Supply Chain Leader - Issue 5 by Brent Baker

April 2008

Ideas & Innovations from i2 Technologies

Ge t t i ng R e s u l t s

faster

• Measuring Performance Across the Value Chain • How to Get Supply Chain Value Fast • Overcoming the New Demand Uncertainty • The Case for Knowledge Process Outsourcing • Managing the Human Element Plus • Interview with Sprint’s Michael Hahn • Leveraging POS Intelligence to Improve Retail Flow-Through

The Supply Chain Results Company

April 2008 Vol. 3, No. 1 i2 Senior Director, Marketing Beth Elkin Editor Victoria Cooper Art Director Peter Klabunde Circulation Manager Sangeeta Bajaj

Contributing Writers Lauren Bossers Michael Cohen Cynthia Fusco John Kadlecek Jon Kemp Kirsten Monberg Deborah Navas

Editorial Advisory Board Sanjiv Sidhu – Co-Founder and Chairman of the Board Pallab Chatterjee – Interim Chief Executive Officer Hiten Varia – Executive Vice President, Global Customer Operations and Chief Customer Officer Steve Estrada – Senior Vice President, Global Services Operations

Chuck Kramer – Senior Vice President, Retail and Consumer Industries Sector Aditya Srivastava – Senior Vice President and Chief Technology Officer Kelly Thomas – Senior Vice President, Manufacturing Sector Razat Gaurav – Vice President, Global Logistics

© Copyright 2008, i2 Technologies, Inc. This magazine is available online at www.i2.com. Reproduction of this magazine in whole or in part in any medium is prohibited without written consent of the editor. Contact: supply_chain_leader@i2.com.

In This Issue Cover story Measuring Performance Across the Value Chain by Alok Pathak and Kenny Li Page 4 A new discipline, called supply chain performance management (SCPM), offers a structured way for businesses to identify and address performance issues at various levels of the business, as well as across the value chain.

Features

Page 10

Page 20

How to Get Supply Chain Value Fast by Kelly Thomas

The Case for Knowledge Process Outsourcing by Anand Iyer

Even the most complex projects can be tackled in an incremental fashion to achieve results quickly—using a “business release” approach and managed services.

Page 24

Page 40

Overcoming the New Demand Uncertainty by Robert Anson

Managing the Human Element by Michael Levi

Today, we know that people will change because they are offered the right incentives—and this means that we must align our numerical objectives with the human rewards that will ultimately drive our businesses toward results.

Case study Page 32

Meeting (and Exceeding) Customer Expectations at Teich AG, by Jon Kemp

Departments Page Page Page Page Page

2 8 14 16 27

Page 34 Page 38 Page 44

Perspective: 20 Years of Innovation at i2, by Sanjiv Sidhu Viewpoint: The Power of Many: User Groups Spur Professional Growth, by Kirsten Monberg News Briefs: Supply Chain Management Leadership Garners Praise Interview: Buying It Right at Sprint. An interview with Michael Hahn, by Victoria Cooper Opinion: How (and How Often) Do You Measure Supply Chain Results? Interviews with Fairchild Semiconductor, Emerson, Timken Steel Group, and MIT Supply Chain 2020, by Michael Cohen Focus: Leveraging POS Intelligence to Improve Retail Flow-Through, by Amarnath Thombre and Sanjiv Sidhu Guest Column: Total Channel Management Demands a Dynamic Partnership, by Michael Aguilar Inside i2: Our Innovation, Your Results, by Hiten Varia

Supply Chain Leader / April 2008

Perspective by Sanjiv Sidhu

20 Years of Innovation at i2 i2 Technologies celebrates its 20th anniversary this year, and in honor of that milestone—and the magazine’s theme this issue, “Getting Results Faster”—I’ve thought about what our value proposition was at the start and how it has evolved. With that in mind, I’ll try to summarize some of our innovations and where we think the supply chain management discipline is going. Twenty years ago the predominant methodology to keep the supply chain under control was MRP (material resource planning). MRP is essentially unidirectional planning, where you start from a forecast and a distribution plan and continue on to develop a master production plan, which enables you to issue purchase orders to suppliers. You factor in the inventory you have on hand, subtract it from what you think is your demand, and then figure out what you need to produce, generally on a weekly basis. Another way to look at this approach is that you start with demand requirements and work your way back to supply requirements. The managers who used this approach achieved a fair amount of supply chain discipline. The problem was, despite using this approach, companies found their inventory levels remained too high. The limitation of MRP was that the constraint calculation was sequential. First you calculated what your material needs were, then you calculated your capacity needs. There was limited intelligence for looking at all of your supply chain constraints simultaneously and therefore limited opportunity to optimize what needed to be done in the presence of all constraints.

Addressing delivery to promise MRP also did not solve the problem of customer delivery to promise, because there was no visibility into supply availability or supplier activity. So manufacturers depended on having inventory on hand to keep their delivery promises. Around this time—the 1970s—the Just-in-Time movement to create what became known as lean manufacturing became popular. Japanese manufacturers—especially in the automotive industry—were using mechanical techniques like kanban (use one, pull one) to control inventory. This mentality worked well where you had high-volume, streamlined production. But it didn’t work in constraintsensitive areas, such as semiconductors (where there could be a shortage of raw materials) and steel factories (making a wide mix of products). In other words, it wasn’t so effective in low-volume, high-mix environments. It also

Supply Chain Leader / April 2008

fell short in environments such as high tech and electronics, where the product mix changed rapidly as a result of customer demand changing rapidly. In such environments, customer lead times are higher than supplier lead times. It was in this environment that Ken Sharma and I founded i2 in 1988. We were interested in supply chain management for several reasons, not the least of which was that we saw the immense potential in this area for enhanced efficiencies from software capabilities. Our first product was called Factory Planner. It had many innovations. Foremost, it allowed manufacturers to plan in a multidirectional way. If you had a supply constraint, you could determine the best mix to produce given this material constraint, or, likewise, if you had a capacity constraint, you could determine what to do. Maybe you had a constraint in the middle of the supply chain. If so, you could figure out what your plans should be upstream and downstream from that constraint. Factory Planner also allowed you to deal with multiple constraints simultaneously, instead of sequentially. A third innovation was that the software was the first commercial planning software that resided in the computer’s memory mode (RAM). So it could run up to 100 times faster than traditional MRP. Lastly, Factory Planner introduced the concept of depicting plans graphically. We used emerging technologies in this area to create user-friendly graphical interfaces that suited managers’ need to get the big picture about problems and solutions quickly and clearly, without wading through marshes of data.

Extended supply chains Our second-generation product was Supply Chain Planner. It applied the same principles to larger supply chains—not just the factory, but multiple factories. It also accommodated distribution planning, and we were able to optimize distribution in ways that traditional products could not, by using memory-resident software, as we had with Factory Planner. The capabilities in speed and accessibility we gained in memory mode allowed us to perform more iterations, more “what-if ” analyses, faster. Now we could represent real-world contingencies much more accurately, helping our customers understand the implications of choosing certain capacities or parts in their supply chain. We became very good at advanced planning and scheduling and continued to broaden the scope of what we offered, adding highly differentiated demand planning and transportation planning software. We were constantly bringing new capabilities to the market. Twenty years later, global supply chains provide more complex challenges, calling for ever more inventive and comprehensive solutions. With the help of our software, many of our customers can now respond to new orders with promise dates in less than one second. If material is not in inventory, the software’s full visibility into the entire supply chain can help planners determine how long it will take to produce it, taking into account all of the other activities in the chain currently using the same material and capacity. Our innovations have not been confined to software development. We have continued to build on our fundamental mission: to help companies achieve their targeted business results by optimizing their supply chain efficiencies and using the supply chain as a competitive lever. In the early days, CIOs wanted us to depend on their MRP systems for core data. But we realized over the years that the quality of data and the kind of data needed to optimize the supply chain aren’t in ERP (enterprise resource planning) systems. The data maintained there supports the company’s financials, not its supply chain. The resultant bill of materials does not have enough information about alternative materials, for instance; nor are capacity and supply lead times represented well, if at all. In the last few years, we have built our own master data management system. It augments the weaknesses inherent in ERP systems, just as our earlier software augmented MRP systems. This consistent approach of augmenting— and not ripping and replacing—represents our partnership philosophy with the companies we serve. In the networked world of today, a lot of data important to running an integrated supply chain do not exist within the four walls of a company. Such data are related to

supplier inventories, point-of-sale (POS) data from the customer interface, channel sources and other aspects of modern supply chain management. This is the kind of data needed to create operational efficiencies.

Closing the loop through PDCA Another shortcoming of ERP systems, from the supply chain perspective, was that, although they could issue work, purchase and customer orders, they did not have the intelligence to analyze what was going wrong with a plan. In the plan-do-check-act loop (PDCA), the “do” and “check” elements were absent. In recent years, we have continued to strengthen our software’s capability to close that loop. The software can figure out what’s going wrong with a plan, through root-cause analysis, early enough that remedial actions can be initiated to “make the plan happen.” To close the loop on our history to date, I’ll summarize by saying we started out as a planning company, focusing on the process first and then providing tools to support or facilitate that process. Improvements in process methodology have played an immense role in increasing operational efficiencies in supply chain management. What we’ve done is embed the processes in the software. Reflecting on the journey we’ve taken, I realize now that one of our chief contributions has been in compressing the time to results. I believe this will become a matter of days rather than weeks or months in the future. We introduced the concept of daily planning, and now a company like Dell, for instance, is planning not just daily but three times a day. One caveat should be mentioned. No matter how advanced and capable the tools are, without realigning their organizations and processes and identifying the metrics that are critical to meeting business goals, companies will fail to realize the benefits and capabilities inherent in today’s software solutions. After the great ride of the past 20 years, I remain committed to the journey ahead. Fundamentally, I believe supply chain management is a “green” discipline. If the inefficiencies and overruns in the supply chain can be addressed, the environmental impact is huge, with less waste and more efficient use of resources and energy. Because today’s supply chains are global, the decisions around sourcing of materials, building to order, and collaboration with channel partners, suppliers, and customers to create a tighter, more robust supply chain quite possibly could have more impact than many other green initiatives. Sanjiv Sidhu is the cofounder of i2 and the chairman of the board. For more information, contact: supply_chain_leader@i2.com.

Supply Chain Leader / April 2008

Measuring Performance Across

Measuring performance has evolved from a broad corporate goal to a data-driven science, beginning with the rise of IT tools and corporate reporting systems in the last two decades. Executives and managers were overjoyed at the huge volume of information they could suddenly access, but this proved to be a dual-edged sword because now they had more performance data than they knew what to do with. While the performance of virtually every corporate process was suddenly revealed at a very detailed level, most executives had little idea how to interpret the data, or link it to the top-level strategy. In response, a new group of reporting businesses

Supply Chain Leader / April 2008

emerged, promising to help executives make sense of their enormous volume of information. Spreadsheets that simply reported data were replaced with new analysis tools that sliced and diced this information, creating the new field of business analytics. Soon, most companies were using a reporting solution that enabled them to analyze their financial data at a very minute level, revealing performance problems affecting the bottom line. As these reporting tools became more sophisticated, they also enabled companies to isolate and analyze important aspects of performance, such as cash-to-cash cycle time, providing true insight that executives could use to

the Value Chain

improve key metrics. Simple reporting was transformed into business intelligence, as the focus shifted to operational analytics: using analytical data to create and track processspecific improvement plans and goals. In a short time, virtually every business had a corporate performance management (CPM) effort in place, supported by dashboards and scorecards that tracked key business metrics such as product quality, inventory levels and delivery times. Today, packaged CPM solutions and in-house efforts have created real financial benefits. But the majority of CPM initiatives have one critical shortcoming: they focus on top-level strategies revolving around financials,

by Alok Pathak and Kenny Li

budgeting and forecasting, but fail to address how these strategies can be transformed into specific operational initiatives.

Extending CPM across the supply chain For CPM efforts to deliver maximum return on investment, they must go beyond identifying problems at a high level and drill down through individual product lines to the shop floor, where meaningful changes can be made in everyday processes. A new discipline, called supply chain VALUE CHAIN CONTINUED on Next Page . . .

Supply Chain Leader / April 2008

performance management (SCPM), offers a structured way for businesses to identify and address performance issues at various levels of the business, as well as across the value chain. SCPM enables executives and managers to more effectively analyze and improve the impact of individual processes, both within and beyond the company’s boundaries. It’s aimed at providing operational information and insights across the global supply chain, both horizontally and vertically. While CPM focuses on strategic financial goals and high-level decision making, the growing field of SCPM enables top-level decisions and measurements to be propagated throughout the supply chain hierarchy. Executives can now improve their ability to determine the success of corporate strategies that are enacted at the operations level, and how well strategic goals are aligned with tactical and operational goals. For example, a common CPM goal is to increase profit margins. SCPM focuses on understanding, at a very detailed level, why margins are low today—and what specific operational changes and initiatives can lead to significant improvements. Because of the maturity of financial standards and corporate governance practices, CPM solutions have proven fairly easy to package and to duplicate. However, because of the incredibly complex way in which most companies source, manufacture and deliver products and services, SCPM methods and solutions are much more difficult to standardize. There will always be variations among supply chains, but the discipline of SCPM is based on developing and applying a set of standard processes and measures aimed at analyzing the complete value chain—and ensuring that it both reflects and enacts the corporate strategy.

How SCPM works SCPM is based on the concept of measuring and managing performance at every level of the business, using standards such as the Supply-Chain Operations Referencemodel (SCOR®), Six Sigma and Total Quality Management, and tools like dashboards and scorecards. To prevent misalignment, it is critical that metrics and standards are first applied at the highest levels of the business, and then cascaded down through the tactical and operational levels. This ensures that both corporate performance and supply chain performance will be assessed for improvement and that, ultimately, they will be closely aligned. For example, a business may define an overall corporate goal of maximizing cash flow by increasing sales revenues while simultaneously decreasing operating expenses. Every function and process within the company must be aligned with this top-level goal in order to achieve it. However, close examination may reveal a number of disconnects within the business. Sales compensation may

Supply Chain Leader / April 2008

be based on bookings—but salespeople should also be measured on achieving cash-collection goals. Operations managers may be rewarded for managing at full capacity, when they should be striving to maximize inventory turns. Functional targets and rewards should always support the larger corporate strategy, but in reality they may actually work against it. One way in which SCPM helps to align and manage the supply chain is through independent industry benchmarking. But SCPM demands much more extensive and in-depth benchmarking than most companies have ever undertaken. Not only must executives study the best practices of industry leaders and key competitors at the top levels of the business, but they must also understand the intricacies of these companies’ supply chains. This enables executives to understand the “as is” situation of their own business, as well as to create an ambitious, but achievable, plan for the future. Functional targets and rewards should always support the larger corporate strategy, but in reality they may actually work against it. When an overall supply chain plan has been created, the SCPM effort next turns to defining the specific process improvements that will support both operations goals and the long-term strategy for the business. These improvements are measured and managed through the use of highly customized dashboards and scorecards that keep supply chain performance enhancements on track and ensure a continuous cycle of improvement. SCPM not only enables businesses to analyze what is happening now and what has happened in the past, but also what is forecasted to happen in the future, through the creation of forward-looking plan data. Powerful scorecards, dashboards and analytical reports allow supply chain decision-makers to test multiple “what-if ” scenarios and predict the impact of their decisions. For instance, a business with a customer service level of 80 percent might be considering a new goal of 90 percent. SCPM tools enable managers to assess the actual operations costs of reaching this goal, which might not support long-term profitability. Managers may determine that an 85 percent customer service level represents the best possible cost and profit outcome, while still supporting the company’s top-level market strategies. SCPM dashboards and scorecards take the concept of plan-do-check-act to a new level, because they reflect a top-down model in which the overall corporate strategy is always considered first. They stand in sharp contrast to typical operations scorecards and dashboards, which are based on achieving discrete process improvements that

may be disconnected from—and incompatible with—the highest-level goals of the organization. For example, i2 recently worked with a high-tech manufacturer that had spent two years and $2 million custom-building a set of 20 in-house reporting systems that focused on discrete performance improvements, such as increased forecast accuracy. Not only was the initial cost staggering, but the business was also investing more than $1 million annually in maintenance costs. This investment might have been justified if the reporting systems had been aligned with top-level goals, but they were narrowly focused on bottom-up operational improvements—and completely disconnected from one another. i2 was able to replace these 20 in-house reporting systems with its holistic performance manager solution, capable of aligning the entire organization with the highest corporate goals. This represented a tremendous advantage in supply chain alignment and performance, as well as a significant “buy versus build” cost benefit.

i2 Business Analytics Content Library • Inventory SCM Analysis

400+ Metrics & KPIs 150+ Standard Reports

Transportation Analytics

• Procurement • Demand • Forecast • Operational – Manufacturing – Capacity – Production • Distribution

Retail Analytics

Inventory Optimization

• Profit Optimization • Transportation • Sensitivity • Segmentation • Replenishment • Exception

The challenge of implementing SCPM There is little doubt that undertaking an SCPM initiative that supports the broader CPM effort makes sense for every business. But understanding and applying the concepts of SCPM represent an enormous undertaking. Part of the challenge lies in the fact that the discipline of SCPM is still in its infancy. Packaged solutions are not yet available and will be difficult to develop because of the complexity of global supply chains and the variations among individual businesses. In addition, while this article describes a recommended approach for applying SCPM concepts that is based on i2’s more than 100 supply chain

analytics implementations, there is no universal process for extending SCPM across the value chain. A huge hurdle for the typical business is developing and applying a robust set of metrics to create an accurate view of current corporate and supply chain performance, both within the company and across the industry. Supply chain leaders such as i2 have access to deep libraries of key performance indicators and industry benchmarks at both the strategic and the operational levels. i2 can also help customers understand which metrics and benchmarks are relevant to their own competitive challenges, a major shortcoming with models such as SCOR, which can overwhelm executives with hundreds of metrics that may or may not apply to their own business situation. These are significant challenges, but there is an even larger one. Successfully applying SCPM concepts requires the right combination of skills and expertise among those charged with the implementation. An implementation team must include strategists who have an extremely high-level perspective and who are capable of understanding the position of the business within its industry, the products and processes of chief competitors, and the key trends impacting the competitive landscape. SCPM requires the participation of supply chain domain experts who are capable of using a top-down approach to align the company’s overall goals with specific operations initiatives. These specialists must not only have in-depth process knowledge, but also a broad view that considers the supply chain models and best practices of others in the industry. In addition, the SCPM team must include technology experts who can work with the supply chain experts to bring improvements to life through the application of the best possible technology solutions. Few companies have the right combination of in-house expertise to successfully create and implement an SCPM effort, and it is probably not cost-effective or practical for most companies to hire such a diverse group of professionals as full-time employees. The obvious answer is to form a partnership with a supply chain leader that offers this highly specialized experience and expertise. For those unwilling to look beyond their own businesses for support in creating and implementing SCPM initiatives, this incredibly powerful new discipline will remain out of reach—and existing CPM efforts will be destined to fall short of their true potential.

Alok Pathak is a director of consulting services at i2. Kenny Li is a technical director at i2. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / April 2008

Viewpoint by Kirsten Monberg

The Power of Many User Groups Spur Professional Growth, Stronger Relationships with Vendors Business technology users today often have multiple opportunities to join user communities. But what motivates someone to join? Member discounts to events? Opportunities for career networking? An inexpensive way to troubleshoot implementations? The reasons to join may be as varied as a group’s membership, but no matter what the motivating factor is, user group membership can be a cost-effective way to expand your skills, maximize your technology investment and ensure that your voice is heard. “User groups play many important roles,” says Bill Bryan, chairman of the i2 User Group. “Obviously membership plays a key role in my ability to represent my company's interests to our software vendors. But I believe there is a broader purpose. I look at the i2 User Group as my entrance into a huge networking community. From this base of contacts and interactions I have the opportunity to improve our company’s performance, advance our field of supply chain management as a whole, and grow my personal knowledge base.” Some of the first technology-focused user groups originated during the days of mainframe computers and were designed to serve as a forum to share information and software exchange, independent of the factorysupplied programs. In 1955, the first known user group, SHARE, was founded by aerospace industry corporate users of IBM’s first computers. It is still active today. The i2 User Group, founded in 1996 on the principles and beliefs of Ken Sharma, the late co-founder of the company, is dedicated to addressing the needs of the i2 user community and fostering an open line of communication with i2. Sharma believed that the voice of the end user must be heard at all levels of the company, and was known to say, “Take care of the customer, and everything will take care of itself.” Today, the i2 User Group consists of more than 500 members, and offers networking and educational opportunities to share information and experiences related to the selection, implementation and effective use of i2 solutions. From the beginning, companies joined the i2 User Group because they were interested in learning from other

Supply Chain Leader / April 2008

companies’ experiences using i2 products and processes to address their business problems. i2 User Group Treasurer Bruce Budahn, who has been involved in the organization since its founding, says, “We tried to learn and apply those experiences to what we needed to do at our company. The i2 User Group allowed us to network with others who had gone through a similar process and gain insight into an implementation from the lessons they learned. This sharing of best practices allowed us to prepare in advance for those risks that could occur at any company.” Budahn also says he finds value in the enhancement and maintenance process discussions and voting offered as a result of his User Group membership. “These discussion opportunities help create awareness not only among User Group members, but ultimately with i2 as to what we need from a product standpoint. Having a formal process through which we know our voice will be heard and where users can help generate awareness and set priorities with regard to product development and enhancements is of tremendous value to us,” says Budahn. The opportunity for mentoring, and learning from those who have “walked the walk,” is another key benefit to user group membership. “User groups allow you to network with colleagues at world-class companies, enabling you to expand your knowledge, learn best practices and avoid significant pitfalls,” says i2 User Group Board Member Tom Dadmun. “User groups are an invaluable source of knowledge that can turn a major project from a daunting journey fraught with risk into a well-planned and executed experience. It's always nice to have a learned group of experts at the ready.” Communication, not just among users, but among a company and its customers, can be enhanced through user group membership. That’s not to say that as the business climate changes every conversation is an easy one, but keeping the lines of communication open, in both prosperous and lean times, can make a world of difference to the success of the customer-vendor relationship. This is especially true when companies like i2 look to make changes to their solutions.

Members of the i2 User Group are at the forefront of providing that voice to the company as a result of direct contact with the company through special interest groups and the enhancement voting process. “I think the User Group has been tremendously valuable to us,” says former i2 User Group Chairman Ravi Vancheeswaran. “With the Semiconductor Special Interest Group, we have been able to solve some really difficult problems related to inventory optimization and scenario planning. Our influence is stronger when we speak with a singular voice as a user community, giving us a greater power of influence as we seek product enhancements.”

User groups offer their members the power of many experiences, opinions and best practices, enabling professional growth and stronger relationships with technology vendors. The strength of user communities comes from an active membership that shares the common goal of maximizing technology investments through best-practice sharing. By building relationships among members, as well as with the vendor, user group members can speak with a common voice and create tangible benefits for everyone involved. For more information on the i2 User Group, please go to www.i2-usergroup.org.

Supply Chain Leader / April 2008

How to Get Supply Chain Value Fast

by Kelly Thomas

Supply Chain Leader / April 2008

Even the most complex projects can be tackled in an incremental fashion to achieve results quickly––using a “business release” approach and managed services.

he 1990s brought widespread adoption of new supply chain management technology and systems, which translated into dramatic business improvements. As a result, most companies have now maximized their value in areas of improvement that could be quickly addressed. Driving true innovation becomes the next challenge for these companies, as they look to further differentiate themselves from the competition through significantly improved business processes and technology. Many companies have come to realize that their business models must be on a continuous improvement trajectory. Those that fail to acknowledge this fact are often caught by surprise and are left playing catch-up. As Tom Meredith, Motorola’s CFO, and former Dell CFO, once said, “Fortunes are won and lost in moments of transition.” Every year, the push to move toward a better business model becomes even more urgent. Even dominant business models of three to four years ago are under pressure and must be repeatedly refined and modified. Continuous reinvention is now a requirement for success in the modern business landscape. Nevertheless, this does not mean that the value equation has changed. All improvement projects should be based on a strong return-on-investment framework, such as return-on-net assets (RONA) or economic profit (EP). These equations are measures of wealth creation and, thus, shareholder value. Therefore, all supply chain projects should be placed within a return-on-investment framework. In the context of economic profit, at a high level, each project should be driving higher operating profit, reducing the capital deployed or both.

Economic Profit =

Net Operating Profit After Tax Revenue Pricing Cost of Goods Sold

But it isn’t just value that is valued, so to speak. It’s also speed. Business executives want rapid time-to-value for their supply chain investments. And when executives think of “rapid,” they are thinking of delivering results in a three to six month time frame. Is it realistic that all supply chain projects deliver value within such a time frame? The answer to this is yes, because even the most complex projects can be tackled in an incremental fashion to achieve results quickly. Of course, there are business problem areas and solution approaches that lend themselves more readily than others to achieving rapid value. i2 has identified two approaches to achieve rapid return on investment in supply chain management. The first is an incremental approach we pioneered, based on short “business releases” within a more lengthy improvement program. (See “An Incremental Approach for Software Implementation,” Sloan Management Review, Winter 1999.) A business release is an integrated set of changes that results in some business improvement. The changes may be made in one or more of the following areas: processes, people, organization, metrics and technology. This approach stands in contrast to the traditional waterfall or “big-bang” delivery approach in which the solution is defined, designed, constructed and delivered in total. Many companies still make use of the waterfall approach, which lends itself to much longer cycle times and, potentially, much higher costs. But many executives have become wary of this approach in the past two FAST CONTINUED on Next Page . . .

Weighted Average to Cost of Capital Debt Rating

Capital Deployed

Fixed Asset Efficiency Inventory Efficiency

Supply Chain Leader / April 2008

decades. The reason is clear today: enterprise resource planning (ERP) and similar projects are like multipleorgan transplant surgery—they are complex and risky. Information technology project complexity is driven by two primary dimensions: the requirements scope and associated customizations, and the depth of how intrusive the new systems are to the existing information technology and business landscape. Innovation is easier when there is little legacy to deal with. As Cisco executive Wim Elfrink said in the October 30, 2007, issue of Fortune: “The reason God was able to create the world in seven days is because there was no installed base.” Thus, solutions to driving value quickly should be based on a focused scope and minimum intrusion into the installed base.

Where should you focus for fast results? The best way to deliver results quickly is to match a specific problem area that is conducive to fast results with a solution approach that is relatively non-intrusive. The table below provides a framework for evaluation, along with examples of solution approaches to problem areas that can deliver fast results. Likewise, it shows solution

approaches that will only yield results over a longer period of time (for example, greater than 12 months). For example, business analytics delivered through managed services or a business optimization center (BOC) will almost always yield fast results. This is the second approach that i2 has found to deliver fast time-tovalue. A managed service is an on-demand capability that is delivered without the need to implement or install software at the customer site. The BOC is a small group of customer domain experts from a solutions provider and technology domain experts who deliver managed services for a business problem or set of business problems. For example, a business optimization center can analyze pointof-sale data, determine sell-through patterns and make recommendations on inventory positioning and shipments, without ever having to install software at the customer site. This capability can be up and delivering value in less than three months. On the other hand, if you are implementing an ERP system, you are probably in for a long haul. In some companies, the blueprinting process alone will take as long as two years. Projects requiring lots of customization or

Evaluating Time-to-Value Problem Area Examples

Shorter

Longer

Solution Approaches

• Business analytics/reporting • Inventory optimization • Forecast optimization • Point-of-sale data analytics • Sales and operations planning

• Incremental business release methodology • Managed services • Business optimization center • Business content library

• ERP • Order management • Procurement systems • Business model changes • System replacements

• Waterfall • Customizations/developments • Big bang

Supply Chain Leader / April 2008

system replacement typically also will be lengthy, just as companies that use a waterfall development and implementation methodology will often see lengthy implementations. A business release is an integrated set of changes that results in some business improvement. These projects are “big bang” in nature, meaning that all of the requirements are defined, designed and implemented in an all-or-nothing fashion. Inevitably, project timelines lengthen and costs escalate as layers of requirements and late process changes are added. When big bang is the norm, there is a self-reinforcing loop, since many business users see these projects as their once-in-a-lifetime chance to get their desired capabilities, thus exacerbating the cost and time factors. It is important to note that faster delivery approaches, such as the incremental approach and managed services, can be used to accelerate value even on the tough, typically longer-cycle business problems. These can be used to bootstrap the overall programs and show early successes.

How to obtain on-demand capability Projects managed by i2’s Business Optimization Center have revealed that executives want an on-demand capability. A sample query might be: “Show me the option penetration rate of the luxury package on the SE auto model within the Omaha region. Explain to me why it was greater or less than planned, and tell me what we can do about it today, please.” This is substantially different from waiting for the monthly cycle to complete, then getting an ERP backward-looking report and then figuring out what to do about it in the next planning cycle. Furthermore, these needs may not be previously defined in such a manner that they can be put into a monolithic system. Managed services delivered through a business optimization center combine human intelligence with tools to deliver improved analytics and answers to daily business problems. This means the BOC may make use of manual techniques, spreadsheets and analytical engines that are installed in an offsite environment. This capability also runs 24x7, so that business problems delivered at the end of one day can be structured, sent to an offshore entity in India, Eastern Europe or China, and then solved for the customer by the beginning of the next business day. This is business-decision support delivered rapidly, around the clock. A number of companies today are using the BOC

concept to deliver an improved sales and operations planning process in a short period of time. Sales and operations planning is rich with needs for information and decision support throughout the process of plan creation and execution.

The pathway from short-term to long-term Short-term and long-term value delivery do not have to be mutually exclusive. Rapid value delivery should be consistent and act as a building block for additional value in the future. i2’s business-release methodology is built on this idea of incremental value delivery. Each business release delivers a set of capabilities (process, metrics, people, etc.) that addresses a distinct business need and contributes to economic profit. Newer delivery mechanisms, such as managed services through a business optimization center, build on the business-release approach. In this case, however, the need to install software in a customer environment is eliminated, thus reducing significantly the amount of time and effort involved. A number of companies are using managed services and the BOC delivery approach as a stepping stone to a future system installation. For example, i2 is working with one company that uses managed services and i2’s Business Optimization Center to provide financial-impact reports, analyses of inventory and capacity deviations—shortfalls and excesses—as well as to plan scenario management. And now this company wants to build these capabilities into a system in their own environment. This company valued the fact that the managed services were up and running and delivering results in a three-month timeframe. And they were able to refine in-house the system requirements they wanted as they went through the learning cycles that the BOC provided. They were able to achieve significant business value while going through the definition and design phases of a traditional IT system implementation—without the expense and internal upheaval of those steps, but with the domain and technology expertise of an experienced business partner. Today, as increased competition and product innovation call for an increasingly rapid time to value, a businessrelease and managed-services approach to supply chain management has become mission critical for the world’s leading companies. Kelly Thomas is senior vice president of i2’s Manufacturing Industries Sector. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / April 2008

News Briefs .

Supply Chain Management i2 Cited in TMS Leaders’ Quadrant by Gartner

CGT Recognizes Burt’s Bees

Gartner, a leading industry research firm, placed i2 in the leaders’ quadrant in its 2007 Magic Quadrant for Transportation Management Systems report. The i2 Total Logistics Management footprint includes solutions for strategic network design and analysis, transportation modeling and what-if analysis, transportation bid optimization, shipment planning and optimization, transportation execution, freight financial management, supply chain visibility, performance management and analytics. i2 helps manage the transportation life cycle at leading companies such as Anheuser-Busch, Caprabo, Cooper Tire & Rubber Company, JCPenney, LG Electronics, Penske Logistics, PepsiCo, Ryder, Samsung, Texas Instruments and others.

Consumer Goods Technology magazine recognized Burt’s Bees, the leading manufacturer of more than 150 Earthfriendly, natural personal care products, for Outstanding Achievement during the Consumer Goods Technology Fall Conference in October 2007. Burt’s Bees was recognized in the small to mid-size business category for its supply chain solution work with i2. Burt's Bees uses i2 solutions to more precisely manage key manufacturing variables, from work-center capacity and set-up times to material availability, labor availability, due dates and production policies. Built on the principles of lean manufacturing and constraint-based planning, i2 solutions enable companies to reach the best throughput and customer service at the lowest inventory level and cost. Burt's Bees is reaping benefits through more effective working inventory, higher throughput, higher on-time delivery rates, improved customer service levels and lower manufacturing costs.

Supply Chain Leader Receives Industry Recognition Supply Chain Leader magazine was recognized by several professional organizations in 2007 and early 2008 for successfully reaching its target audience with appealing content, innovation and design. The League of American Communications Professionals LLC (LACP) awarded i2 a Silver Award in the newsletter/magazine category of its 2007 Spotlight Awards, an annual print, video and web communications competition. Additionally, PR News’ Platinum PR Awards program awarded Supply Chain Leader an honorable mention in the external publication category. The awards salute the year’s most outstanding communications initiatives and programs and set the industry benchmark for excellence across all areas of public relations. The 18th Annual International GALAXY 2007 Awards recognized Supply Chain Leader with a Silver Award for copywriting in the general magazine category. The competition honors excellence in product and service marketing and symbolizes the assembly of numerous disciplines that create marketing excellence and honors the professionals who contribute to the process of building image, creating profit and making a difference in the marketplace. Finally, Supply Chain Leader was given the Bronze Award in the 21st Annual MERCURY 2007/08 Awards Competition. The award is given for excellence in professional communication, and Supply Chain Leader was recognized in the external magazine category.

Supply Chain Leader / April 2008

Ken Sharma Award for Excellence Finalists Honored Ten i2 customers were recognized as Ken Sharma Award for Excellence finalists in a ceremony at the i2 User Group’s Directions conference November 6–7, 2007. The award is named in memory of i2 co-founder Ken Sharma, and recognizes companies for their ability to leverage i2 solutions to drive innovation and business excellence. An independent panel of AMR Research analysts judged the entries and selected finalists in several categories, including implementation depth and breadth, supply chain innovation, and return on investment. The following companies were recognized in each category: • Implementation Depth and Breadth: VF Corporation, Sprint Nextel, Cummins, Inc. • Supply Chain Innovation: Panasonic, Fairchild Semiconductor, Texas Instruments, Inc., Tata Steel Limited • Return on Investment: China Steel Corporation, BAE Systems, Lenovo Group Limited Global Ken Sharma Award winners were selected from among the category finalists and will be recognized at i2 Planet 2008, April 30–May 2. Winner names were not available at press time.

Leadership Garners Praise AMR Research reported in January 2008 that its Supply Chain Top 25 portfolio of companies outperformed the market for the third year in a row. The average total return of the Supply Chain Top 25 companies for 2007 was 17.89 percent, compared with returns of 6.43 percent for the Dow Jones Industrial Average (DJIA) and 3.53 percent for the Standard & Poor’s 500. In a press release, Kevin O’Marah, chief strategy officer at AMR Research, stated, “We’re excited to once again have proof that supply chain excellence and leadership do make a difference. Clearly this is a group of companies that excels, strongly weathering the ups and downs we saw in the market last year.” AMR Research’s Supply Chain Top 25 is an annual ranking that recognizes large manufacturers and retailers that display superior supply chain performance, capabilities and leadership. The analysis takes basic public data as a foundation—return on assets, inventory turns and growth—and considers expert and peer assessments of the future leadership potential of each company. Twenty of the companies ranked in the AMR Research Supply Chain Top 25 are i2 customers.

Aidmatrix and NAFC Named Winners of CSCMP’s 2007 Supply Chain Innovation Award The Aidmatrix Foundation Inc. and the National Association of Free Clinics were awarded the 2007 Supply Chain Innovation Award by the Council of Supply Chain Management Professionals (CSCMP) at its November 2007 annual conference. The award was presented by CSCMP’s Research Strategies Committee and Global Logistics & Supply Chain Strategies magazine, who established the Supply Chain Innovation Award to recognize the best and most innovative teams in supply chain today. Keith Thode, Aidmatrix chief operating officer, and Nicole Lamoureux, executive director of the National Association of Free Clinics, presented their case to a panel of judges from industry and academia. The FreeClinicLink program they presented is a web-based tool that connects medical donors with members of the National Association of Free Clinics. The tool enables free clinics nationwide to receive donations of medical products and to purchase medical products at discounted rates. This supply chain has made great progress in the area of medical relief and

facilitated over $50 million of donated products. The cost savings alone totals more than $1 million from collaborative buying and real-time data integration with suppliers. i2 Technologies is a founding supporter of Aidmatrix, having donated the original supply chain software from which today’s Aidmatrix solutions evolved. By combining proven supply chain management and Internet technology with collaborative partnerships from the business and nonprofit sectors, Aidmatrix creates visibility to supply and demand information, better decision support capabilities, more collaboration, and an open forum to engage more donors in mobilizing needed aid quickly. Ultimately, it links aid with need worldwide. Aidmatrix mobilizes more than $1.5 billion in aid annually, working with more than 35,000 nonprofits and government agencies worldwide. The international organization activates product, human and financial resources impacting the lives of more than 65 million people. To learn more, visit www.aidmatrix.org. ©2007-2008 Hewlett-Packard Development Company, L.P.

AMR Research’s Supply Chain Top 25 Beat Market with 17.89 Percent Return

A LT E R N AT I V E T H I N K I N G A B O U T V I R T UA L I Z AT I O N :

Build In Cohesive Maneuverability. (Translation: Dare Anyone To Keep Up With You.)

Supply Chain Leader / April 2008

Interview

by Victoria Cooper

Buying it right Supply chain efficiencies remain a focus at this wireless operator, as it applies the most advanced technologies to solving the riddle of getting the right product to the right customer at the right time. Michael Hahn is the vice president of Product Operations at Sprint, the third-largest wireless operator in the United States (revenue, $41 billion). Hahn is responsible for inventory management, demand planning, procurement, transportation and warehouse logistics for all products purchased and sold in Sprint’s distribution channels. Before joining Sprint in 2004, he had a similar role with AT&T Wireless for nine years, where he was vice president of Consumer Equipment, responsible for logistics, inventory management, supplier management and product portfolio. Prior to entering the telecommunications industry, Hahn had experience working for major U.S. retailers, such as Circuit City and Macy’s. In this interview, conducted by Supply Chain Leader editor Victoria Cooper at Sprint’s headquarters in Overland Park, Kansas, in late January, Hahn discusses the results of a wide-ranging supply chain initiative at the company.

What is the scope of the products your team supports at Sprint? The products include our core wireless devices, including our standard handsets, and our data devices, such as PDAs (personal digital assistants), wireless modem cards, smart phones, and the accessories to support all of these devices. The distribution channels include the independent dealer/ agents, our national retail partners—such as Best Buy and RadioShack—and more than 1,300 Sprint-owned retail locations. In addition, Sprint has an extensive direct fulfillment effort utilizing the Web (Sprint.com), telesales, and the Sprint Business Direct sales team, across small, medium and large businesses, plus public sector accounts.

Are there any other supply chain organizations within the company? Yes. There is a corporate supply chain organization, with responsibility for the supply chain activities with our network equipment, capital purchases, contract management and cost negotiations. My team has an outstanding working relationship with this organization, which also provides us with our performance metrics and handles supplier disputes. Product Operations is the customer-focused organization, and serves as the last line of defense before the products leave our warehouse and reach the customers’ hands or the distribution channel.

How closely do you work with Marketing? My team reports into the product development organization, and we are closely aligned with both the sales and marketing organizations. We’re an integral component of the planning cycle for understanding what our product needs are for the future. Sprint has always been known for creating unique and innovative products—for instance, Sprint offered the first GPS-enabled phone in 2001, and we are leaders in navigation and location-based services for mobile phones. We work closely with the marketing and sales organization to understand the demand for our

Supply Chain Leader / April 2008

at Sprint Photos: Dan Ruettimann

products and then work with our suppliers to ensure that we have adequate supply available at the right time and location throughout all of our distribution channels.

How have customer demands changed over the past few years, and what has this change meant at Sprint? Simply put, customers have become more demanding, calling for greater diversity in the types of devices offered. Quarter after quarter, we have seen that our customers enjoy doing more with data services on their phones, such as email, Web surfing and access to entertainment. They want “smart” phones, whether they’re on a Windows, BlackBerry, or Palm operating device, with full access to their e-mail and the Internet. Currently, Sprint has some of the hottest products on the market, ranging from devices that allow you to text message easier via a cell phone with a slide-out qwerty keyboard to many of the most innovative data devices in the marketplace. The devices are getting more cuttingedge, offering a wide variety of different applications. To meet the growing needs of our consumer and business customers, we must be able to offer a diverse collection of feature-rich devices. The traditional use for a basic wireless phone—making calls back and forth—is still a substantial share of the business. But, that said, the number of customers utilizing data capabilities over the Sprint network continues to grow, quarter over quarter. And Sprint’s new “Simply Everything” unlimited voice and data pricing plan for $99.99 opens the door for even more customers to fully explore data services on their wireless phones and truly appreciate what wireless mobile data services can offer.

Connect (push-to-talk), or a combination of such features. And yes, we still offer voice products.

Is the product mix going to get greater?

What is your product volume?

Yes, and fortunately, Sprint has a long history of being ahead of the curve when it comes to products. The needs of the customer are forever changing, and there is more of a need for segmentation in our channels. We have a great deal of diversity in our customer base, from the small business owner to the Fortune 100 corporate customer; from the individual consumer to the government client. We have to make sure that we have the diversity in our product assortment to meet their needs, whether it’s a desire for data, music, video, text messaging or Direct

Across all of our products in our distribution network, Sprint “touches” more than 4 million units a month, from a forward and reverse perspective. But the types of orders that Sprint fulfills range from tens of thousands of units shipped in bulk to a national retailer to a single phone with customized software shipped to a satellite business location. So the range of “where and who” we ship to is quite diverse. INTERVIEW CONTINUED on Next Page . . .

Supply Chain Leader / April 2008

What is the nature of the competitive environment? The global telecom market is forecasted to manufacture over 1 billion devices in 2008. It’s a very competitive environment, with more than 80 percent saturation in the United States. The companies who succeed will be the ones who plan, forecast and procure accurately and in a timely manner with their suppliers. The global telecom market is forecasted to manufacture over 1 billion devices in 2008. It’s a very competitive environment with over 80 percent saturation in the United States.

What was your first challenge when you came to Sprint almost four years ago?

Did you need to change your organizational structure?

When I joined Sprint, we needed to improve in our inventory forecasting and distribution. We experienced challenges with supply during product launches as well as with forecasts for procurement and replenishment. In addition, we faced long vendor lead times and delivery inconsistencies. When we merged with Nextel, our distribution network became even more complex, with legacy systems that did not “speak” to each other and were mostly manual rather than automated fulfillment processes. We determined that to achieve world-class demand and supply management we would need to change our organizational structure, our processes and our systems technology.

By automating many of our processes and achieving more accurate demand planning and replenishment management, we have been able to structure our organization more efficiently. Instead of having people structured by channel, working at very detailed levels for lack of automated tools, we have now organized our management processes across the following competencies: warehouse logistics, demand planning and procurement, and replenishment and distribution. And I’ve instituted a fourth function: program management across these three groups.

What role did i2 play in your initiative? When I arrived at Sprint, the company had just inked an agreement with i2. I guess you could say I inherited it, but I then became its champion. We liked i2’s history and background working with similar-sized corporations that manage inventory across multiple distribution channels. We chose i2 for its ability to help us manage the flow in inventory through our points of distribution and, in turn, monitor the demand that we have planned with our suppliers to ensure that they manufacture and deliver the goods when we need them. What we needed was more accuracy and more agility in our demand and supply modeling. What we don’t want to have is our suppliers manufacturing the wrong quantities—too few or too many. We didn’t want them manufacturing the wrong models or the wrong colors, having too much of one model or too little of another. We need for them to focus on building to what

our true demand needs are. With the i2 forecasting and replenishment tools and capabilities, we were able to create the solution. The applications and systems that we worked with i2 to develop have allowed us to better forecast our inventory needs, more accurately distribute our products to the right places across our distribution channels, and better replenish our warehouses and locations. Sprint had the vision years ago to recognize that the portfolio was going to expand, to get more diverse, with a fashion component. We realized we would not be able to enlarge our inventory, but rather would have to manage it in a more disciplined way across multiple models. We could not do this on our own, without some of the advanced technology offered by a company like i2.

Supply Chain Leader / April 2008

What about your warehouse logistics network? To further simplify our business we went from 19 warehouses (after the merger) to 2 central warehouse facilities. Our main point of distribution is centralized in one of the largest distribution hubs in North America: Louisville, Ky. We have a great partnership with UPS, whom we work with on our transportation and warehouse needs. UPS provides the “brick and mortar” as our outsourced, third-party logistics partner, but Sprint manages the processes and requirements. The partnership between UPS and Sprint is excellent and involves executives at the most senior level of each company’s management team. Sprint also uses Brightpoint in Indianapolis to support the logistics management in our dealer/agent distribution network. Brightpoint is the most capable supply chain provider focused in the wireless space, and has a long history of partnership with Sprint. By consolidating and centralizing our logistics needs, we can leverage tremendous savings and maximize efficiencies. And we are now “next day” to anywhere in the country, regardless of order size.

What are some of the improvements you’ve realized? In addition to cost savings, we’ve reduced inventory levels across all of our distribution channels. We’ve improved our in-stock levels, despite the fact that our product portfolio is more diverse than ever. This is a substantial improvement for any industry, not just the wireless space. Our margin of error continues to get smaller as we add more diversity to our product portfolio.

understand what the content should be, what the software needs are, and what services the customer requires access to. We do not manufacture the devices, although we need to forecast and plan the quantities correctly so our supplier partners can meet our inventory needs. We’re developing devices today that will ship in the second half of 2009. The ironic part is that because the life cycles of our devices are as short as they are, it’s even more important than ever to “buy and plan it right, from the start,” and our partnership with i2 has helped Sprint make this happen.

We’ve seen significant improvements in forecast accuracy. The purchase forecast accuracy (3 months out) has doubled to around 70 percent, while the replenishment forecast accuracy (1 week out) has improved by 60 percent. We’ve automated more than 90 percent of our replenishment orders.

Doesn’t Sprint have a large retail presence? Yes. What we often don’t get credit for—and I think this applies to all telecom operators—is that we are a large retailer, in addition to our other distribution channels. We have more than 1,300 retail locations. How many retailers have that many locations? So retail is very important to us.

What is your next challenge? How can we reduce the inventory levels even further? How do we reduce the timeframe between when an item is manufactured in Asia to when it is delivered to the Sprint warehouse? What I’d like to see is a true “just-in-time” scenario. This will require collaboration with all of our partners, involving third-party logistics operators, our IT partners, transportation providers, and our device suppliers. Clearly, the device suppliers are our partners in this endeavor. We cannot insist on something that is a surprise to them, so we have to engage them in our processes from the earliest moment. They have to understand what we’re working on, and what our customers demand. We work continuously with them to make improvements in quality, availability and efficiency. Our role in the food chain works like this: we work with the manufacturer on the requirements and capabilities needed to support the customer and their needs. All of our potential devices are then tested thoroughly on our network, before they are launched and approved for sale on the Sprint network. We are working on the development of a device from 12-to-24 months before it’s launched. It’s up to Sprint to

Victoria Cooper is the principal of Cooper Communications (www.coopercomms.com), based in Sausalito, Calif. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / April 2008

The Case for Knowledge Process Outsourcing

by Anand Iyer

Supply Chain Leader / April 2008

Many supply chain organizations are turning to outsourcing various capabilities— from information technology outsourcing (ITO) to business process outsourcing (BPO) to knowledge process outsourcing (KPO)—requiring multi-location teams to work together effectively. Managing complex supply chain operations and applications requires an increasingly broad collection of sophisticated skills. Sustaining a team that possesses this skill set, while controlling costs, is one of the main challenges facing businesses today. Because it takes a large, skilled staff to support supply chain management applications, enterprise and legacy systems, and the human processes with which they intersect, personnel costs can easily be at odds with tight budgets. Complex workflows and data integration consume management attention, undermining the focus on continuous improvement and exception management. Because staff is tied up in basic operational tasks, innovative projects with a real business return on investment wait in the queue. Likewise, the complexity involved in the delivery of future requirements demands deep solution expertise, often lacking in existing support teams. In addition, companies are challenged by increasingly frequent changes in business requirements as they respond to market dynamics. For instance, new technology in automotive, telecommunications and consumer electronics

has opened up new markets to semiconductor manufacturers. Each market has its own business requirements with which these manufacturers have to stay current. A contract with an automaker to provide a component for a number of years can go unchanged. But a component for a cell phone must be custom made for a particular model, and will be in production only as long as the phone is produced. In the latter case, the shorter product life cycle for the custom component requires effective order and inventory management to maximize profit. In a quickly changing scenario, businesses often rely on ad hoc spreadsheets that cannot handle either the volume or the complexity required for data analysis and decision making. These market challenges can all be met through outsourcing with service providers to help fill the resource gaps. Many supply chain organizations are turning to outsourcing various capabilities—from information technology outsourcing (ITO) to business process outsourcing (BPO) to knowledge process outsourcing (KPO)—requiring multi-location teams to work together effectively. Advancements in technology and international telecommunications, as well as a mindset shift brought about by the forces of globalization, have made it easier for multilocation teams to accommodate each other and work productively. The availability of outsourced teams, onshore and offshore, comprised of specialists who can run day-today supply chain functions, and experts who possess the depth of knowledge required to offer business and strategic guidance, has begun to help shift the goals of supply chain service providers. As they endeavor to satisfy their customers, they are delivering outcomes, not just software products. Whether it's demand management, inventory optimization, channel management, forecast optimization or point-of-sale-based replenishment, leading-edge supply chain service providers offer such capabilities as services which can be rapidly assembled and reassembled to meet the demands of today's market. This eliminates a rigid set of roles, fixed assets and processes that can be ineffectual, costly and slow. Additionally, by assembling multi-location teams, these leaders are able to work with their customers on an operational level rather than on a project-by-project schedule. And these teams become part of the customers’ supply chain organizations, dedicated for the long haul. As a result, expenses are reduced, learning curves are shortened and effectiveness is increased. Building a team like this is similar to a semiconductor manufacturer outsourcing a component to a specific manufacturer who becomes integrated into the production of KPO CONTINUED on Next Page . . .

Supply Chain Leader / April 2008

the final product. Let’s look at how a hypothetical semiconductor company’s responses to changes in the market helped develop today’s KPO scenario. ABC Semiconductor had manufacturing sites spread across five continents. Because of a siloed approach, oftentimes the different business units within ABC were talking to the same customers. Each business unit had its own relationship with one of ABC’s manufacturing sites, creating massive duplications and inefficiencies. As they try to satisfy their customers, supply chain service providers are delivering outcomes, not just software products. To simplify business processes and focus business units on growing revenue, ABC was reorganized to make business units focus on sales, marketing and design. Manufacturing became a shared asset that was its own cost center focused on increasing efficiencies and getting the best return on capital investments. It didn’t make sense to purchase manufacturing equipment that wasn’t going to be in production often enough to justify its cost. As a result, ABC made the innovative (at the time) move of using a mixed strategy of internal and external manufacturing sites. In the quest to find cost-effective ways of doing things, it determined that in some cases it was smarter to use subcontractor resources, and in others it was best to keep production internal. When the dot-com slump arrived, ABC’s CEO wanted to see more cost-reduction measures. He put increasing pressure on upper management to reduce expenses in staff and support functions. At this time, advancements in global communication technologies supported the move by the CIO to develop an ITO strategy that moved routine

application maintenance and specification-based programming jobs to low-cost countries. Soon ITO became a routine, ordinary part of the work landscape. Still, the pressure remained to further reduce expenses while maintaining service-level agreements with customers. In the meantime, the industry worked its way out of the dot-com slump, and the company crafted a more nuanced strategy to develop the business, leveraging BPO and KPO. The changes included carefully matching supply chain policy, business-support policies and customer segmentation with the different lines of business. A onesize-fits-all supply chain strategy for diverse markets was no longer effective. It was apparent that to accomplish company goals while keeping costs low, the traditional lines between IT and business needed to be blurred in some areas, notably in the supply chain operations space. Supply chain business expertise expanded to include supply chain management applications. In addition, the years of working globally with teams in different geographies had provided fresh data and insights into the structure of work; which tasks could be outsourced and which needed to be done in-house. In the final analysis, ABC met its market challenges by embracing innovation and allowing itself to build the team it needed from both inside and outside of its walls.

BPO performs essential tasks Companies like ABC learned to solve resource problems by going off site when justified. The early days of outsourcing were focused on information technology capabilities, but it soon became obvious that companies needed the human resources to perform essential tasks beyond data warehousing and analysis. While BPO paved the way for KPO, the two must be viewed as providing quite different capabilities to a company. The kinds of services

Progression of Process Outsourcing 1900-1980s

1990s

2000s

2007+

Enterprise Competencies

Business Competencies

Knowledge Competencies

Core Process Competencies

Enterprise Focus

• Strategy • Brand/Sales/ • SC Ops Marketing • Technology • Analytics/BI • Manufacturing • R&D • Payroll & • Call Center Accounting • Logistics

• Strategy • SC Ops • Technology

• Strategy • SC Ops

• Strategy

Supply Chain Leader / April 2008

• Brand/Sales/ Marketing • Analytics/BI • R&D

Competency Partner Network • Manufacturing • Call Center • Logistics • Payroll & Accounting

• Brand/Sales/ Marketing • Analytics/BI

Competency Partner Network • R&D • Technology • Manufacturing • Call Center • Logistics • Payroll & Accounting

• Brand/Sales/ Marketing

Competency Partner Network • SC Ops • Technology • Manufacturing • Payroll & Accounting

• Analytics/BI • R&D • Call Center • Logistics

provided by BPO include: • Low-cost offshore programming • Integrated ordering • Fulfillment management of solutions • Order picking and tracking • Distribution • Warehouse management • Print and fulfillment • Data processing • Technical support • Email support to customers As indicated on this list, BPO focuses on scripted tasks within business processes that can be learned quickly—in a few weeks or months—by offshore workers. Typically, an entire business process is given to a BPO vendor. In some cases, the hiring company transfers some staff to the BPO vendor as well.

KPO provides in-depth industry knowledge KPO moves one step above BPO in the pecking order by adding domain expertise and an in-depth understanding of a specific industry. KPO workers have specialized proficiency in their field, which often requires several years of experience, a high level of intellectual skill and an advanced degree. Their work requires a fair degree of judgment, subjective analysis and interpretation. In general, KPO workers provide business-sector expertise—rather than pure process or technology expertise—that directly affects efficiency, effectiveness and business outcomes. Typical KPO services include: • Data input, transformation and reporting • Research and data analysis • Financial data analysis • Inventory analysis • Marketing and channel data analysis • Supply chain application operation and maintenance When looking for a KPO partner, companies should look beyond the best price point available to the most critical competencies and knowledge available across all locations globally. Imperative to any KPO approach is that the provider offers secure hosting and working environments, ensuring that all sensitive data and intellectual property are secure and protected. All members of a KPO team also need to have deep operational experience within a specific industry area, so they can set up solutions that give customers the greatest knowledge available in a given vertical. Companies that do not have the resources to add staff, or the knowledge in place to solve complex supply chain problems, can meet their needs and excel in their business using a mixture of ITO, BPO and KPO. In most cases, because these outsourced resources focus only on one customer’s supply chain interests, cycle times are low and

operations stay in a continuous innovation mode. This enables companies to focus on updating and implementing new processes on a regular basis so they can hold a competitive advantage in the marketplace.

i2 Solutions

Operations Services Companies today want supply chain management implementations that drive quick value. Too often in the past, these implementations required significant upfront financial investments and took years to realize a return. Now, leveraging more than 20 years of leading-edge knowledge and domain expertise and 10 years of offering knowledge process outsourcing capabilities, i2 Operations Services takes inventive, outcome-based approaches to solving these problems— redesigning processes when necessary, implementing technology to reflect those process changes and helping companies make sense of their data. Using i2 Operations Services, companies can outsource core supply chain processes including forecast tuning, channel sales management and inventory optimization—bundling the services and solutions that they need to meet their business requirements. With secure hosting and working environments, and a dedicated staff of experts in both the United States and India, i2 Operations Services provides end-to-end supply chain initiative support, from solution planning to hosting and application maintenance. i2’s specialists have deep operations experience within specific industry areas, giving them the ability to set up and deploy i2 solutions with the users’ specific needs in mind. Executive affiliates also provide practical insight and expertise derived from their years of working within industry. Applying the experience from more than 1,000 supply chain initiatives, i2 Operations Services has demonstrated success with some of the world’s leading companies. By outsourcing supply chain management functions to i2, customers are increasing profits, removing hardware and personnel costs and reducing risk.

Anand Iyer is an i2 fellow. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / April 2008

Overcoming the New Demand Uncertainty by Robert Anson

Today’s new international marketplace demands that suppliers and manufacturers create a more open and honest relationship—one that acknowledges demand variations, and shares risks and rewards with both businesses. As consumers, we have realized enormous benefits from supply chain globalization, which has made a new world of options available to us. Suddenly, we can choose a laptop or cell phone in our favorite color, with customized features that meet our own specific needs. While we used to wait for August to look at next year’s car models, today we can walk into a dealership at any time of the year to find brand-new vehicles waiting for us, or order one to be delivered in a few weeks’ time. And our local department store, which used to change its assortments only a few times a year, seems completely reinvented each time we visit. While we enjoy this amazing abundance—and, often, the lower prices that have resulted from global competition— today’s international marketplace has created seemingly insurmountable challenges for supply chain managers. Spread around the world, driven by fickle fashion trends, supported by ever-changing selling seasons, and dispersed across a seemingly infinite number of product categories, consumer demand has never been harder to predict or manage. There is no doubt that suppliers have done their best to rise to this enormous challenge, especially in expanding the capacity of their operations. But, while global supply chain capacity has risen to answer the new level of demand, suppliers still face natural and inevitable limitations in such areas as raw materials and physical infrastructure, which have made it hard to keep pace. Additionally, they must manage their capacity investment: they cannot assume infinite demand. Their success really depends on one central competency: ensuring that the right amount of the right material is available at the right time, at the right place, and at the right cost to meet promises and sustain profitability. How can supply chain managers hope to balance this combination of business needs and imperatives? Today’s new demand uncertainty cannot be managed unless both manufacturers and suppliers are willing to shift to an entirely new mindset—one that encourages a truly global view, and that eliminates the traditional barriers that separate trading partners. By taking a more global and

collaborative view of their shared supply chain, manufacturers and suppliers can work together to manage and even leverage the demand uncertainty that characterizes the worldwide marketplace.

Think globally––act globally The reason so many manufacturers struggle with the ramifications of offshore and low-cost-country sourcing is that they are trying to apply traditional strategies to a completely different business paradigm. The old adage “think globally, act locally” doesn’t hold up when the supply chain is distributed around the entire world, and the entire concept of “local” no longer applies. Modern supply chain managers must embrace a new mantra: Think globally—and also act globally. Instead of building a series of regional supply chains that serve each of their manufacturing locations, supply chain managers must take a truly global view. They need to aggregate demand across the global business, evaluate total supply needs, and examine the best trade-off opportunities when the unexpected occurs. Faced with a potential materials shortage at one facility, they can reassign materials from other locations or re-route inbound material from the source in order to capture the greatest return across the entire value chain. Then they can make intelligent allocation decisions that maximize the volume of the highest-margin products, meet critical regional selling season deadlines, fulfill especially large orders, or satisfy the needs of key customers. Today, offshore lead times and delivery costs can be roughly equivalent to closer-to-market onshore locations, whether products are being delivered to the United States, Europe or South America. Redirecting supply can be a relatively straightforward decision; that nearly loaded ship in a faraway port can be routed to Rotterdam instead of Houston at approximately the same delivery time and cost. While offshore and low-cost-country manufacturing have presented challenges, today’s new global supply chain OVERCOMING CONTINUED on Next Page . . .

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does offer significant advantages in terms of flexibility— benefits that most supply chain managers have not yet fully embraced or realized. For many organizations, the ability to see and balance the global demand and supply picture requires process and organizational changes. Once centralized at the regional level, supply management will need to take place on a much broader international scope. This new global perspective enables manufacturers to more effectively manage demand uncertainty. Armed with an enterprise-wide view and a new sense of agility, supply chain managers can honor their traditional inventory and velocity targets, while also minimizing the costs associated with expedited shipments.

Make your supplier your partner––really There is yet another mindset shift required of supply chain managers who want to successfully manage fluctuating consumer demand—and it involves redefining their historic relationships with suppliers in order to make them true partners. We all know that serving consumer markets means operating with a given amount of uncertainty every day. No matter how talented a manufacturer’s employees, how well-honed its processes and how advanced its technologies, meeting the changing preferences of an international population will never be an exact science. But the traditional manufacturer-supplier relationship has been based on the notion that end-user demand is predictable; that a certain amount of product or material is absolutely required on a given day. In many respects, the historic manufacturer-supplier relationship has been characterized by a sort of unfounded optimism. While manufacturers know that their materialsrequirement forecasts will always be somewhat inaccurate, they have asked suppliers to commit to these estimates anyway—and then adjust upward or downward as the true demand level reveals itself. Recognizing that manufacturers’ initial forecasts are usually overly optimistic, suppliers have responded by making delivery promises that they could never realistically fulfill. A true desire to partner has too often degenerated into a series of gaming and hedging exercises—with neither party emerging as the winner. Today’s new international marketplace demands that suppliers and manufacturers create a more open and honest relationship—one that acknowledges demand variations, and shares risks and rewards among both businesses. For example, manufacturers can assign a tiered cost structure to capacity usage at supplier facilities, negotiate specific cost terms for the use or non-use of this capacity, and pay in advance to reserve capacity. In return, suppliers can provide additional upside volumes without the usual price premium, or agree to incur penalties if they fail to deliver the promised volumes.

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This kind of manufacturer-supplier model requires an improved level of trust, which is enhanced by sharing and calibrating uncertainty. Instead of engaging in gamesmanship and overestimating, manufacturers can make their demand uncertainty more explicit, just as suppliers can make their actual assignable capacity more explicit. Manufacturers can restructure their demand forecasting in order to make it more collaborative, as well as basing it on a “range” of uncertainty that is more realistic and informative than a definitive forecast. The old adage “think globally, act locally” doesn’t hold up when the supply chain is distributed around the entire world. For example, demand can be partitioned into three tiers: 80 percent confidence, 50 percent confidence and 30 percent confidence. As both organizations progress through the forecasting horizon, uncertainty will shrink and confidence will increase. This creates a manufacturersupplier relationship based on informed confidence, where uncertainty is visible—and so are the costs and consequences of missed deadlines. This type of approach is especially valuable when supply capacity elasticity is low and dependency is high—for instance, when a manufacturer relies upon a second-tier supplier for a critical component required in the late stages of product assembly.

A new world requires a new perspective There is no doubt that supply chain globalization represents a significant challenge for even the best-managed businesses. But this challenge is difficult to meet for those manufacturers—and suppliers—who try to adapt old ways of doing business to a world that has been completely transformed. Today, achieving supply chain excellence requires entirely new perspectives and strategies. Two imperatives are clearly emerging. One, companies need to globalize supply planning and management—often through the use of an enterprise-level demand-supply process. Two, they need to establish more honest, collaborative supplier relationships that acknowledge and share uncertainty. These innovative approaches must be embraced by any business that seeks to gain competitive advantage in today’s transformed business environment—where the entire world is a potential customer.

Bob Anson is senior director of Total Supply Management at i2. For more information, contact supply_chain_leader@i2.com.

Opinion

by Michael Cohen

How (and How Often) Do You Measure Supply Chain Results? Mary Wilson Director, Global Supply Chain Management Planning Systems, Fairchild Semiconductor

The Global Supply Chain Management Systems team at Fairchild develops and manages the global supply chain systems and related business processes that drive our supply chain success. Our CEO, Mark Thompson, highly values and understands the leverage that an efficient supply chain can give the company, and has given us the resources to be successful. Our supply chain organization consists of several hundred people in locations around the globe, and forecasting and measurement are key components of our success. Our focus on supply chain measurement and process improvement during the last five years has delivered great results. Every week our team measures key supply chain performance metrics and reports the results to our senior executives. The report includes our top-tier metrics, such as inventory turns, shipment-to-commit and delivery-torequest performance, and the revenue outlookâ&#x20AC;&#x201D;measuring our backlog and our position relative to revenue realization. We also take it to the next level and look at areas like new product delivery performance, customer delivery performance and lead times. While geared toward C-level management, these weekly metrics reports are also distributed to the supply chain team. This broad distribution offers visibility into our metrics achievement throughout the supply chain, allowing team members to quickly review the performance of their product group or manufacturing site and, if necessary, to do a root-cause analysis and remediate issues. Speed is another key component to our success. There is significant complexity in our supply chain, and sudden changes in demand, supply or costs require us to be fast, flexible and able to react based on real-time information. Our longer-term view of the supply chain is managed through a monthly sales and operations planning process (S&OP). The comprehensive metrics package we publish plays an important role in that process. We start with a consensus forecast roll-up, and then managers from each functional area of the business meet to determine our capability to respond to that forecastâ&#x20AC;&#x201D;and what that

means in terms of revenue and expense for the company. Visibility and accessibility of supply chain performance data are critical to the S&OP process because they empower us to better respond to requests for internal or subcontractor capacity, analyze progress on major initiatives such as new product introductions, or capitalize on excess capacity for increased revenue-generating opportunities. Annually, we conduct a supply chain metrics review to assess our total supply chain management costs and asset utilization. We engage a consulting firm to conduct a comprehensive SCORÂŽ (Supply-Chain Operations Reference-model) assessment for us, and also to benchmark Fairchild against others in our industry. We use this annual review process to identify performance gaps and solutions to close those gaps, as well as to prioritize improvement initiatives and investments. One of the areas of significant improvement realized through the metrics and benchmark analysis process is delivery performance to commit date. Fairchild targeted 10-plus percentage points of improvement to increase our competitive advantage in service. We used detailed rootcause analysis and regular metric reviews, and also developed some new functionality to monitor performance through the factories to proactively manage late work-in-process instead of waiting until the time of shipment. Timely availability of results allows the planning teams and factories to rapidly respond if things are off track. While geared to C-level management, weekly metrics reports are also distributed to the entire supply chain team. Our root-cause analyses also revealed that our orderpromising system was not adequately accounting for a number of secondary constraints. Despite some products being nearly interchangeable in our system from a capacity perspective, we were not fully allowing for these when promising orders. Consequently, we factored more detail for significant secondary constraints into our process models, and the problem was resolved. Another important area of improvement for Fairchild involved taking better control of our channel inventory. An extensive review of our channel inventory processes has enabled us to substantially improve our inventory controls and sell-in, helping us to mitigate the bullwhip OPINION CONTINUED on Next Page . . .

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effect. Our weekly measurement and monitoring have led to significant improvements in stability of weeks-on-hand and buffer stock. I am fortunate to work for a company with an executive team that realizes and appreciates the strategic value that a well-managed supply chain brings to the overall business. Our focus on results and commitment to weekly, monthly and yearly monitoring and evaluation have made us a more efficient, productive company—and made supply chain management a competitive differentiator for Fairchild Semiconductor. James Geesey Director of eSourcing, Emerson

Emerson has over 60 divisions with more than 270 manufacturing facilities all around the world. Raw materials are approximately 40 percent of our sales, so our procurement processes are very important to our overall performance. At the corporate level, we handle the sourcing for any materials or components that have leverage opportunities across business divisions, and that turns out to be about 60 percent of our direct materials. Procurement is the only function that is center-led. Corporate commodity teams are organized in a business/commodity matrix, leaving the business divisions to manage commodities that are nonleverageable at the corporate level. To measure our performance and to drive improvements, we look at one overarching metric, and that’s return on total capital (ROTC), which we then break down into its components—cost of goods sold and working trade capital. When you tie everything back to return on total capital, you manage all things relatively well. On the cost side, we monitor net material inflation, which we manage to reduce the cost of goods sold. We’ve developed a proprietary tool to track certain events that influence our material costs. If, for example, we see changes coming in the cost of steel or copper, we get early warnings on that and we take action to deal with it. We measure inventory monthly and net material inflation at least quarterly. Based on that data, there are a number of ways we can respond. We can look for alter-

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native materials or sources. We are very fond of on-line and electronic negotiations—including reverse auctions, Dutch auctions and multivariate events—all of which are well-known methods that help us reduce component costs. In those processes, however, we are always very careful to only invite suppliers that we are very comfortable with. We will never invite an unqualified supplier to bid just to drive down costs, as sometimes happens in this business. You introduce a lot of supply chain risk into your operations if you are not careful in that way. When you cut corners, you jeopardize market integrity, and that’s something we won’t do. We also find it very important to get in front of the product development process by inserting the procurement function into new product design, so that our engineers are working with a design-for-sourcing mentality. This is important because once a bill of materials is fixed for a product, a good purchasing person can only take about 10 to 20 percent of the material cost out of that product by using the best sourcing practices available. When you get engineering and purchasing working together in the conceptual phase, however, you can often take 35 to 45 percent of the material costs out of the product. So that’s where the biggest gains are made.

Return on total capital On the trade, working capital side of the metrics, we look at what we call “raw-material inventory velocity,” which is measured by days-on-hand of inventory. It’s a commonly used measure of asset utilization. We also strive to improve days payable outstanding, so we shorten the days in the cash cycle, which is also known as the cash conversion cycle. We take this approach because we think that when you tie everything back to return on total capital, you manage all things relatively well. You end up making more holistic decisions about sourcing by not just focusing on one element. These days, anyone can go to Asia and get significant cost reductions, but you also have to consider the additional capital costs required for that decision, or the supply chain risks that enter into the equation. The longer the pipeline, the larger the bullwhip effect. Of course, we are well established in Asia, but we primarily use Asian sources for supporting domestic production. We also use Asian suppliers to support North American production, but we use a sourcing decision support tool to help us analyze price, working capital and supply chain risk. It’s also a multi-function effort—it’s not just procurement sitting in a vacuum. Everyone has a seat at the table and that helps us make the best decisions.

Because our business models are so diverse, all functions except procurement are led at the division level. So to share supply chain best practices, we have quarterly meetings, where division and corporate leaders gather to exchange ideas, to inform each other about what their teams are doing, and to set strategy. At Emerson, we are growing at a healthy clip, and we have to ensure that our supply chain is as solid as it can be to sustain our top-line growth and to mitigate risk. Therefore, carefully monitoring our supply chain and measuring its performance are critical to our ongoing success. William Bryan Director, Supply Chain and Supply Chain Economics, Timken Steel Group

The steel group at Timken has approximately 2,500 employees, and in 2007, we had more than $1.5 billion in revenue. We have a complex business, performing 100 different operations, with more than 300 different steel types, and about 9,000 customer specifications in our system. It is important that the supply chain group shares a significant portion of the economic responsibility for the overall business, because what we do drives much of the financials for all of Timken Steel. In a similarly correlated relationship, the accuracy of our planning assures better customer service through on-time delivery to our promises and more precise determination of lead times. We must excel at a number of key factors to leverage our supply chain performance; having, and meeting, the right performance metrics at all levels of the business is critical to our success. At the highest level, you need to bring together the key metrics that interact with each other. We call it a balanced metrics approach, because you can’t just look at any one metric in isolation. On our top-level scorecard, we balance throughput, inventory, on-time delivery, lead times and cost. They are all connected, and you have to consider them all to understand the whole supply chain picture. I view our metrics like a pyramid, with each element getting segmented and more detailed as you move down each level on the pyramid. Our top-level management group focuses on the top of the pyramid—the metrics that look at process path constraints and other key areas for our business. For example, melting steel, or “heats,” as we call it, is a critical process. Every day we see the number of heats from our melt shops, and as long as we’re achieving the planned

heats per day and the planned output from a handful of other key processes downstream, then we’re not sweating the metrics at the next level down on the pyramid—those metrics will be for others to monitor. If we don’t see the right output at key process points, then we know we’re not going to be able to finish and ship the right amount of product this period, and we need to start asking questions. Each time you take a step down on the pyramid the amount of data explodes, so we stay focused at the top. You can’t look at everything or you’ll be overwhelmed. Our system of checks and balances forces us to think through the overall ramifications of various supply chain decisions. Of course, we have people on the sales, manufacturing and supply chain teams that are looking at the data at each step down the pyramid. At any given level in the pyramid, we can measure data in months, weeks, days, hours or minutes. We’ll get down to the level of one work center or machine. We’ll measure the inventory in front of that machine, and the sequencers will monitor and schedule that machine on a shift-by-shift basis. We’re looking at lead times every week, comparing working capital to sales on a monthly basis, and reviewing operating expenses on a daily, weekly and monthly basis. When we see deviations at any level, the people responsible for that area will start asking questions, performing analysis and taking actions as required.

A balancing act None of this happens in a vacuum. These metrics are used in our S&OP (sales and operations planning) process, which my group leads. Every Wednesday afternoon we bring the business representatives to the table to review the metrics, our plan and where we stand. And, unless it’s Christmas Day, we seldom cancel that meeting. It’s not unusual for Timken Steel’s president to stop by and participate in that meeting—and it is huge for us to have that kind of support. It shows that he views the supply chain as important to the success of the business. In that weekly meeting we balance the needs of the sales team with those of the manufacturing team. These needs are inherently at odds with each other in any organization. Sales folks want every product available in any quantity, at all times, to satisfy customers anywhere in the world. Manufacturing folks want to make batch sizes and OPINION CONTINUED on Next Page . . .

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sequences of similar items to get production efficiencies. My group is responsible for bringing these teams together and achieving a mutual goal of delivering both customer and shareholder value. We’re constantly adjusting capacity in response to demand, taking into account the whole picture from raw materials to customer delivery. Our system of checks and balances forces us to think through the overall ramifications of various supply chain decisions. This includes playing the hand you’ve been dealt as best you can, as well as influencing future scenarios. To me, it’s just common sense, although some would argue that common sense is not all that common. Mahender Singh, Ph.D. Research Director, MIT Supply Chain 2020

Measuring supply chain performance on a regular basis is obviously important for having a supply chain framework that is aligned with a company’s business strategy. Realtime data are important, particularly on the execution end of things—for tracking components and raw materials, for on-time delivery of finished products, and so on. Data, however, do not capture everything you need to know to make good supply chain decisions that support the business’s goals. People are comfortable with numbers, and there is a sense that if I am measuring 5,000 data points, then I can’t miss a thing, and that is good for the supply chain. But that’s not always the case. In short, I believe there is an over-reliance on hard data in the industry. We believe that no amount of analysis will provide wisdom—that hard data do not equate with insight. Making matters worse, in this over-reliance on numbers, supply chain managers are under increasing pressure to make faster decisions, because businesses are moving at much faster speeds today. What I am seeing is that because of this pressure to make fast decisions, managers have a tendency to exclude much of the data available to them and to focus on selected key performance indicators (KPIs). Unfortunately, ineffective KPIs can lead to wrong decisions, too. I have interacted with several companies facing this challenge, and people will often say that they can’t take in a lot of data to make a decision because it slows them down. Then, if they are slow in making decisions, they will miss opportunities and pay a heavy price. However, we are finding that this tendency to ignore

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some data is also counterproductive. When managers make supply chain decisions based on limited data, they are prone to make more iterative, sequential decisions. This happens because the managers know they are acting on limited data, and they are worried about making a big mistake. Therefore, in their efforts to make fast decisions, they end up slowing things down by taking small, sequential steps. There is some research that supports this observation.

Using new networking technologies What is better, therefore, is to capture the most important real-time data available, and use that data, along with other environmental uncertainties and drivers, to do multiple-scenario simulations that consider the systemlevel impact of various choices. This approach yields better supply chain decisions. To do this, companies need advanced systems and tools, of course, but more importantly, they need to be very good at communicating across multiple functions of the business, so the person making decisions has a good grasp of the context of the entire operation. This is important because information takes time to harden into data that can be used for quantitative analysis. Furthermore, during its transformation into hard data, information often loses its texture and context. Social networks and blogs…create a continuous communication process. At MIT’s Supply Chain 2020, we see real value coming from the blogs and social networking sites that are growing all around us. We are now working with companies who are contemplating using these new ways of communicating in their supply chain process. I believe companies that do so effectively will see significant improvements in their supply chain performance. Although many companies’ supply chain leaders meet regularly to discuss problem areas—say every Friday at 3:00 p.m.—that doesn’t mean that you are getting people’s best thinking at that time and place. Ideas come at all times. Inevitably, supply chain events will trigger new thoughts and concepts. People come across information that is important to be shared immediately, not at an appointed meeting time. Social networks and blogs give managers and others the ability to stay connected at all times. They enable people on the team to think proactively, post information and ideas, react to information, and in this way create a continuous communication process. For example, if I were a company manager, I could be

on a trip in Singapore and overhear a discussion or read in the local newspaper about problems with a small supplier that my company is using. This information wouldn’t make headline news, and by the time it showed up in our process, either through late deliveries or quality problems, it would be too late for us. Using a mechanism such as a blog, I could post this information, and everyone on the supply chain team would immediately be aware and take steps to validate and act on the information. Using these new networking technologies is the next step in supply chain management, although none of these tools is a substitution for measuring real-time data. The value here will be in creating better ways to utilize the data that are available, both through traditional metrics and through tapping into the wisdom of the people on the team. The results will be better, faster decisions and increased flexibility of the supply chain.

The Last Word Michael Berry Executive Vice President and Chief Financial Officer, i2 Technologies

product cycle times, for example, and tying those back to improving working capital and gross margins. As supply chains continue to evolve, growing in length and complexity, the role of the CFO also should grow. Now, more than ever, CFOs need to have a good view of their company’s suppliers and the financial and regulatory risks that come with a more complex and extended supply chain. It’s in the supply chain that you find the things that have the potential to really rock your world and impact your company’s performance significantly. Just consider the increased trend to outsourcing, often in international locations that are more difficult to monitor from a company’s corporate offices. The CFO must evaluate the stability of the chain, factor in the extension of capital and the already huge and growing costs of transportation. Plus, there are new risks when supply chains are so extended, including the sourcing of products from other nations. The CFO needs to have a strong level of comfort about the people building the product and the materials going into the product, because the associated risks are so significant.

Capturing efficiencies As a CFO, I have always been interested in the supply chain, because it is one of the largest components of a company’s ability to achieve its business objectives. Furthermore, one of the great things about the supply chain is that it allows you to measure so many things about your business, which is always attractive to the CFO—we live in a world of numbers and measurements. All CFOs are responsible for assessing and measuring the costs and the return on investment for their company’s initiatives. While we have many tools to do that, at the end of the day, my focus on metrics comes down to one thing—cash flow. Especially in our business, cash is king. The CFO has always been at the forefront of optimizing the company’s spending to make sure the business objectives are met. Within the past couple of years, however, I am seeing more CFOs thrust into the role of evaluating their company’s supply chain. It makes perfect sense to do so, because it’s in the supply chain that you find the things that have the potential to really rock your world and impact your company’s performance significantly. For this reason, CFOs are now more involved in measuring the supply chain, looking at inventory turns and

Furthermore, the uncertainties we see in the economy today make the CFO’s role in supply chain management even more important. In our current economic downturn, growth for many companies will be very hard to come by. In the absence of growth opportunities, to maintain financial performance companies must do whatever they can to find and capture efficiencies in their operations. Again, it is in the supply chain where they will find the leverage to make adjustments and capture those efficiencies. In general, there is never a lack of information available to CFOs, but it’s important to draw a clear line between reporting and analysis. Numbers are great. Data are important. But you always have to ask, “What does this mean for the business?” To do that, it’s important for the CFO and others to maintain good lines of communication, so they will benefit not only from the numbers, but from the knowledge of the entire team. At i2, we continuously communicate with people across various functions within the company, as well as with our customers and peers outside of the company, to understand the trends and the context of the business environment. Opinion interviews were conducted by freelance writer Michael Cohen.

Supply Chain Leader / April 2008

CASE STUDY

Meeting (and Exceeding) Customer

World-class manufacturers of food, pharmaceuticals and other critical products place heavy demands on their suppliers. In today’s increasingly competitive environment, manufacturers expect vendors to meet often extraordinary quality, production, customization and timing requirements. Suppliers who cannot meet those exacting demands struggle, fail and often disappear. Those who can meet these requirements emerge as profitable market leaders. That is certainly the case in the highly competitive packaging industry, and for Teich AG, a respected international supplier of innovative, flexible packaging materials. A wholly owned subsidiary of Constantia Flexibles, Austria-based Teich Aktiengesellschaft utilizes aluminum, paper and other prime raw materials to manufacture high-quality packaging for manufacturers in the dairy, confectionery, food, pharmaceutical and pet industries. To meet the exacting standards of those demanding customers, Teich leverages state-of-the-art systems and procedures to meet ISO 9001:2000, BRC and FDA hygiene certification requirements and its own high quality standards. The company employs 2,000 workers and operates its own aluminum rolling mills to ensure the integrated production of foil supplies for the entire corporate group. Not long ago, company managers took a hard look at their performance and at the production and control systems they needed to remain competitive. They saw both challenges and opportunities, and, in response, laid out an ambitious plan to upgrade their vital metal-foil output capabilities.

Production challenges The Teich AG rolling foil mills at Weinburg, Austria, supply its key customers and sister companies with a wide range of packaging-related foils. The production processes

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are extremely complex and require the individual plants to meet very demanding, and frequently changing, delivery and product-customization requirements. The company’s previous-generation systems did not provide the control or flexibility to consistently meet those high expectations. With those older systems, central order processing was costly and time consuming. Scheduling was largely a manual process, with planning for both material procurement and the production process done primarily on paper. Feedback was slow and error-prone. Given these fundamental limitations, Teich AG was forced to keep extensive and expensive rolling-foil reserve stocks on hand at all times. Even then, every specialdelivery request presented a significant planning and production challenge.

Integrated approach To address those shortcomings, Teich AG set out to create a new, vertically integrated rolling-foil production capability. The company’s planned 100 percent automatedfoil “Rolling Plant II” represented its largest-ever capital investment, and would integrate advanced planning and manufacturing execution technologies to create a highavailability, real-time supply chain solution. The new rolling-foil facility would incorporate sophisticated management capabilities to manage scheduling and tools, material flow, manufacturing execution and shop-floor activities. The new facility would allow the package provider to more precisely schedule material batches and items, to plan rolling workload, and to precisely monitor activities against planned windows. Teich AG managers expected this new Rolling Plant II project to deliver: • Procurement optimization • Internal and external delivery performance improvement • Reduced work-in-progress (WIP) and WIP material requirements • Shorter production lead times • Faster responses to production opportunities • Optimized resource utilization through improved material routing and capacity management • Planning and scheduling synchronization • Reduced deviations in planning, scheduling, inventory and costs • Improved visibility and collaboration between planning and production • Reduced manual-coordination requirements

Expectations at Teich AG To meet those ambitious objectives, Teich AG called on a long-term technology partner, 4Production. 4Production specializes in the planning and control of the production of metals, paper and other industrial products. 4Production applied its unique knowledge of manufacturing production systems to deliver a solution that integrated its 4P MES production management system with i2 Factory Planner technology. This approach promised a new and higher degree of planning accuracy and flexibility for the new and expanded Teich AG rolling-mill operations. 4Production then implemented the new technology in parallel with ongoing production runs and fully trained Teich AG foremen and shift supervisors on the solution. “Increasingly, the productivity of rolling-foil mills is a core part of our growth strategy. This way we are able to stay abreast of the increasing demand for our products,” says Wolfgang Geyrhofer, process engineer with Teich AG. Geyrhofer says Teich AG selected 4Production based on proven performance in similar implementations, “since the company is very competent and has enormous experience at its disposal from comparable projects within the aluminum industry.”

i2 Factory Planner provides intelligent decision support for production planning and scheduling, and is designed to simultaneously manage material and capacity constraints in the development of workable operating plans for plants, departments, work centers and production lines. Planners and schedulers can utilize Factory Planner to intelligently optimize the performance of a manufacturing facility to reduce lead times, inventory and operating costs while improving throughput and due-date performance.

Extensive modeling capabilities allow buyers to more efficiently forecast, purchase and manage key production materials. This field-proven approach allows manufacturers to spot and resolve potential supply chain bottlenecks and to create more precise and timely production reports. “i2 Factory Planner was selected for this combined solution because of its seamless integration with the 4P MES solution,” says Erwin Bronk, 4Production chief operating officer. “Factory Planner could be implemented quickly, and delivers the accelerated planning and specialized functionality needed in the Teich AG production environment.”

Speed and efficiency The combined solution gives Teich improved flexibility and transparency at all levels of foil production. As part of this solution, 4Production helped Teich redefine and improve manufacturing-related processes, interfaces and responsibilities. This approach now supports optimized planning and production, and allows Teich to respond more quickly and efficiently to late-breaking change requirements. By more fully integrating with key suppliers, Teich AG has also improved its ability to meet critical production schedules. “These integrated planning and control systems enable maximum transparency within production,” notes Rainer Huber, project manager of the Teich AG’s Weinburg rolling mill. “Things are more at ease.” Teich AG reports the following specific improvements from this integrated planning and production solution: • Real-time, closed-loop production planning, scheduling and execution capabilities • Automatic-loop, batch-execution adjustments for better scheduling and planning • Faster internal order quotes • Reduced production lead-time requirements • Reduced foil stock and reserve-stock requirements • Greater stock and production visibility • Fail-proof system for maximum availability • Seamless integration between planning and 4P MES system scheduling and execution • Optimum throughput, lead times and delivery performance for Teich AG’s largest-ever new system investment Those gains now enable Teich AG to meet high customer expectations, and help keep this proven leader at the forefront of the competitive packaging sector. — Jon Kemp

Supply Chain Leader / April 2008

Leveraging POS Intelligence to Improve Retail Flow-Through

Focus by Amarnath Thombre and Sanjiv Sidhu Historically, consumer product companies have focused on “selling in” their products to the retail channel without paying adequate attention to the actual “selling out” to the end consumer. Since typical contracts safeguard retailers against the risk of carrying inventory—through protective clauses, such as price protection and end-of-life (EOL) markdown support, they don’t mind the sell-in focus and use it to their advantage during quarter-end sales pressures. In fact, most sales-incentive programs are focused on enticing retailers to buy more product from manufacturers, rather than collaboratively focusing on increasing the sellout to the end customer. Retailers focus on maximizing sales of a particular category for the short term—spreading product lavishly across many branches to expedite sales—and are not as concerned as manufacturers are with maximizing the sales of a particular brand. With a high-demand item like the iPod®, retailers will try to hoard as much product as possible, often causing shortages and lost sales elsewhere. But then, when sales of hot products drop off, or slowermoving product backs up in the retailer’s pipeline, the resulting inventory carrying costs, deep discounting and diminished brand profits come out of the manufacturer’s pocket. These hoard-and-discount cycles can cause a 4–6 point swing in product net profits and make the difference between a profitable product and one that incurs losses. Specifically in the consumer electronics industry, a hotselling product can swing to a net operating loss solely because of the liquidation costs at EOL, with the rush to flush the old version out of the retail channel so that the new version can get its shelf space. In an industry where margins and product life cycles increasingly shrink, and growth is a competitive necessity, such preventable financial and brand-equity losses are insupportable. Clearly, brand owners need to shift their focus to what the end consumer is buying from the retailer, and pointof-sale (POS) is the best data source to effect it. Once the focus shifts away from celebrating sell-in to increasing sell-out, the attitude toward channel inventory shifts to keeping it under tight control and ensuring that it is deployed in the right place to maximize end-consumer sales opportunities. Fortunately, it is possible for brand owners to get daily insights into both the POS and storelevel inventory picture because of recent advances in information technology. When analyzed correctly and regularly, this information is highly effective, ensuring that channel inventory is deployed accurately and, most important, in uncovering hidden sales opportunities. Leading consumer product (CP) companies embrace POS to drive their supply chains by making both short-term and long-term decisions based

on consumer behavior rather than on what the retail buyer is planning to order.

Using POS effectively Many of these CP thought leaders have developed competencies around POS that enable them to make better decisions about inventory deployment and promotions than the retailer can. For example, typical brand owners have multiple products placed at every retailer store. Each of these products has different popularity and pull across regions and store locations. However, in most cases, retailers deploy the same mix of products to every region, leading to simultaneous stock-outs and overstocks, unless the brand owner intervenes, based on insights provided by POS. i2 worked with one brand owner that saw store availability jump from 70 to 95 percent by closely monitoring POS and inventory deployment and, at the same time, lowering the overall inventory at the retailer. The manufacturer increased operating margins and sales, thereby lifting the company to tier-one status with the retailer. The clincher in this case was the brand owner’s ability to point out that the retailer’s abysmal sales—despite a hot market and a channel flush with inventory—resulted from the stores displaying the older version of their best-selling product, which was obviously out of stock. Simply resetting the store displays with the new version increased the sales in the market by 500 percent—a win-win scenario for both the brand owner and the retailer. Brand owners are increasingly focusing on creating competencies around POS and taking charge of the execution of their brands in the retail channel for increased sales and margins. Retailers too, are more open than ever to sharing daily POS information with brand owners as they see the advantages in a mutually beneficial partnership. Wal-Mart’s RetaiLink® is a classic example of a bigbox retailer encouraging brand owners to take an active part in inventory management and monitoring sales execution in the retail stores.

Retail channel management models In the past few years, multiple successful models of a mutually beneficial relationship centered on brand owners playing an active part in retail channel management have emerged. Among them are: 1. The aggressive consignment model, where the brand owner takes financial ownership of the inventory in the channel and accepts payments only at POS. In return, the retailer lets the brand owner control the movement of goods and gives additional benefits, such as increased price POS CONTINUED on Next Page . . .

Supply Chain Leader / April 2008

and better shelf space, to account for the enhanced cash flow and reduction in working capital. Such relationships require extensive contract renegotiations and may not be feasible for every retailer/brand-owner relationship. 2. The brand owner only takes ownership of managing the inventory within agreed-upon parameters, without any changes to the financial contracts. The retailer in such relationships monitors the overall service-level performance, but the manufacturer controls the movement and placement of goods. Typically, such models work well for commodity products that are not of strategic focus for the retailer, and for brand owners with significant clout with the retailer. 3. In an enhanced CPFR (collaborative planning, forecasting and replenishment) model, the brand owner shares insights derived from analysis of POS data to influence the forecast signal and deployment of inventory. More important, the brand owner also points out opportunities for increased sales through targeted promotions. This is a significant departure from traditional CPFR, where the focus is primarily on order collaborationâ&#x20AC;&#x201D;heavily influenced by the brand ownerâ&#x20AC;&#x2122;s focus on achieving a quarterly sell-in goal. When the brand owner enters a CPFR discussion with clear, operational insights derived from a systematic analysis of the POS data, the discussion turns into a lively exchange of ideas aimed at increasing the sell-out while keeping inventory under tight control.

Developing POS competency The shift in focus to sell-out requires brand owners to systematically develop competencies around POS in order to have meaningful impact on sell-out and channel inventory. Integrating clean POS data within an array of cuttingedge, exception-based, demand-sensing and planning tools and services now makes it possible for manufacturers to stay in tune with changing consumer preferences and to

ensure that their supply chain is directly aligned with the market at all times. Daily visibility and analysis by SKU and by store are fundamental to optimizing shelf inventory by individual store demand. Analysis of POS data at the store level enables replenishment teams to preemptively address potential stock-outs and act upon sudden local bursts of demand by quickly diverting the flow of goods to the high-selling regions. Hoard-and-discount cycles can cause a 4â&#x20AC;&#x201C;6 point swing in product net profits and make the difference between a profitable product and one that incurs losses. Developing rich analytics capability at the store/SKU level not only enables quick reaction to changes but also creates a broad, root-cause analysis framework to understand the underlying market forces that are causing the change from expected patterns. The framework can help identify shifts in consumer preferences toward the product mix or the effect of a competitor introducing a new product or making a price move. Also, the framework can provide the necessary breathing room to counter a negative trend or take advantage of a positive one before it is too late to react. By developing process playbooks that map trends in POS performance to a library of possible root causes, brand owners can take surgical, demand-shaping actions at a region/SKU level to ensure optimal spend of their promotions budget and prevent localized problems from becoming broad trends. While POS data can be instrumental in optimizing the performance in the retail channel, such data also provide significant advantages to the brand owners to manage their own supply chain. The problems posed by low-mix accuracy in short-life-cycle product supply chains are well

Demand-Shaping Process Playbook POS deviation detected

Is deviation detected at the national or regional level?

Is deviation detected at the category or model level?

Supply Chain Leader / April 2008

Analyze market intelligence reports

Identify root cause

Pull analyses of different scenarios from lever library

Apply appropriate demandshaping lever

Readjust sell-out plan

known. The problem only worsens when procurement and capacity allocation decisions are made based on forecasts derived from historical sell-in signals that do not reflect current market reality and incorporate multiple levels of bias. Fresh POS data, on the other hand, represent consumer preferences on a daily basis. When coupled with syndicated market data, POS provides a far more accurate forecast signal and mix.

POS Root-Cause Analysis Identifies Key Replenishment Problems

The managed services approach Moving to a POS-driven supply chain may seem daunting at the beginning, starting with the immediate concern about the validity and cleanliness of the POS data. Many brand owners i2 surveyed were receiving regular feeds of POS data but were doing very little with the data, due to either skepticism about quality or the lack of a clear approach for deriving meaningful insights from the data. Most companies lack an internal POS competency, resulting in the data at best being collated into reports, without any operational plan associated with it. Realizing the need to help companies get over the adoption hump, companies like i2 have taken a managedservices approach to help develop a POS competency for manufacturers—a competency they can integrate into their organization in the long term. The service takes a results-oriented approach, helping the brand owner to gather POS data from the retailers, providing cleansing and validation services, and developing the necessary analytics and planning capabilities through a combination of skilled resources and tools (see sidebar). i2 has a dedicated set of POS experts and statisticians that leverage world-class tools to derive the intelligence from POS and work with the brand owner to help build internal competency. The service delivers clear, operational insights based on POS analytics that customers can leverage to collaborate with the retailer or take internal corrective actions. This is like learning to ride a bike with training wheels—where i2 as a partner works with the manufacturers to set up the POS competency and jointly drives the forecasting and replenishment decisions, until the brand owner achieves sufficient competency to go it alone. Finally, new-generation demand sensing and forecasting solutions not only reduce inventories and markdowns, prevent stock-outs and increase sales; they lift the focus to a higher strategic level. Streamlining operational processes and enabling end-to-end visibility along the entire supply chain enable what happens at the store shelf to align more closely with corporate goals. These actions also result in a better end-customer shopping experience, thus reinforcing customer brand loyalty—no small dividend.

Historically, replenishment teams have not had the visibility to determine the fundamental cause of stock-outs, and so channel stuffing was most often the one-size-fits-all, short-term solution, with attendant revenue losses. POS-based visibility has made such generic “cures” obsolete. POS demand sensing, root-cause analysis prevents: 1. Current and future stock-outs: Potential stock-outs are identified by comparing POS data-determined SKU rates by individual stores, and with inventory levels at those stores and feeder distribution centers. The solution also proactively identifies the root-cause problem and combines that analysis with guided resolution workflows. 2. Overstock situations: These are relatively easy to discern, based on the rate at which an SKU is moving against current in-store inventory levels. POS provides the most accurate and current picture of the market, and manufacturers can divert inventory to the right place, preventing a stock glut in the channel. 3. Stores not scanning: Often, when a store is “not scanning”—SKUs are not moving as rapidly as at comparable stores—the issue may be shrinkage or poor stockroom management. 4. Root-cause analysis identifies four types of forecast variance to actual: where forecast sales and actual sales differ and by how much.

Amarnath Thombre is director of services at i2. Sanjiv Sidhu is i2 cofounder and chairman of the board. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / April 2008

Guest Column

by Michael Aguilar Aguilar

Total Channel Management Demands a Dynamic Partnership Supply chain professionals today recognize the value of tracking customer behavior through point-of-sale (POS) data. But while tracking POS data has become increasingly pervasive, very few companies actually use that information to leverage a competitive advantage. Frequently, the data are simply reviewed, but not used strategically. Retailers can make that data operational by sharing it with their suppliers, and letting suppliers use the data to take command of all functions powered by POS. This transfer of responsibility enables total channel management (TCM), allowing suppliers to take control of their own destiny.

What’s in it for the supplier? By managing the forecasting and demand fulfillment functions, the supplier increases its sales by ensuring its products are in the right place at the right time. The supplier decides how many weeks of inventory will be carried, in what locations, and how to write the orders to meet its needs and those of the retailer. By moving out of a reactive mode, suppliers have the ability to concentrate on other areas, such as demand shaping, to maximize their sales. They can also look at specific markets to target problem areas and quickly find resolutions. Through TCM, suppliers can smooth out their production because they are not continually reacting to what happened the week before. They can adjust for trends on a more incremental basis. Additionally, this collaborative structure invariably improves business partnerships, ingraining the supplier within the culture of the retailer. It makes it difficult for suppliers to be removed, and gives them an edge when competition is tight. The biggest objection from retailers that suppliers have to address is the fear of giving up “the power of the pen.” Demand and forecasting personnel on the retail side may fear that transferring power to the supplier puts their jobs at risk. Therefore, suppliers must work to assure their partners that this new relationship enables them to be more strategic and shifts the tactical aspects of the relationship to the supplier.

What’s in it for the retailers? Big-box retailers typically carry 6–8 weeks of inventory because they know they are going to make mistakes. They

Supply Chain Leader / April 2008

don’t spend a lot of time putting the right product in the right place because they can fall back on their suppliers to take care of the problem, creating a flawed system that ties up capital for both the supplier and the retailer. This dynamic represents a perfect scenario for shifting the responsibility for forecasting and demand management from a retailer to a supplier. By engaging in a TCM relationship with suppliers, retailers reduce their total weeks of supply, and can sell at a net-zero ownership of goods, depending upon their payment terms. Their free cash flow goes up enormously, because the supplier is tightly controlling inventory and assuring that sales will be maximized by putting the right product in the right place, at the right time. In addition, end-of-life expense becomes much less of an issue, due to demand shaping and depleting inventory in a systematized manner.

Proving the value of a new kind of partnership Convincing a retailer to change to a TCM business model is typically a long process for a supplier. During the course of several months, the supplier should meet each week with the customer and compare forecasts to demonstrate that the supplier has the superior forecast. After 3–4 months of this process, the supplier should begin collaborating with the customer to manipulate its forecasts. As the customer continues to see forecasts improve through this collaboration, the door is opened for the supplier to ask the customer to take over the management of forecasting and demand fulfillment functions.

The i2 solution The i2 Total Channel Management solution has been designed to take POS analysis to this next level. The endto-end solution incorporates i2 software, consultants and analysts, enabling a successful transition from the buy-sell relationship to TCM. The solution has been proven with a variety of i2 customers, leading to dramatic increases in sales and turnover, lower sales-related expenses, and significant improvements to the bottom line. Michael Aguilar is president of Intrepid Consulting Group, LLC For more information, contact supply_chain_leader@i2.com.

Managing the Human Element By Michael Levi

Supply Chain Leader / April 2008

Today, we know that people will change because they are offered the right incentives––and this means we must align our numerical objectives with the human rewards that will ultimately drive our businesses toward results. As supply chain management has evolved as a discipline, a tremendous amount of resources and attention has been focused on investing in the best available technology solutions, as well as putting in place well-honed processes guided by such principles as Total Quality Management, Six Sigma, Just-In-Time and Lean Manufacturing. But even the best tools and the most innovative processes do not guarantee success. As companies strive to maximize supply chain performance, they cannot overlook another critical factor: the need to effectively manage the human element of the supply chain. No matter how sophisticated the technology tools and how refined the processes, a supply chain is, in the end, a human construct—and human beings play the most significant role in its ultimate success or failure.

Behavior: A force to be reckoned with People represent a vast and elusive variable in supply chain management, whether they are the managers and operators who run the supply chain or the customers and consumers that operations are built to address. To achieve high-level results, an organization must work with its internal human assets, with the goal to ensure that all participants understand both the company’s vision and objectives, and how they play a role in achieving both. Equally important, whenever possible companies must anticipate the behavior of external audiences––including customers, suppliers, and consumers—and respond with agility and flexibility. The impact of fluctuating human behavior on the global supply chain cannot be taken too lightly. Demand variations, regulatory issues, geopolitical turmoil and the exploding worldwide consumer base are introducing challenges and opportunities at an unprecedented pace. But it is the shifts in consumer preferences that have repeatedly HUMAN CONTINUED on Next Page . . .

Supply Chain Leader / April 2008

align our organizations from top to bottom, so that our highest-level strategy is reflected in the incentives offered to supply chain employees at every tier—ensuring that everyone in the organization is working toward the same results.

Aligning people, processes and systems

thrown curve balls—and expensive ones, at that—at even the strongest organizations, forcing them to realign their strategies and their operations to match the shifting consumer landscape. Even market leaders have been repeatedly forced to look closely at every aspect of their businesses, from product mix to organization design. The people who manage and implement supply chain processes and systems can be just as unpredictable and challenging as the customers and consumers who drive it. In the past, executives tended to believe that people and organizations would be motivated to change “for the greater good.” But today, we know that people will change because they are offered the right incentives—and this means that we must align our numerical objectives with the human rewards that will ultimately drive our businesses toward results. We also know that we must build our systems and operations so that they can manage unpredictability. It is no longer enough to create a lean environment. We must create an environment that is both lean and agile, one that honors the principles of waste elimination while also enabling the flexibility to deal with the inevitable surprises— human and otherwise—that disrupt even the best-designed supply chains. Effectively managing people and technology requires both art and science. While technology is built on an information-based foundation that is calculable, measurable and tangible, people exhibit much greater variability in behavior. While we can never hope to predict or control human behavior with absolute certainty, we can tightly

Supply Chain Leader / April 2008

Sales and operations planning has demonstrated that it is not enough to simply establish connection points between the supply and demand sides of the organization. Instead, supply and demand must be very closely aligned. And, because the dependent variable is human beings, people and processes must also be aligned, so that the high-level rewards translate into personal rewards that motivate individual contributors. For organizations seeking the kind of tight alignment that allows them to manage—and even leverage—the human element, seven actions can improve overall performance and drive high-level results. 1. Define the top-level vision and expectations, then align the entire organization around that. This requires a holistic perspective that considers the interdependent relationships among different parts of the business, the contributions of each function and the rewards that will motivate individual employees. The people and processes within each function must support the desired results of the entire organization, and all functions must work together to achieve these shared goals. Incentives should reward those core behaviors that strengthen the entire enterprise, instead of focusing on narrow functional targets. Across the enterprise, multiple departmental measures should be replaced with a critical few metrics that measure progress toward ultimate business goals. 2. Redesign processes and technologies to maximize their ultimate contribution to results. Every key process within the business must be re-examined to maximize its contribution to top-level goals, and each process must be supported by highly collaborative, highly usable tools and systems. Many organizations begin this process by rationalizing their products, while others focus on enhancing transparency, so that planning and execution are better synchronized. A logical starting point for many businesses is specifying technology tools and systems that more effectively support strategic objectives, as well as key performance metrics. 3. Establish a cross-functional system of shared responsibilities and rewards. Closer interaction and visibility among functions create transparency, which enhances collaboration because individual functions can understand exactly how their own actions impact the larger organization. As everyone begins to share an accurate, timely view of demand and supply data, functional managers can

implement control levers that recognize and respond to variability. Subsequently, the entire organization is empowered to take corrective actions and keep overall performance plans on track. 4. Build confidence through synchronized, operational information. The accumulation of hard data removes doubts and instills confidence throughout the organization. By sharing accurate, up-to-date information, the entire organization can understand what the larger goals are, how progress is measured, and what individual teams need to do. Salespeople can be confident in their projections, eliminating the need for “buffer volumes” that cover anticipated delivery failures. Acting with accurate forecast data, operations managers can confidently work against more realistic timelines and commitments. 5. Monitor and enforce progress toward larger goals. In a closely aligned environment of shared rewards, responsibilities and information, it is imperative to look at overall business performance on a continuous basis, examining any anomaly and acting upon it immediately. Enforcement actions must emphasize the interdependent nature of all functions, as well as the ramifications for the business as a whole. Variations in any aspect of the organization must translate directly into corrective action across the entire company. 6. Establish the right metrics and incentives. It is absolutely critical that performance metrics reflect the highest-level corporate vision, and that compensation systems reward the behaviors that help to achieve that vision. Employees should be motivated not just by traditional sales and operations goals, but also by more specific objectives that reinforce the overall strategy. For example, businesses seeking to increase collaboration between the sales and the operations teams can implement monthly commission payments based on shipments to bookings. This aligns sales goals with operations targets, ensuring that orders actually ship before salespeople are compensated. It also encourages a more consistent stream of orders, instead of the traditional end-of-quarter push that can negatively impact both cost and delivery performance. 7. Drive loyalty through reliability. A tightly aligned organization creates an environment of trust. Internal performance improvements carry forward across external partners, making the entire supply chain more reliable. Businesses can become better suppliers to their customers, and better customers to their suppliers. Reliability and trust create a collaborative supply chain environment, built on the confidence that promises will be kept and deviations swiftly corrected. Every action across the chain becomes connected to the highest-level results, and a sense of loyalty is created among customers.

Enforcement actions must emphasize the interdependent nature of all functions, as well as the ramifications for the business as a whole. Using these seven principles as a guide, organizations can establish a framework for aligning their various functional departments, and then re-aligning them as the competitive environment changes and the top-level vision is redefined. Improvements in technologies and processes have enabled significant flexibility within the supply chain—and this agility must be supported by flexible human components, such as compensation and incentive systems that are updated as the top-level vision shifts. Alignment is not a one-time event, but an ongoing commitment in which the entire organization must engage.

Combining science with art Stripped to its core, our modern challenge is achieving operational excellence while also developing and delivering superior products to customers. This combination of cost and service decisions—balancing numerical outputs with the intangible human factor—lies at the heart of the results that everyone talks about today. Business performance is most easily understood at its highest level—its ultimate impact on financial results and market share—but it is hugely influenced by the behavior of individual human beings, which is much harder to predict, measure and control. Many organizations completely overlook the human element in designing and managing their supply chains. Others view human behavior as an uncontrollable force, like the weather, which can only be responded to—not managed proactively. But, as the playing field grows increasingly competitive, and the stakes higher, some industry leaders are beginning to recognize the importance of understanding and managing the human aspect of their supply chains. Both supply chain technologies and processes have reached a high level of sophistication, but they cannot be fully leveraged until the performance of the people who deploy them rises to the same level. Those companies that strategically manage the inherently unpredictable human variable of the supply chain will achieve significantly more value than those who do not consider its management mission-critical.

Michael Levi is director of solutions marketing at i2. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / April 2008

Inside i2

by Hiten Varia

Our Innovation, Your Results Much has changed in the world of business since i2’s startup 20 years ago. Technology-driven automation has continued to eliminate many manual processes. Wireless phones and email devices have become ubiquitous, rendering the 9-to-5 workday virtually obsolete. And the Internet has forever changed the way we buy and sell goods and services. But in the past two decades, one thing has stayed the same—i2’s customers want tangible results, quickly. That’s why, throughout the years, we’ve maintained an unwavering focus on delivering value. We demonstrate that focus through our commitment to research and development, in which we have invested more than $1 billion since our founding. As a result, i2 has more than 150 patents issued and more than 140 pending patent applications. We cultivate a specific sort of restless ambition at i2— we’re never satisfied that we’ve found the best way to do something. By staying in a perpetual state of innovation, we create continuous opportunities to develop new services and technology to meet the evolving needs of our customers. One such way we’re delivering rapid, measurable and world-class business results to customers is through i2 Operations Services. i2 Operations Services drives the kind of quick value that today’s customers seek. Frequently in the past, supply chain management initiatives necessitated substantial investments of money, time and human resources on the part of companies embarking upon them. That reality persists today, serving as a roadblock for many organizations overwhelmed by the implementation process. Deploying creative methods for tackling the toughest business problems, i2 Operations Services enables our customers to outsource key supply chain processes to us. By bundling the services and software that they want i2 to manage, customers can begin achieving value quickly, at a lower cost than traditional implementations. Supply chain management initiatives deployed using i2 Operations Services can achieve results as soon as changes are implemented, with less upfront investment and faster cycle times. i2 Operations Services has been proven at some of the world’s leading companies, including a top consumer electronics manufacturer. Operating in an exceedingly competitive market, this manufacturer responded to increasingly complex customer requirements by embarking on an extensive supply chain management initiative. This company leveraged i2 solutions and services under the subscription model offered under the i2 Operations Services umbrella, with the goal to increase on-time delivery, elevate customer service and achieve greater market share. Using

Supply Chain Leader / April 2008

i2 Demand Manager and i2 Supply Chain Planner, it moved to the top of its industry in terms of customer service—all without a single i2 license being sold or a product being implemented in-house. The electronics manufacturer deployed i2 Total Channel Management solutions as a service through the i2 Competency Center in India. A mix of on-site and off-shore services enabled a 24x7 planning operation. i2 process consultants in the areas of business, finance, IT systems, and channel qualification and management were located on site with the customer. Business analysts and solution architects in the i2 Competency Center were assigned to design solutions and operate processes. Prior to deploying this consumer-oriented solution, the manufacturer suffered from misaligned inventory, stock-out problems, and dead inventory in slow markets. Sales and profits were weak, and relations with key retailers were strained. With the visibility provided by i2 solutions, inventory distribution is now aligned with consumption, and product availability to customers has jumped from 70 percent to 95 percent. In the first year of the project, unit sales of a targeted model went from 20,000 to 100,000, and average weeks of supply in the channel went from 25 to just 5, continuing to trend downward. A major electronics retailer has since elevated the consumer electronics manufacturer from a tier-three supplier to a tier-one “go-to” brand for its product. Other successful deployments include a large storage device original equipment manufacturer that has leveraged i2 Operations Services to reduce the order error rate to 1 percent. In addition, a large semiconductor company utilizes i2’s services to run and maintain its global supply chain management solution, while a global leader in the personal computer market has leveraged these services to run and maintain an award-winning eCommerce solution. These are just a few examples of how i2’s unique approach enables our customers to achieve tremendous value. But what truly makes i2 Operations Services unique is the i2 team that supports it. These industry specialists leverage their extensive experience to deploy i2 solutions and services in a customized way that maximizes value for each individual customer. This specialized approach enables i2 to deliver greater profitability to our customers, as well as lower hardware and workforce costs, all with reduced risk. Hiten Varia is executive vice president, Global Customer Operations, and chief customer officer at i2. For more information, contact supply_chain_leader@i2.com.

The Supply Chain Results Company 11701 Luna Road • Dallas, Texas 75234 www.i2.com • 1-877-926-9286 • 1-469-357-1000