| December
9, 2003 |
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In
replenishment logic, most companies use some version
of "order point, replenish to max level" policies,
meaning as inventory declines to a defined level,
it triggers a replenishment order, which is geared
to return inventory to some range, not to exceed
a predefined maximum.
Such
policies are often also executed with three levels
of SKUs, or so-called ABC classification, based
on normal sales volumes.
To reduce overall inventory levels,
consider more nuanced approaches than straight ABC
methods. Perhaps your SKU profile is really more
appropriately served by an "ABCDEFG" classification
that more ideally matches policies to individual
SKU characteristics. Policies should also look beyond
just volume classifications and consider other inventory
drivers, such as supplier lead times, transit times,
supplier lead time variability, demand variability
and forward-looking forecasts.
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Dan Gilmore
Editor-in-Chief |
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Buried
away on page C7 of last Friday's Wall Street Journal
was an interesting story on Viasystems, a maker of printed
circuit boards that almost went under in 2002 but has
now revived itself - thanks to offshore production.
"Viasystems'
Salvation," as the article calls it, was moving manufacturing
to China. Viasystems in fact is the only U.S.-based
company among the Asian-dominated top ten circuit board
makers worldwide. At its peak, it operated 34 plants
in eight countries, including several in the U.S. and
Europe, but became increasingly uncompetitive in the
price-dominated industry. It now plans to maintain just
one plant each in those two main markets, moving all
other production to China, where it employs tens of
thousands.
One
of Viasystems' owners is quoted as saying "The whole
U.S. electronics industry will be domiciled to China."
OK,
Viasystems has been saved. I'm a pretty strong free-marketer,
but it simply has to make you wonder whether this scenario,
played out over and over again in the U.S. and Europe,
is in our overall economic interest. Commenting on this
offshoring trend, Morgan Stanley chief economist Stephen
Roach said recently that there is "the distinct possibility
that job-less recoveries may remain the norm in the
high cost developed economies for some time."
Meanwhile,
has anyone checked out TV host Lou Dobbs on CNN Financial
lately? He's calling on employees to contact the show
and report companies that are "exporting jobs" overseas.
Apparently, he's going to create some "most wanted list"
that he hopes will shame corporations into keeping the
jobs here. Dobbs is certainly no union-oriented protectionist
- this trend is troubling to observers across the political
spectrum.
This
isn't just related to supply chain management
- it IS supply chain management. Web-based supply chain
tools are also making it easier to integrate offshore
sites with overall supply chain processes. And when
it comes to offshore versus corporate survival, the
choice for most of us would be easy. Still..
If
you'd like an email copy of the WSJ article on Viasystems,
let us know. There's a related piece in our News and
Views section, questioning whether offshoring companies
really have the economic facts right.
Is
the battle decided? Is basic manufacturing lost forever
in developed economies? Was there another survival path
for Viasystems? Let
us know your thoughts.
Side note: after writing this column,
I was waiting at the airport and overheard a cell phone
conversation from someone who apparently worked at a metal
tube company of some kind. He was asking a colleague for
his opinion of the market impact (versus today's "made
in America" position), of following the new recommendation
from corporate - begin offshoring production to China. |
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While
we're on the topic of domestic production, approximately
how much worth of goods do U.S. manufacturers
ship each month?
Answer below
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Reader feedback from
the topics in SupplyChainDigest is growing every
week! Keep the comments coming! If you would like
to keep your identity or company anonymous, please
let us know in your response.
Had
another strong group of letters again last week,
including more comments on the whole training
issue, and our Feedback of the Week from Claus
Heinrich, who responded to the SC Digest review
of his new book, "Adapt or Die."
For
more complete comments from readers, click
here.
Keep
the dialog going! Give us your thoughts on this
week's Supply Chain topics.
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Martin
Donegani, a consultant at the Bourton Group, recently
penned an article in Assembly magazine that says the
supposed cost savings from moving part production offshore
is not as great as many believe.
Donegani
notes: "Once the contract is in effect, parts are made
in batch quantities, shipped in bulk, and may go through
extended customs procedures if they come from overseas.
There is more handling, more chance for damage and more
need for higher enforcement costs. The people who negotiated
with, and selected, the outsourcing vendors are still
on the payroll. But now we pay other companies to make
these items for us and we generate their profits from
buying our old parts. At what point do we have to ask
ourselves, 'If they are making a profit from selling
us our old parts, and we have not reduced our overhead,
who is making money now?'"
He
makes the argument that the costs of parts and components
are mostly variable, and that therefore "if parts that
are not on a constrained operation or function are outsourced,
and overhead costs are not removed, then the real costs
must go up."
I
do believe that in many cases companies do underestimate
the total costs of an outsourced part, especially in
relation to increased inventory buffers and international
sourcing and logistics costs. And yes, I suppose companies
may sometimes fail to fully consider the impact of spreading
fixed overhead across a smaller pool of total in-house
production activities.
But
I'm afraid much of Donegani's argument is wishful thinking.
A 30% per part savings can really drive improvement
to the bottom line, even if the true savings isn't really
30%. Donegani's column has to be considered in the "assembly"
context of the audience he was writing for, which may
have some different dynamics than say a pure component
manufacturer such as Viasystems, whose story we cite
nearby. Whatever the other considerations, I'm not convinced
offshoring companies really have the financial analysis
screwed up.
Do companies often overestimate the
savings from moving production offshore? Are the total
supply chain costs completely considered? Let us know
your thoughts.
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View
full article >>
Jim
Ayers, a consultant at CGR Management consultants, recently
identified four areas where executives should look for
opportunities to cut supply chain costs. Ayers cites
the following:
| 1. |
Lack
of clarity. Notes the problems associated
with accounting systems that simply don't shed
the right light on true supply chain cost drivers.
"Accounting for supply-chain costs rarely goes
beyond financial-reporting requirements, and as
a result, it obscures, rather than draws out,
the details. In the supply-chain context, costs
are spread across multiple companies, all of which
use similar accounting rule books but have varying
levels of willingness to collaborate on cost reduction."
One answer - activity-based costing, but the burden
of this effort doesn't have to be on-going. Occasional
efforts to understand supply chain cost drivers
can suffice. |
Variabilty:
Supply chain "visibility" systems show
the effects of variability, but not the root causes.
These come in two types: "V ariability that's inherent
in processes and variability caused by management
behaviors... The former is amenable to process engineering,
such as Six Sigma. Effective solutions can be formulated
using a thorough process analysis. Because that's
hard work, companies often look for an IT solution
rather than fix the root cause.
Management behaviors are more difficult to change.
In many companies, for example, the end of the quarter
brings a desperate push to book more revenue. This
leads to all kinds of distortions in the supply
chain. People scramble to find product to ship;
suppliers interrupt schedules to handle rush jobs.
One company even pulled products out of inventory
for reconfiguration." |
| Product
design. "This has a profound effect on
supply-chain costs. Poorly devised designs increase
supply-chain complexity-another driving force for
more elaborate systems to track the mess. Poor design
discipline also results in too many products and
variations, the use of out-of-production components,
hard-to-make and hard-to-fix products, and faulty
products that result in complex return processes."
Notes how office furniture maker Herman Miller used
a combination of process re-design and new technology
to dramatically reduce new product introduction
lead times. |
| Information
sharing: " Supply-chain information sharing,
or collaboration, is progressive: Sharing will build
gradually as a relationship develops. Often this
is a top-down process that starts at the CEO or
CIO level. Here, too, low-tech solutions that let
you get to know one another must often precede high-tech
ones. Good places to start include joint product
development, sharing forecasts and actual sales
data, and incentive-based joint cost-reduction efforts."
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There's
no one list, but this is a pretty good start. The article
actually encourages CIO's to become less involved in
IT infrastructure, and more focused on issues like the
above. Good reading.
Does
this list match your views of the best opportunities
to reduce supply chain costs? Should CIOs be more involved
in operational supply chain issues? Let us know your
thoughts.
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Great
story in Fortune about the one company that Wal-Mart
has been unable to pummel into submission - warehouse
club chain Costco.
Some
interesting facts:
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Sam
Walton actually took many of his successful ideas
from Wal-Mart from Sol Price, founder of a west
coast chain called Fed-Mart that has direct lineage
to today's Costco. |
| Costco
has more sales than Wal-Mart's Sam's Clubs ($34.4
billion vs $32.9 billion) with far fewer stores
(312 to 532). |
| Correspondingly,
Costco has almost double the per store sales of
Sam's ($112 million versus $63 million). |
| Costco lives by
the principle of marking up goods no more than 14%.
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| It has thrived
by smartly adhering to a "trading up/trading down"
strategy that entices more upscale consumers with
high end goods at low prices (they rush to get hot
new electronics into the store, for example) and
bargain prices for commodity goods about which they
don't care as much. Sam's Clubs, by contrast, offer
fewer upscale goods and locations in fewer "hip"
urban locations. |
| It practices
"intelligent loss of sales" by stocking fewer SKUs
than many retailers, meaning it may lose a few sales
for the customers who must have the less popular
versions of a product, but the practice of course
"streamlines distribution and hastens inventory
turns - and none out of ten customers are perfectly
happy." |
| In the warehouse
club market, it has consistently been ahead of Sam's
innovation (new products, services, etc.) |
Sol
Price adds this perspective: "I always felt department
stores and conventional retailers were doomed. They
lived and died trying to take advantage of customers,
and they were inefficient. The more I studied it, the
more it seemed the cost of getting goods to consumers
was way too high. I'm surprised the department store
has survived this long."
The
article ends on an optimistic note for those concerned
with Wal-Mart's dominance: "The nimble first mover can
outrun the powerful colossus; the innovator can stay
a jump ahead of the imitator; the quality of leadership
can trump the quantity of resources."
Alas,
there are no Costco's near me. The article made me want
to shop there. If you want the article and don't want
to register at the above link, send us an email.
Will Costco continue to stand strong
against the Wal-Mart challenge? Are there lessons here
for other retailers? Let us know your thoughts.
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I
was honored to read your recent review of my book "Adapt
or Die." Thank you for the constructive feedback. You
are indeed correct that the statements made by the book
cause many highly interesting debates about the direction,
timing, and extent of the trend toward adaptive supply
chain networks.
We
at SAP are learning much from this debate.
In
any case, many thanks and I would of course be happy
for any further feedback. I must confess however, I
do still remain at odds with you on the timing! [Of
the business transformation predicted in the book -
we thought it would take more time.] I am in fact sometimes
wondering, when viewing projects that our customers
are undertaking whether my prognosis of 5-8 years was
maybe even a bit conservative!
Claus
Heinrich
SAP
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I'd
like to comment on this issue of training. It
is my opinion that many companies out there under
utilize the vendor training that is offered. Tight
timelines and budgets on implementations are usually
the points I hear. Everybody wants to get the
application running as quickly and cheaply as possible,
and as soon as there is a cost overrun in some area,
training is one of the first to get cut back. After
many implementations, on both the vendor and customer
side, I have heard time and again, "Sure, we know
we can use training, but we just don't have the money
to send all those people." So what happens
is, the "Train the trainer" concept is employed. This
involves a usually abbreviated training schedule with
a brand new user or (if lucky 2-3 users) that must go
back and educate the entire user community at the
company.
What
this leads to is a user group that has no real idea
how the application really works, so they start guessing
on set up and use. After a short time, the application
appears to falter in its intended use, which causes
expected results to fall short of targets. I have
seen this many times, and the outcome has the potential
to create an adverse relationship between vendor
and supplier that may take some time to repair.
Or worse, the customer will stop using the software
all together. When the relationship is fixed,
and both sides look at the situation, what generally
happens is the customer pays the vendor for the proper
training for the right users. Of course this adds
even more cost to the project that could have been avoided
in the first place.
I
would love to see a more focused effort to get
as many good users trained as possible so the application
can be set up and run as intended. Of course there
is never time or money to do this at the beginning
of the project, but it's always available at the end.
Michael
Adorjan
LogisticStrategies,
Inc
General
supply chain education versus application training is
indeed vastly under utilized. I don't mean to split
hairs but there is a difference between general supply
chain education versus application training, in my mind.
Application vendors know their product and offer training
on how to use it. The problem is that many of the resources
using it have been doing their jobs for years and very
possibly for the same company. They believe that they
know the right way to plan inventory both for supply
& demand. Unfortunately, their management doesn't
believe that and hence they are bringing in a new application(s).
The
problem is that the workers will find ways around the
application or demand customizations that will allow
them to do the same things. Management thinks the application
is the solution but still OK's the customizations instead
of changing the processes to take advantage of the application(s)
they just paid millions of dollars to install. If we
do what we have always done, we will get what we have
always got. This will not get the expected value out
of supply chain applications. Resources need to be educated
as to why a new process can help and be given a say
in how to measure and reach the expected results.
I
think the main reasons that education investments are
not made are:
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Workers
are already overworked and management can't/
hasn't explained to them that proper education
will reduce the workload. |
| Workers
fear that reduced workloads on current tasks
or more efficient processes will result in more
new tasks. |
| Management
believes that the application not education and
process change is the answer. |
John
F. Blakowski, CPIM, CIRM
CSC
Consulting, Inc.
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I
was fascinated by the comments
by Brian Arthur that you included. His examples of "significant
sources of next-generation IT productivity gains"
are right on. There are many areas of productivity gain
that can be attacked by the IT community. We've only
begun to mine the sources of waste and profit loss.
Deeper analytics and real-time decision-making systems
will sustain IT growth for many years.
However,
his comments about the continued US technology dominance
over off-shore technology seems to me to be so much
"it can't happen here" bunk and "US uber
alles" rhetoric. He says "...But, as the U.S.
endures a never-ending squeeze at the lower end of advanced
technology, I believe it will retain its position at
the top. One reason is that advances in technology proceed
from advances in science, and the U.S. has sufficient
leadership there to carry it for several decades more."
This is scary to me.
I
was wondering if Mr. Arthur has looked very close at
the profile of the graduate school student body's in
science programs in US academic institutions. Take a
look and you'll see that the majority of these students
are coming in from off-shore (and then mostly returning
home.)
Couple
that with the fact that the half-life of many technology
areas is less than five years. How does that add up
to a continued multi-decades of leadership for the US?
You
need intellectual horsepower to tackle the new problems
and provide a differential solution. The problem is
that there is subtle leakage of this brainpower to the
offshore centers. This will catch us by surprise; you
just don't have the Icon of a "sputnik" satellite
being launched to provide a national catalyst to renewed,
competitive science/technology investment. We shouldn't
think we can't lose the science leadership or that it
won't happen quickly. We may continue to train the technical
leaders of the future in our advanced science programs.
They just don't work here after getting the education.
Erv
Bluemner
RedPrairie
Corporation |
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