identified A, B, and C items and established counting rules. We also set up weekly and monthly reports, which still are in use.
Results were immediate, and we celebrated these early successes by publishing metrics for all to see. By the end of the year, our inventory accuracy was so high that we were able to eliminate the annual physical inventory count. The final test of our inventory accuracy came at the annual audit conducted by an outside firm, which resulted in zero discrepancies. This was unheard of within our organization—but we had accomplished it within a single year.
Since 2004, our department’s mastery of inventory accuracy has yielded a 5.4 sigma level of inventory accuracy (measured as dollars of adjustments stemming from counting errors divided by average inventory), a 47 percent reduction in inventory investment, a 96 percent fill rate, and a perfect record of zero variances in outside audits for seven consecutive years. Supply chain operations continues to improve the program by implementing spot checks and updating procedures, maintaining our dedication to accuracy and making it part of our organizational culture.
Game changer 2: improving vendor relations
Vendor relationships can make or break a supply chain, and, in order for NYCHA to provide the best service to its residents, it has to rely on its supplier community to provide quality products and consistent service. In 2007, supply chain operations developed a strategic sourcing vision. Our strategy became “trust—but verify.” We do everything possible within our procurement rules to be the best customer to our vendors by eliminating excuses.
For example, in conjunction with NYCHA’s accounts payable department, in 2005 we began paying vendors using electronic funds transfer methods.
Meanwhile, we implemented early payment discounts: We were allowed to take a cash discount if the vendor was paid within 10 days. The discount program was voluntary at first, but, in 2008, it became part of our purchasing terms and conditions for blanket orders—an example of “crawl, walk, run” in action. We now apply a “2/10 net 30” discount to nearly all material purchases—meaning, bills paid within 10 days enjoy a 2 percent discount. Since 2007, use of early payment discounts has grown more than 900 percent, and NYCHA saved more than $1 million in 2009 and 2010.
In addition to early payment discounts, supply chain operations issues a quarterly vendor scorecard. Our vendors are ranked on a 10-point scale, with a score of 8 or higher indicating acceptable performance levels. Currently, nearly 85 percent of our vendors are above this threshold. Rarely does a vendor rate as unacceptable for longer than one quarter because they cannot win new business with NYCHA in this state. Also, vendor contracts are subject to cancellation if scores are unacceptable for two or more consecutive quarters.
My department meets with accounts payable on a monthly basis to review ongoing problems and address vendor complaints. We also have implemented software such as Oracle’s Advanced Procurement and iSupplier Portal, which enables vendors to register with us, place bids, and track payments electronically.
Game changer 3: sustainability
In 2008, supply chain operations laid out a plan for sustainable procurement. Its goals were to acquire more environmentally friendly products, obtain them in a sustainable manner, and encourage vendors to use sustainable practices. We wish to stay ahead of the curve with respect to new laws and mandates while providing cost-effective products.
Our vendors are learning that there is “gold in green” and that adopting sustainability does not mean reducing profitability. Within the last year, my department more than tripled the number of environmentally friendly items in its catalog. In addition, since switching to compact fluorescent light bulbs in 2007, supply chain operations saves $1.5 million annually in energy costs. Switching to smoke detectors with 10-year life spans has saved nearly $1.8 million annually.
Game changer 4: customized programs
NYCHA has been around for more than 75 years, and its age means its inventory of housing stock requires constant upkeep. Also, emergencies do occur, and we must be ready to face them. To supply material quickly in emergency situations, supply chain operations worked closely with the elevator and plumbing divisions, determining the items and quantities typically needed in an emergency and adding those requirements to our department’s inventories. We also reorganized the elevator and plumbing areas of our warehouse and made materials easily identifiable. This way, our emergency services department’s staff people can find and obtain material and, using forms we provide, record what was taken so inventory is reconciled the next day. As a result of these efforts, NYCHA saves many hours in waiting for parts, allowing emergency repair work to be done more efficiently.
Game changer 5: supply chain operations replenishment system
While our latest game changer still is a work in progress, it has the potential to create huge savings and make our supply chain more efficient. NYCHA’s property management department operates 338 housing developments, and most contain at least one material storeroom. The employees who operate these storerooms report to the management of the housing development, and they have little or no training in warehouse operations. Additionally, storeroom inventory is not owned by supply chain operations—it is not in our inventory system or subject to our cycle counting regimen. Audits showed these storerooms had inventory levels much higher than required.
Working closely with the property management department, we piloted an inventory program in 22 housing developments. For the top 50 to 100 items, we placed inventory owned and managed by supply chain operations in the storerooms. As needed, orders for this material are picked at the development and replenished from our warehouse based on min/max levels in the software. Cycle counting also was implemented. We achieved a 26 percent reduction in the amount of material purchased by the developments for the items in the program. We conducted focus interviews with staff members in a variety of roles, and they nearly unanimously recommended that supply chain operations take control of storerooms and manage materials.
The journey of supply chain operations is to provide the best and most efficient material supply chain possible for NYCHA. Through the systematic application of no-excuses supply chain management, we will continue to design and implement initiatives that keep NYCHA on the path to supply chain excellence.
Competitive advantage and steady improvement arrive through the efforts of professionals who use tools and execute supply chain concepts. These people share a common outlook, are team-oriented, and innovate. They are the foundation of no-excuses supply chain management, believing that what they do makes a difference. When given the right tools and training, they remove barriers and build relationships with an almost limitless capacity for creativity and innovation. NYCHA’s supply chain operations staff has been—and will continue to be—pivotal to our success.
Gary A. Smith, CPIM, CSCP, is responsible for the sourcing, procurement, warehousing, and delivery of material used in the operations and maintenance of more than 175,000 public housing developments as part of the New York City Housing Authority. He spent much of his 30-year career in private sector supply chain management, consulting in a variety of industries. He may be contacted at gary. email@example.com.