Supply Chain Side Infrastructure Support Systems
- Category: Supply Chain Management
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In this section we will discuss the background systems that can be used to fit the supply capability to the customer requirement before going on to discuss the kinds of skills needed by the people employed in this set of activities.
In the relationship portfolio discussion we highlight the need to select customers and suppliers who contributed most to our income and expenditure and to then consider them for possible preferred status. The generic name for this kind of analysis is spend analysis because it is traditionally used on the incoming side rather than the customer facing side where marketing people would do a similar thing in their approach to market segmentation.
We need to understand how we spend the money but goes to suppliers. The total size and spread over points of use and delivery routes needs to be examined. High spend does not necessarily determine that a supplier should be preferred since what is supplied is more important.
That is, can it be sourced from others, is it something that is uniquely able to satisfy a particular customer requirement or is that supplier the market leader in this item? Total value is still a useful indicator that these other criteria should also be measured.
In some cases the amount of money spent with this supplier will suggest investigating the possibility for preferred status and at the other end lots of very small expenditures with too many suppliers should suggest a need to rationalize and concentrate spend with fewer suppliers or indeed to have one supplier take over responsibility to manage these other suppliers on our behalf.
While the concept is easy to understand many organizations find it difficult to implement. This is because their information systems have not been constructed or integrated enough so as to perform the analysis required. A degree of standardization in processes and naming protocols is needed so that any spurious differentiation of items that are in fact similar in their intended function, are avoided.
This problem can go all the way back to a product design stage where it is often easier for an engineer to design a completely new part because the system is not good at identifying things which could perform the same function but have been named in a different way by another designer.
Another issue is that different computer systems are often in place. In many cases this will be because companies grow by mergers and acquisitions and with the new organization comes different computer systems and identification codes and processes.
Computer systems provided for one purpose do not often fit other purposes without much modification. For example an employee who occasionally is repaid some expenses by their employer can appear on the suppliers’ register of the employing company. The accountants who specified this system were interested in controlling the flow of funds out of the business and so this allocation made sense to them but not if the company is now looking for strategic partners in their supply chain and trying to do their spend analysis.
Spend analysis is not usually difficult to do but does require time and effort and of course some computer systems make this easier than others. It is a very important first stage in the overall process of allocating resources where the impact is going to be greatest.
Enterprise Resource Planning, e-business and compliance
The operations and manufacturing world has evolved its planning and control approach from a focus on physical inventory counting and allocating to customers through various software generations of Material Requirements Planning (which essentially automated the physical inventory thinking) through to Enterprise Resource Planning where a suite of software program modules can be used to bring together all of the data needed to run a business internally and in collaboration with customer demand and supplier capability information.
At one level it is just a higher level data processor but it can be much more. Capturing all of the data means that the physical world of product manufacturing can be allied with financial information for operating and capital expenses of all of the resources of equipment, systems and people along with customer commitments and supplier purchases. All of this can be put into a timescale so that implications and clashes of decisions can be foreseen and the decisions re-evaluated.
All of this can be built into a computer model of the business in its environment and alternative decisions can be simulated in the computer before real time and potentially risky actual decisions are made and acted upon.
Enterprise in this usage describes extending across the supply chain since the visibility is out towards the final market place and back upstream towards the suppliers.
For the linked preferred customers and suppliers it is also possible to link their ERP systems so that they can to some extent automate decisions. For example, if stocks of product in a customer’s stores are running low the systems can connect and send a replenishment signal to the supplier.
One of the key modules is called Sales and Operations Planning. This is the interface between demand and supply such that a sales commitment can only be made when the system simulation confirms that the supply side has the required capability to meet the delivery promise to the customer.
In this way satisfaction has very high probability (massive disruption of some kind excluded) of being achieved in a planned, organized and routine way. This avoids the overpromising to close a sale that was discussed before when sales and supply do not coordinate.
Such systems can be expensive to buy and pay for in operation, complex to set up and run the risk of being more complicated than many people can cope with so that management ‘feel’ is overtaken by a blind belief in what the computer output is indicating. As ever, there is a challenge to ensure that IT systems act to support and inform and do not obscure the ability of managers to create their own insights and systems understanding.
Such data driven management approaches seem necessary in most businesses of any complexity and the trend as we have already indicated is for more of these initially individual systems to become more interconnected to mirror the inter-organizational relationship connections discussed.
As the spread of ERP systems increased more attention was brought to bear on the wider possibilities of performing most inter-organizational communications electronically. In EU procurement nearly everything is electronic from the initial announcement that a contract may be offered to the market from a buyer through to all of the tender documents, calls for clarifications from one supplier and the answers (questions and answers shared with all bidders for reasons of equal treatment), through to final contract award and any information about challenges and decisions.
Face to face meetings will still have some place in this (especially to make the buyers comfortable that a bid document is supported by real and credible people), but electronic business is just so much quicker and should be subject to fewer human errors in the transcription processes. However the human element should increase in the preparation for the tender process and in the care with which impartial evaluations are used in making an award.
Once the contract is in place, invoicing and payment can also be automated permitting more effective use of the planning, checking and rectification resources for invoice errors or badly communicated plans.
In all such situations suppliers with multiple customers can run into other problems as they try to align their internal computer systems with their varied customers and their varied systems. There is an inherent waste in such mismatches and this can be an added burden on a small supplier. We are not yet in a world where different computer systems can interface seamlessly. This is further complicated by the inherent complexity in some of the large ERP systems where the internal lack of detailed understanding of assumptions and design rules makes it more problematic for the customer representatives to offer much in the way of support to their supplier colleagues. This might well be one of the hidden costs of the buy option to be put in the overall balance of benefit.
Compliance has a number of meanings. In the next section we will discuss a product’s production being in compliance with the designed specifications. In the procurement world compliance is used in a different context.
When buyers are considering their sourcing strategies and getting ready to either advertise a tender process or begin to enter into discussions with suppliers, one key metric for the supplier will be the volume of demand that is being purchased. Buyers often aggregate the demand over a number of buying units where they can to build up the volume they will negotiate about. For the potential supplier more is frequently better since the benefits of scale can come into play and they can afford to run their production processes for longer before stopping (and losing economic output) to make changes to another product order.
In this way the costs of set up are spread over many more parts thus reducing the per unit cost and allowing them to charge a lower unit price to the buyer. It is however very unfair if the negotiations were based on one level of demand when the actual outcome is that demand is always at a lower level. Suppliers are bound to complain about the treatment from the customer organization if this happens.
Procurement departments are therefore interested to monitor how accurate their internal clients (the using departments) were in estimating their expected demand on which these contracts were established.
In most contracts there will be an agreed obligation to keep a record of the actual orders demanded of the supplier to check up on these details.
Procurement departments have other problems however not related to different orders to the agreed supplier. This is where important (perhaps too self important) managers decide that the deal agreed through procurement does not in some way meet their requirements and therefore choose to buy from another supplier who they see as offering something better. This is called ‘Maverick buying’ as it is out of the control of the procurement department and is not in compliance with the agreed supply contract.
It reduces the money that the legitimate supplier was expecting and puts at risk their belief in any volume demand numbers supplied in future contract discussions. In this circumstance the procurement group has to act to support their supplier against the actions of the mavericks in their own user group so that it will be possible to build longer term interactions with these important suppliers.
E-business processes can aid this greatly for the procurement department. If the ERP systems and the communications processes are managed so that the work flow needed in order to get orders raised on suppliers and payments made to outside people are all controlled by the system then proper oversight of planned actions and decisions are possible. In effect the skill is to design the systems so that it is easier to do what was planned and contracted for and impossible to operate in any other way.
By these means the mavericks are starved of their freedom and are obliged to follow the corporate path that the rest of the key stakeholder buying group has decided is appropriate. If the deliveries do not in reality suit the users needs then this is serious and corporate processes are needed to redefine or renegotiate contracts but in a controlled and reasoned way in which the interests of the incumbent supplier are also recognized. After all, we might have taken a long time and a lot of effort to get to the point of having this supplier in place and functioning well so we cannot afford for a few mavericks to put this at risk.
Product data management and product life cycle management
We have previously argued that the importance of design is indicated by the fact that all choices of materials, manufacturing methods, initial quality and performance standards and many other factors are determined at this stage and changes made later in the product’s life can be more difficult and expensive to make.
If we then decide to outsource the production of these items to our suppliers then we are putting our future literally into their hands. Again electronic systems make sense here to avoid any miscommunication issues.
One great feature of electronics processes is the need to describe everything digitally. This starts from the computer design screen which creates the first set of agreed digital specifications. These same digital specifications can be used to purchase materials, processes and allocate equipment. This equipment will use the same digital instructions to drive their production machines and automated quality testing machines (using the same information) can then inspect the goods to ensure compliance to the design specifications. The series of interconnecting loops are all managed and controlled by one set of digital codes.
In a world where changing customer requirements and evolving technologies means that making sure everyone in the extended chain is operating with the same set of design revisions becomes crucially important and very expensive to get wrong.
A simple demonstration of the problem is the example of Airbus in 2006 when they hit a major problem when they could not fit together parts of the A380 airliner. This had been designed and made in different factories but using different versions of the same design software. It cost millions of dollars and took lots of time to fix.
Product data management describes the processes need to specify and control all of this data and avoid the Airbus issues. It can be extended into product life cycle management since the thinking about how to recover products at the end of their first life in order to repurpose, recycle, recover or reuse the basic materials, can allow the product to take on different functions as part of a second or subsequent life. This is addressing one of the sustainability challenges.
In order to facilitate these options it is also necessary to think about the end of life stages when the product is being first designed and make such value recovery from the product as easy as possible for people who perhaps have had no active involvement with the product until then. This can be aided by effective information provision and part identification in the product itself.
There might therefore be one supply chain to produce the product the first time and satisfy the first set of customers and users’. Another supply chain might collect these products at the end of their first life and bring them back to another supply chain to do the recovery and recycling process and then another supply chain to take the latest incarnation to a new market. At some stage a new set of digital specifications will be generated to fuel the next turn of the cycle.
Customer satisfaction is clearly not easy. We have tried to understand what they want, designed and specified it, sourced it or produced it and now we have to complete the life cycle, at least for the first life. In order to do this we have to add some further utilities to our value proposition. This is where the logistics function takes over to deliver place, time and security utilities. In other words, the customer requires to have what they asked for in product and/or service delivered to the point where they want it (place) at the time that they want it (time) and in the condition in which it was produced, ready for the customers to take use or ownership of it (security).
However, while many of the words of logistics can fit to some degree to less tangible things much of the discussion has grown up around physical product travelling over physical distances from source to use. However the more digital the product or service and the more it can be transmitted wirelessly, then the lower the traditional logistics barriers are, in actual practice.
There is in logistics however the concept of the last metre or yard. This relates to the speed at which some of the processes can be accomplished if supported electronically but that it might all depend on whether the customer is at home and able to open the door to receive the order as it physically crosses the last metre across the doorstep. This aspect is still a challenge for home shopping channels and there are all sorts of different order collection solutions being tried in different market places.
The logistics processes and planning approaches need to interface with all of the upstream activities from sourcing through manufacturing and out through warehousing and distribution channels to reach the end customer. Physical movement implies some physical constraints however. All of the means of carrying goods and people have limits on their capacities and performance and similarly the routes along which these carriers move are also subject to controls and limitations.
Some aspects lend themselves to moving materials in bulk or agglomerated formats and others to moving smaller quantities or even small parcels and letters. There are therefore different modes of transport: road, rail, rivers, canals and oceans with different means and capacity sizes. Generally speaking the largest distances are covered by water in large container or liquid/gas tanker ships. Other bulk items can move effectively on the fixed paths represented by rail systems. Fastest, but in smaller quantities, are by air while the most flexible are based on road vehicles of enormous variety.
All such movements are inherently wasteful of the energy resources they use and polluting of the atmosphere so we are keen to reduce this impact where we can.
Global supply chains increase these concerns especially when climate effects are also brought into consideration. Large distances from source to intermediate or even final customer also increase the opportunities to experience a disruption risk to the supply chain. While natural and man made disasters can have a major and immediate local effect a disrupted supply chain can cause a business great pain or to fail through failure to deliver to key customers at crucial times in the buying cycle.
Shipments of smaller electronic goods coming through (or not if there is a problem) one or other of the ship canals around the world can be critical if it happens just ahead of a key holiday gift buying period with no chance to fill the shelves before customers go elsewhere. This happened a few years ago when a container ship full of computer games was stuck for two days in the Suez canal behind another ship that had lost control of its steering and went sideways in the canal.
This describes a buy for stock situation that will always happen in such markets, for example new toys or computer games, when it is impossible to fully predict how buyers will react to the new offers and actual demand can fluctuate too widely to be followed by the production process. In these circumstances the suppliers can only guess as best they can and try and build stocks in anticipation. If demand greatly exceeds their plans they often cannot react to the opportunity and lose sales to their competitors.
If we imagine all of the physical flows of materials from source through many intermediate steps until in a finished format and then along all of the possible distribution channels to reach a final consumer then we can see a very pressing need to coordinate all of these and see if we can be more efficient. One of the abiding problems in logistics or freight transportation is that it is often relatively easy to fill a vehicle going in one direction but often much more difficult to fill it on the way back and often for much less money.
Keeping vehicles full and operating along traffic free and unhindered routes is the goal of logistics managers while keeping their drivers and vehicles from accident and high-jacking is a constant stress for all involved in the logistics system.
Technology is also helping here as GPS monitoring and associated scheduling software can produce and update a planned route in real time as changes emerge. It is also possible to track and trace more items as time goes by. Individual assets can be tracked by electronic tags for monitoring at sensing stations and increasingly we are talking about the internet of things (IOT) which will be capable of identifying themselves to other items and to planning and supervisory computer systems so that even more of the assets involved in the complex flows can be usefully coordinated to mutual advantage.
This work is similar to the developments in driverless cars and faces the same kinds of issues of requiring collaborative and coordinated action across very many different organizations so that something meaningful can be introduced.
A relatively new challenge is the re-cycling one. We have discussed some aspects of thinking through the design so that this is possible but now we have to design a logistics system capable of collecting these end of first life products and bringing them back for evaluation, sorting and re-processing in some way.
The challenges involved in designing and operating these supply chains effectively and with economic value are large but are being to be addressed at different rates in different countries. Being able to continue to make new products without a great need to extract more raw materials from our finite planet is the opportunity and the base of the business case to invest in these developments.
The further new technology with the potential to disrupt much of this is 3D printing or additive manufacturing. In this, complex shapes are progressively formed in near final dimensions through various processes which involve adding and forming materials into a computer controlled, three dimensional space and thus it produces the complete item with no need to create joins or in some cases hinges.
This has the potential not just to reduce material usage and waste but also to change the need for factories and distribution systems. In effect we might in some cases go straight from co-design with a customer to producing their artifact in a mobile unit brought to their place of need. Increased variety can be easily catered for and changes to design are simple to do.
It might not solve all of the re-cycling problems since there are few parts that can be reused in other products but that concern is still some way ahead in time before it becomes significant.
This concludes our look at the systems which the company can use to match the supply capability to the customer requirement. Now we need to look at the kinds of skills that are needed for the people who are going to work in these critical areas of the business.
Historically the procurement role in companies was not regarded as a high status career destination so that many who ended up working there had been other places before and often not too successfully. The work was very transactional involving placing orders that others had decided upon but this book has argued that this is no longer a sensible way to recruit into the procurement function.
In somewhat similar ways contracts have been seen in the past as the area where legally trained people (if not necessarily full lawyers) would be employed, again to finalize decisions made by others. Of course a number of years ago no one would have talked of supply chain managers or logistics managers rather there would have been talk of materials managers and freight managers.
This book has been arguing overall for a much more integrated and less functionally controlled way of working which extends beyond the boundaries of the focal business to work with customers and suppliers. This requires systems development to span the former large no mans land between functional areas.
It crucially depends on people who have or have had developed a set of skills in which the ‘big picture’ is always in focus and in which complimentary and necessary capabilities are actively engaged regardless of where they come from in an organization or indeed which organization they come from as long as it is part of the required supply chain linkages for the customer need which has been identified and for which the supply system is begin aligned.
These people skills will also be subject to more modification going forward as increasing levels of data automation and computer assisting decision making or even autonomous machines being to appear in greater quantity.
Some aspects of the emerging thinking machines or artificial intelligence applications will make some memory and experience based human skills less important as the computer network will be able to provide base information more readily and reliably. Already a number of professional skilled groups are talking about this impact.
For example the legal profession is thinking carefully how their world of influence might change if easier access to case law or statute could be provided and the information interpreted independently of the human intermediary. This is no different to what we are all doing in reacting to a medical diagnosis where the first thing we do is check the spelling of what the doctor said so that we can search Google more effectively to see what the symptoms, prognosis and potential treatments and outcomes can be. In this way we hope we can have a more informed discussion about options with the clinicians.
So what kinds of skills can we forecast will still be needed for a few years yet?
Relationships are everywhere but in the business sense they have an overarching purpose which should never be overlooked. Relationships are intended to operate so that the desired level of performance can be delivered and maintained.
This is not about being nice to each other but certainly we need to consider the other’s point of view and see them as partners in the venture not adversaries. If we can do that in a way that is more nice than nasty, then all to the good. Nasty can sometimes work to shock and change perceptions but it is unlikely to be sustainable over any longer period of time and should surely be reserved for ‘all else has failed’ situations.
This of course is with customers and suppliers with whom you want to continue to work for some time. (If it really is only a single opportunity, taking short term advantage is actually the rule of the competitive market place so it still has a place in the playbook but should certainly be used much less frequently than used to be the norm.)
This change in attitude can be difficult for long established personnel who have been trained in, and rewarded for their excellent practice in, the old ways. Managers of such people have the challenge of trying to instill new ways of thinking and acting in such people or reallocating them to the ‘nasty’ group and finding new people to develop into the ‘relationship’ group.
Of course these relationships can be externally focused towards suppliers and indeed key customers but internal relationships are every bit as important. There is no prospect of succeeding in our aim of supply chain alignment to deliver customer satisfaction if the different factions inside our business are effectively at war with each other or are playing the game of ‘I am more important than you’.
There has been too much of this between different professional groupings and their external professional bodies all claiming the complete corporate agenda but driven only by themselves and their limited membership. The only person who should and has the right to drive our business agenda is the customer and as long as their satisfaction is obtained at an economically acceptable value to us then why should it matter that for customer A engineering were very important whereas for customer B it was supply chain delivery.
The key mind set is to see the opportunity to bring together multiple skills to meet a customer requirement effectively for all concerned as more important than little arguments about relative status at different points in the chain.
Contract management related skills
There are ongoing discussions about which is more important or comes first, the relationship or the contract. Too often contracts are definitions of what can go wrong and who pays whom in compensation when it does go wrong. As a form of insurance policy this has some merit and again when all else has failed and the business interaction is going to stop it can be very important to have a means to recover some of the costs involved to date. In business terms of course it is usually too late to do anything other than mitigate the losses since there is unlikely to be any further interactions between such aggrieved parties.
We know of long term business partners who never have had a formal contract and their business interactions carry on satisfactorily year after year but sometimes it is better to clarify and define how the parties have agreed to behave and how they will arbitrate on any disagreements. Some cultures of course still put enormous burdens of expectations on the promises made between two business representatives so here the formal contract is less important. The social contract is of course hugely important.
There is an argument that the interactions and reciprocal obligations of the business relationship need to be fully defined, understood and agreed so that a formal contract can be written simply and quickly to capture this understanding. If this is done the hope is that the formal contract will be locked away never to be referred to again since the behaviours will follow the agreed paths. The insurance policy is still available in this scenario however.
As discussed above, contract management and learning the lessons from the contract performance is an important part of the contract life cycle and skills and commitment area needed to perform as agreed, record and analyze any emergent issue not anticipated, negotiate and agree any required modifications and learn how to define things better in the next contract.
The skills and comfort in operating in the twin regions of relationships and contracts are core to all commercial activities. This also suggests that any manager looking to move up the corporate ladder would do well to spend some quality learning and experience time actively involved in these aspects. In this business activity there are so many aspects of the complete business all interacting so that a deep understanding of the possibilities and dangers in the interconnected world becomes evident here very quickly.
Any new recruit into business should spend some formative time in this are to obtain a real feel for what the business is all about. When they move to other areas to build their career they will carry this understand of what important contributions can be made from this area that they will themselves be more informed and demanding internal clients looking for better supply solutions.
In the same way as everyone knows something about buying then we all know something about selling. Perhaps we do not talk about it in this way in our part of the business but the more we are involved in trying to influence or persuade someone to agree with our analysis, the more we are engaged in a selling process. Professional sales people go through intensive training, learn how to simulate issues and opportunities and how to play the negotiation game to maximize their perceived benefits from the process. At the very minimum the people on the buying side should be at least as skilled.
However, if we can reach the integrated ideal of the aligned supply chain and delivered customer satisfaction we have been discussing, the objective will not be to take unfair advantage of a less skilled negotiator, it will be to ensure that the very best mutually acceptable solution has been reached.
In order for this to happen we need to make sure that our suggestions are formed in the language of business so that a new idea is justified on the contribution it can make to the objectives of our own business while contributing to our customers’ objectives and those of our supply network partners.
Thus selling of our ideas has to be based on the language of business, which is money. There will of course be many other factors to be built in but if at the end of the process there is not a believable financial return on the investment commitment, then no business person, acting rationally, will agree. This is true for all of the key players in the extended network.
One of the skills needed therefore is the ability to get close to all of the clients and customers internally and externally as well as with the key suppliers, empathise with their situations and gather and share appropriate information with them so that all angles are considered and try and perform this enormous juggling act we have discussed to an all round satisfactory outcome. The juggling will involve the gathering and analysis of quantities of financial and performance data to be brought together into a coherent plan and then ‘sold’ to all the participants.
This skill, almost on its own, is well worth taking time to experience and become proficient in so again the career professional should be looking for these opportunities. Of course teams are fundamental to everything we are describing so the selling is even more important inside the designated team and being an effective team player is built into this profile as well.
One of the foundational principles of the quality movement applies here and that is the belief that the journey towards perfection is a valid and sensible one to undertake in every aspect of one’s existence. In business it translates to ‘tomorrow must be better than today’. Of course we will always have a challenge to define better.
In the capable supply chain there are so many dimensions and there might need to be some shifting of priorities sometimes but performance on the overall path must improve.
At one level this sounds very difficult indeed but it is no more than any athlete, musician, craftsperson or artist does all the time. We need to see our business challenges in the same fashion as do these creative and motivated people and always strive for our own ‘personal best’ performance.
Given the increasing level of complexity, the appearance of artificial intelligence and big data and its opportunities to build understanding across an ever wider field of activity, perhaps the ultimate continuous improvement challenge is to embrace these emerging technologies and really look for ways in which they can aid in managing this complex and highly dynamic environment.
We have looked at a variety of the support systems which are available to all businesses if they choose to spend their investment money carefully. This book has argued that these decisions should not be made from a functional efficiency argument inside procurement or contract management rather they need to be made by a global look at the relationships between the customer requirements and how we can satisfy and sometimes delight them while providing a support network extending outside our ownership boundaries which is considerate of each partner’s requirements and capabilities to produce a coherent and reliable plan to deliver these objectives.
Systems can change over time but what really makes the difference are the ways in which people think. It is here that the real challenge is located for if we are in an existing business a number of our people will face the need to make real changes in their attitudes and behaviours and we will need to provide training and support (if we have time) to try to bring such people along with the new direction.
If this is not possible we have to recruit and train in the new ways of thinking from the beginning but recognize that in such a dynamic world we need to keep checking that we have still analysed the situation appropriately or we need to plan for another set of realignments.
We have now reached the end of these sub-sections of our topic so let us now attempt to bring this together into some coherent and implementable messages and general operational principles.