To assist managers, To-Increase’s Global Industry Director, Luciano Cunha, has put together a three-step plan to ensure a budget is justified and implementation is successful. 

Step 1: Rationalise the Purchase

 Data collection errors and inefficient picking processes can be very costly, especially over a long period of time. A modern WMS that can offer improved data collection automation and advanced picking functionality can help increase revenue and improve the bottom line.

Step 2: Match Product to Workflow

A bulk of the product evaluation should take place around finding solutions that adapt to a user’s workflow. Improving on existing processes will lead to benefit realisation, rather than transitory hiccups and inabilities. Managers should look closely at the systems that are evaluating to ensure they contain the features necessary for successful implementation and execution.

Step 3: Allocate Resources for Proper Training

Ensuring that management is on board for the deployment and training period is important for success, as well. A great way to rationalise this is to compare the time spent correcting mistakes or for manual entry, and showing the time (and financial) resources that will be saved with proper deployment and training for a new solution. This is an important last step for successful budget acquisition and solution deployment.

For more on this topic and additional resources on warehouse management systems, check out: Warehouse Management Systems Guide.

It is becoming apparent that many companies who have taken decisions to manufacture offshore may not have considered all relevant factors.

For a start, in places where labour markets were previously thought to be in never ending supply, such as China and India, it is becoming increasingly difficult to find workers. And, with wages and energy costs rising, contract manufacturers are starting to feel the pinch.

Add to this, an increasingly demanding customer base, which now expects products to be supplied closer to the source – in other words, we don’t want to wait several days for our goods to arrive.

A recent survey conducted by Accenture in the US confirmed that over 60% of companies surveyed will make the shift, citing cycle/delivery time (higher inventories!), product quality, logistics and supplier/component prices as the factors influencing their decisions. These companies have discovered that managing supply operations that are separated far from where demand occurs has limited their overall operational planning, forecasting and general flexibility, in some cases also driving up costs through the need for complex network management.

According to the survey, companies who are considering shifting their manufacturing closer to their customers are also responding to a need to re-balance their supply footprint to improve flexibility and responsiveness to varying demand and unknown customer requests quickly, with high quality and faster delivery and optimised costs. Whilst this may not always be ‘lowest cost’ these companies recognise that other value drivers, such as the ability to supply customer specific sku’s or customised products quickly, is important.

And while market conditions of Australian manufacturers may differ slightly from their US counterparts, it will be interesting to see if this trend amongst US manufacturers takes hold locally.

Are you, or leaders at your company, considering shifting operations so they are closer to your customers? Are increased flexibility and customer responsiveness now more important now As than low-cost production? Has the complexity of your network management begun to outweigh the reduced production costs off-shore?

As always, I’m interested in your comments. What you are noticing?

Kind regards

Richard

1. Too Much Product Complexity
All firms will admit they carry too many SKUs, and further concede that they don’t have a good process to eliminate under performing products. Yet others have broken through and have a disciplined process in place to manage SKU growth, proving that it is possible to manage SKU growth effectively.

2. Too Much Slow-Moving and Obsolete Inventory
Companies struggle with the problem of disposing of obsolete product in a timely manner. There is inbuilt resistance to reduce price. Unfortunately, slow moving products never increase in value. Instead they sit there month after month consuming cash, taking up valuable warehouse space and incurring inventory holding costs until it is finally scrapped or sold at a large discount, sometimes literally years afterward; a classic case of pay now….or pay more later.

3.Supply Chain Considerations Not Part of the Product Design Process
When product design engineers develop a new product, they rarely consider inventory, transportation, or warehousing issues. Sometimes small changes in a product configuration can yield big logistics savings. This applies to retailers as well as manufacturers. Retailers should not ignore the new product development process in their suppliers.

4.No Supply Chain Strategy
It is surprising that few firms have a documented supply chain strategy. Such a strategy starts with assessing the future needs of their customers. The strategy development process then determines the new supply chain capabilities the company will need in the future to meet its customer’s needs. Eventually specific initiatives need to be chartered to deliver these capabilities. Unfortunately most supply chain organisations are so consumed with the daily battles of cutting cost, managing inventory, and delivering good customer service that that they don’t plan properly for the future, sometimes with disastrous results.

5. Ineffective Matching of Supply with Demand
This problem stems from the classic struggle among functional silos in most companies. On an overly simplistic basis, Sales is driven by revenue generation, while Operations strives to cut cost. Often these goals conflict with each other. Leading firms address this issue by establishing a Sales and Operations Planning process to align the various corporate functions around a plan that matches supply capabilities with demand requirements. Most firms attempt to do this, but most would acknowledge that they still have a long way to go.

6. Physical Network Problems
Where should warehouses be placed in this era of incredibly volatile transport costs? This question is a very prominent topic today. Just a few months ago it seems, transport cost were being driven up rapidly driven by the cost of fuel, driver shortages and other factors. Now everyone expects that situation to return, but who knows when? Logisticians are confused to say the least; and the old answers don’t work anymore. One thing is certain however. All firms should question their physical network configuration under a wide range of future fuel prices.

7. Global Issues and Outsourcing Problems
The global arena offers an even more confusing picture. Many firms are now reconsidering the mad rush to outsource to countries outside Australia and the US, for example. The long supply lines, incredibly volatile fuel costs, exchange rates, the geopolitical risks have all come home to roust. And if a carbon trading scheme comes into play, the ingredients for a paradigm shift in thinking could very well occur. Yet few firms consider the total cost of an outsourcing decision, and even fewer incorporate the additional risk of a global source in their analysis.

Conclusion
Since almost all companies face some combination of these seven issues, a rich database of best practices exists that can be transferred across highly diverse industries. It is critical that all firms engage in networking activities such as forum participation and benchmarking to make sure they understand these best practices. Once they see how other companies address these issues; they need to develop an urgent action plan to implement the essential changes. Supply chain is the frontier of competition. Only by aggressively addressing challenges like those listed above can firms effectively compete in the increasingly intense global environment of the future.

This is third of my three blogs about how to ensure you achieve transformation of your supply chain. Today let’s look at statistics and thoughts from a recent article on this topic by a leading North American publication.

The article cites statistics from various sources, rating the success rate for business transformation initiatives at about 30%.  To put  it another way, 70% fail to realise their full business cases.

Perhaps that success figure is a bit higher in supply chain; however, I would be surprised if it was greater than 50%.  On the positive side, the authors went on to state that organisations skilled at implementation realised nearly one and one half times their expected value.

Before we look at a renowned, well proven model for successful change, lets take a brief look at the top 10 reasons projects fail according to our North American friends.  They will come as no surprise to any who have lived through ‘failed’ projects:

1. Lack of top management support
2. Too much work, insufficient resources, lack of time, budget constraints
3. Lack of knowledgeable and dedicated project team with clear accountability and ownership
4. Lack of a proven project management approach ie methodology, documentation, reporting and communication plans
5. ‘Silo’ approach in use; failure to consider impacts on people, process, systems and equipment
6. Lack of cross functional buy in and end user involvement
7. Poorly defined project timeline and scope (ie no Program Management)
8. No formal transition program established
9. (For Software implementations):  Lack of common expectations of the applications (ERP, WMS, TMS)
10. Lack of willingness and/or ability to change from status quo.

Do any of these sound familiar?  The majority of these reasons fall into the ‘people’ category.  After all, effective program management has a lot more to do than just adding assets, implementing systems or changing processes!

A model for successful change

Many models for dealing with change have been developed over the years, some specifically in a business context, others at a more personal level that have, in turn, been adapted for business use.

The CAP Model

One very influential model developed by General Electric (GE) in the 90′s is called the Change Acceleration Process (CAP). While all the models are similar in nature, the GE CAP model is focused squarely on execution.   The CAP model is an ideal change model, prescribing an 8-step approach, as follows:

1. Identifying the need and urgency for change: Fact-based analysis on problems and opportunities in the marketplace or with respect to competition, customer needs, or regulatory actions.
2. Creating the Vision: Detailing the “future state.”
3. Communicating: Development of a communication plan used throughout the project life-cycle that addresses the timing of messages, documents the level of detail for each audience type, and provides a strong, consistent meaning.
4. Assembling the team (who will do the work): How many, where are they located, the right mix of skills and commitment, etc.
5. Empowering for success (eliminating obstacles, aligning accountability): Executive steering committees are often used; ensuring the initiative doesn’t fail for lack of resources, sponsorship, etc.
6. Mobilising commitment (assessment, analysis, readiness, capability, training): Identify friends, foes, and agnostics towards the new program/strategy; if there are individuals who just won’t support the change, they may have to be let go.
7. Architecting, Designing, & Measuring (the how and metrics): Align the people with the systems of recruiting, training, measuring, and rewarding to drive the new behaviours needed to support the change.
8. Celebrating short-term wins: Recognise accomplishments and milestones

In an environment in which the ability to react quickly to market and competitive changes counts for everything, the ability to get the organisation to move faster than the competition is perhaps the most important key to sustainable success, as GE realised when it built the CAP model under Jack Welch.

Have you used a different change management model?  Any other thoughts, stories, or perspectives on change management?  What do you consider fundamental to successful implementation?

Kind regards

For as long as I’ve worked as a consultant, I’ve wondered why, after completing a successful project, some companies fail to implement the recommended idea or concept, even when the benefits are so obvious, foregoing in most cases an opportunity for substantial cost savings in the process.

I used to ask myself what I could have done differently to influence the organisation to act on my recommendations.

Now I see this as a much wider issue and my attention is on these two key questions:

• How much is change management a part of supply chain advisory services?
• What are the barriers between an idea and its practical implementation?

I have polled people and received all kinds of answers – resource shortages, technically not feasible, market or budget constraints, etc.  These reasons are often valid, but on closer examination almost always appear hollow to me.

With today’s advancements in technology,
I believe it is possible to do practically anything – IT and not IT.

If not a radical change, to at least bring about quantum changes and keep making continuous improvements. I’ve come to the conclusion that most of the barriers are not physical constraints, rather they are in the mind.

It doesn’t matter whether the initiative is implementing the optimal supply chain network, a new ERP or a WMS, the constraints can be prioritised based on availability of resources such as money, people, space, etc.

However, the larger hurdle of a person’s mindset is much more difficult to overcome because it is typically hidden behind all types of rationale, much of which are based on resistance to change and past perceptions rather than hard facts and open mindedness.

Most of us also tend to interpret data and information to justify preconceived notions rather than the other way around. The bottom line is – we do not change our ways easily.

Thinking differently starts with removing the barriers in one’s own mind, including our investment in maintaining the status quo.

This is followed by convincing the immediate team about the idea, then the larger organisation where it needs to be implemented – the last one being the most difficult.

And, ultimately change occurs when the company has a champion within who:
• relates well with and understands the consultant and
• is also a key influencer in the organisation.

Only when these two conditions exist does change happen and happen faster and more smoothly.

The main influencers in the organisation and the champions may be two different sets of people. Bringing about change depends on how effectively the champion can arrange for internal data and get cooperation from the internal team for getting at facts. It also depends on how effectively the consultant can arrange for external data and supporting analysis of facts to powerfully present the champions cause to the influencers.

And while supply chain consultants need to be effective change managers, the next time you engage an external consultant, think about how this change will be managed internally. The consultant can then do the heavy lifting for you.

However, if you are an internal contributor to a project or establishing a project – be clear who the champions and influencers are. This will support you to achieve the end goal you have – effective change.

Your consultant needs to have more effective change management skills than supply chain skills – especially when enaging with your senior management.

I’ll have more to say on supply chain transformation and change in my next blog. In the meantime, I’d be very interested to hear of your experiences dealing with change within your organisations. What has been essential to successful large scale change within your company? Have your supply chain implementations met intended goals?

Until next time,

Richard

So what makes the logistics RFP process unique?  On the surface, a logistics RFP contains most of the key elements of any RFP, irrespective of the product or service required.  What makes it unique is the type and quality of details required; by this I mean how well the current and future needs of the business are clearly defined so that they are understood by the prospective suppliers.

And, while it is important to explain the business requirements in detail, most RFP’s fail when the document is not supported by an accurate data profile of the business activity for which an RFP response has been requested.

In my experience, this is arguably one of the most critical challenges facing any project team charged with responsibility of preparing an RFP.  And while many RFP’s contain adequate data from an historic perspective, failure to forecast future requirements in meaningful terms and portray these in the RFP is another key challenge of the RFP process.

For example, a 50% downturn in sales of a high volume product range can have a dramatic impact on the logistics activity in a 3PL warehousing contract.   And while there are ways to mitigate risks associated with volume reductions, many companies and  3PL suppliers fail to adequately address these risks during the RFP process.

Key Elements

In generic terms, the RFP typically includes:

• an overview of the business issue
• a description of the services required
• detailed business / operational requirements
• a preferred pricing format
• due date
• selection criteria
• time line
• questions
• how to respond and
• point of contact.

Some RFPs contain information on a cost breakdown, approach suggestions, company policies, or other documents that may be required.

Below is a summary of RFP ‘must haves.’

Overview of the Business Issue
There should be a succinct description of the business issue or problem that is driving this particular selection process. It can be in summary form  and should focus on providing suppliers with an overview of the project and why it was initiated.

The first question on the minds of most prospective suppliers is ‘why is the business up for review?’  Clearly, this is a delicate issue, not only for the incumbent supplier (if there is one), but for all competitors participating in the RFP.  All suppliers need to understand that the RFP process, while there are no guarantees, isn’t just about keeping the incumbent supplier honest.

Description of Services
The RFP should contain a brief description of the services that are required. In most RFPs, the services that the company needs are complex and may be difficult to describe in detail. Nevertheless, a good description of these goods or services will greatly assist suppliers in developing an excellent and highly targeted proposal.

Detailed Business Requirements
In addition to the description of services, with most RFPs there are detailed business requirements that need to be clearly outlined in the document. These can include specific operational processes, support requirements, delivery guidelines, design specifications, performance management expectations, etc.

The purpose of the business requirements section is to give the suppliers details of what is needed by the company for this purchase so that the suppliers can come up with a proposal that meets these requirements. This section should take up a good portion of the RFP.

If the requirements do not accurately reflect the company’s needs, suppliers will not present proposals that address the key issues. It is always important to collaborate with the people who are using the services for this selection project to ensure that the requirements are accurate. and

Other Information Needed for Proposal
Often there is additional information that suppliers will need in order to prepare a proposal. This information is usually the information about the organisation’s internal operations that the proposal authors will need may include demand projections, current performance information, internal survey results, etc. The key for this section is to neither provide suppliers with too little or too much information. Rather, it is to provide them only with the information that they need.

Approach Suggestions
For RFPs in which the purchasing personnel know what they require, it may make sense to suggest an approach for the suppliers. Many companies will not have this section because they are looking for creative ways to approach the problem and to not want to force suppliers into a mold.

Performance Key Performance Indicators
If applicable, describe some performance indicators that will be used to measure supplier performance of the contract in the future. This will help suppliers get a quantifiable idea of what will constitute acceptable and target performance.

Proposal Format
Any RFP needs to specify the format and length of the supplier proposals. A highly structured format for proposals makes it easier to compare the responses from suppliers. It will also encourage clarity and provide focus in the supplier proposals. It can also be useful to list the specific business requirements in a point by point format and encourage suppliers to respond to each point.

The RFP should also state the maximum length of the proposal. Having a maximum length will help to reduce the time needed to review the proposal and will also ensure that suppliers keep unnecessary information to a minimum.

We’ve found it very useful to include a ‘documentation response checklist’  of all mandatory items to be included in the proposal.  This checklist will help focus the supplier on the minimum requirements of their proposal.

Due Date
The due date for the supplier proposals should be clearly stated near the beginning of the RFP and in other relevant places. This makes sure that suppliers know when it is due.

Selection Criteria
This is an important section and contains essential information for suppliers. This should clearly state the areas and metrics that supplier proposals will be evaluated on. If possible, the RFP should disclose the weighting that a particular section or topic will be given as a part of the overall proposal score. This weighting is often described as a percentage or in terms of points out of a total possible score. This section more than any other, helps suppliers focus their responses on the criteria on which their proposals will be judged.

Questions and Clarification
Supplier may request clarification or ask questions about even the most well written RFPs. The RFP must clearly outline the method by which questions may be asked and a time period during which supplier questions can be submitted. The contact point for the RFP should then provide responses in written form to the suppliers.

When the response is of a nature that should be of interest to all suppliers, it is helpful to display the questions and answers so all suppliers can see them and to make them a part of the RFP as an update.

Timeline
The time line should display the RFP creation date, the RFP issue date, the time period for questions, the due date for proposals, the selection period, and the contract award date. This should all be communicated as clearly as possible.

Single Point of Contact
The point of contact is the person that handles interactions with the suppliers. This means that all supplier questions and comments about the RFP will be directed to this person. It may also be necessary to include a backup contact person in case the primary point of contact is out of the office or unavailable.

Communication with suppliers is a key issue in many RFP’s and it is critical that a single point of contact with suppliers is established.  Failure to strictly adhere to this is a remedy for disaster – and we’ve heard of too many examples where communication from multiple sources within the buying organisation have compromised the entire RFP process.

Pricing and Cost Breakdown
Another key area in an RFP and one that is a source of many failures relates to pricing.  This is typically the subject of endless debate amongst buyers and should be given careful consideration by the RFP project team. To enable cost comparisons, it is essential that the RFP clearly stipulates that suppliers submit pricing in a specific format and include a breakdown of the costs to ensure an ‘apples per apples’ comparison between proposals.

It is also a good idea to encourage suppliers to submit pricing in an alternative, or ‘non-conforming’ format.  Many suppliers have a preference for a particular pricing methodology and this will allow you to consider other options that may have been overlooked.

Other Documentation
Some RFPs have other documents that need to be filled out as part of the RFP process. These could be diversity certifications, agreements to certain terms and conditions, or other company specific policies and forms. These should also be included with the RFP if they are part of a company’s standard procedures.

Response Method
This will include special instructions on how to respond to the RFP, information on the address of where to send the proposal. It should include the submission format (hard copy, electronic, etc) and specify any additional submission requirements.

Conclusion
If used correctly and in the correct circumstances, an RFP is an excellent tool that your company can use to source third party logistics services from among several supplier offerings. While the RFP process is more time consuming and takes more effort, it can provide you with a unique insight into the project risk and can help the company determine the best way to move forward with a complex project.

Once a company decides to use the RFP process as the selection method, it is important to follow all of the best practices and to write the RFP in a concise and clear manner to ensure that supplier proposals will deliver the best value possible with the most targeted pricing.

And finally – a short blatant plug…
My team at New World have a vast amount of  supply chain expertise and will be delighted to help you manage your RFP process. If you would like to find out more please do not hesitate to get in touch – please email me via this link or call  +61 2 9401 9152.

Thanks for reading!

Until next time,

Richard

Related links
www.rfpservices.com.au

I am frequently surprised how easily and often scheduling in regular reviews of logistics operations falls by the wayside. Such reviews are invaluable and necessary.

Of course this applies whether you outsource or manage your logistics internally, but the impact of a poorly performing 3PL operation is arguably greater for those companies who outsource, so I’ll focus on outsourcing at this point.

As many companies have found, finding a logistics partner who continues to meet their requirements year on year is challenging at best and requires open communication and ultimately, strong relationships and ongoing management of the partnership to be truly successful.  This in itself is difficult enough to achieve and various surveys conducted with companies and their 3PL suppliers worldwide continually confirm that about half of all outsourcing arrangements terminate within 3-5 years.

And, while many companies go on to be satisfied overall at the level of service they receive from their 3PL suppliers, a constant theme plagues even the best 3PL relationships – ongoing cost reduction, or more to the point, (in most cases) cost containment.

AMR Research in the US referred to it a few years ago as the ‘slide to disillusionment’ where, in their experience (and one that I share), many companies achieved cost reduction in the initial 1-2 years of their outsourcing agreements, followed by a steady increase in the years following.

Why does this happen?

Obviously, the reasons are varied and I won’t go into all of these now, but as many companies have learned,  there are a few ‘tools’ that the 3PL client can use to ensure the overall competitiveness of their existing outsourcing arrangements.  In this blog, I’m addressing one very effective strategy for dealing with this loss of competitive service.  An often overlooked tool: The 3PL Audit.

The 3PL Audit

A periodic (typically annual) audit of the 3PL operations and agreement is  the only way to  truly ensure that the initial intent and promise of the outsourcing arrangement remains on track.  The audit should always be completed jointly and it is often advantageous to have an independent, experienced consultant conduct the audit.

Blatant plug aside, engaging the services of an experienced consultant, who is motivated only to bridge any gaps in communication and find opportunities to improve the existing relationship, can deliver lasting positive results for both parties.  After all, an audit requires objectivity. And in the end, an audit of your 3PL  is only as good as the experience, insight, and creativity of the people who are leading the execution.

Try to avoid being one of the many companies and their 3PL partners for whom the audit is often either overlooked entirely or where the client waits until the relationship has soured before seeking help to fix what is broken!  Not unlike any ‘marriage,’ at that point both parties are looking for a way out.  My advice is don’t wait until it’s too late!  The alternative is at the very least, continuing frustration and in some cases, termination of the contract with potentially difficult exit arrangements and service disruptions.

It’s also important to note that reasons for under-performance do not rest solely with the 3PL.  Many performance issues which surface during the term of an agreement have their roots in either lack of proper planning and oversight prior to and during implementation or inaccurate data provided to the 3PL during the initial planning phase of a project.

An effective audit of the 3PL arrangements should include a thorough review of the following issues:

1. Commercial – adequacy of pricing mechanisms, resourcing, improvement initiatives.
2. Operational and cost performance – actual compared to expected; underlying reasons for under-performance.
3. Contractual – inherent business risks, performance measurement and expectations, review mechanisms, accountability.
4. Management and reporting – availability and adequacy of reporting and information systems; account management and relationship.

Frankly the 3PL audit and methodology outlined above isn’t very exciting on the surface.  It is more about the detail behind these points that give them weight and value.  However, such a review is a very effective investment that will help you to avoid the fate suffered many companies and their 3PL suppliers and re-set the partnership for ongoing mutual benefit.

In my next blog, I’ll talk about another popular tool used by many companies to ‘test’ the competitiveness of their 3PL supply arrangements:  The Request for Proposal (RFP) process.

Until then,

Richard

However, in not all implementations are the desired benefits of flexibility, improved service levels and reduced waste evident.  In some industries, implementation is forced upon unwilling vendors by the larger and stronger buyer organisation. If the desired benefits are evident and convincing, then one wonders why it is necessary to force this system on any organisation?

Of the many factors which contribute to a successful implementation of the pull system what are the three factors you must canvas thoroughly in order to determine whether it is right for your business?  Read on …

Inventory impact

At the top of the list is the notion that many people associate pull systems with no inventory. The logic goes something like this: since it is pull based and not dependent on a forecast (which will have an error), no safety stock is required. This is simply not the case. Safety stock is held to account for demand uncertainty. In a push based system replenishment is based on the forecast, thus the amount of safety stock held will be as per the forecast error.

On the other hand, in a pull based system, replenishment is based on actual sales, but the level of safety stock required is determined by the replenishment cycle time coupled with a transit lead time. Just as in the push system, safety stock is required to account for demand uncertainty in the supply response time, which is the sum of these two factors.

If this time is equal to a month, the SS is then as good as the safety stock of a push based system and there would be no inventory cost reduction. For inventory benefits to occur, the pull system must have the ability to respond quickly to any change in demand – short transit time and short replenishment cycle time, which means high frequency of replenishment. Pull systems work well only in systems where both these factors are present. If they are not, other distribution network options may need to be evaluated to determine the appropriate one that delivers an overall reduction in supply chain costs.

Forecasting impact

Another misconception that many managers have is that forecasts are not required because the replenishment is based on a sales based pull system and not on forecasts. In any manufacturing environment forecasting and the corresponding stock build-up is done at some level or the other. In build to stock it is done at a finished goods level, in assemble to order at a WIP level and in a made to order at a raw material level. Forecasts are a prerequisite to this stock build-up and are required for any business to function smoothly without reacting to circumstances.

One of the best illustrations to demonstrate how a pull system works can be found with the humble vending machine. Typically, the customer pulls product from the vending machine – the exact item, quantity wanted, and at the time it is needed. Then, the supplier replenishes only the items that need to be replaced.  By contrast, in a push system, the supplier replenishes the vending machine even if it doesn’t need to be replenished, often resulting in produce overflow and over-inventory.

In a pull based system, the daily replenishment occurs based on stock depletion due to sales. But stock build up itself at the appropriate level is also based on forecasts. The term ‘X days of inventory’ is associated with the number of days the stock will last based on the forecast.

In many businesses, it makes sense to freeze the forecasts for a certain period of time. For example if the forecast accuracy does not improve significantly with coming closer to the month of forecast, there is no additional value added by reviewing the forecast closer to the month. In such cases it is better to freeze the forecast for a longer time horizon – say a year or 6 months and save precious people work time. A system where the forecast is frozen works like a pull based system because the only thing supply reacts to now is the sales at the end of the supply chain.

Transport Costs

Another area of concern with pull systems is that transport costs will increase. This should be expected, as a pull based system works only when the reaction times are short, which means higher replenishment frequencies. Offsetting this would be a reduced inventory requirement and the trade off between the two needs to be determined to decide the optimal frequency level.

The lower inventory cost should more than balance the increase in the freight cost. However, if this does not occur, then the option is to consider alternative ways of controlling the increase in freight costs. It may be better to use a different mode of transport – for example express mode. It may also pay to consider ways of consolidating loads with products from other industries with the help of a logistics provider.

Another opportunity may be to direct ship to customers after consolidating loads across multiple customers, thereby eliminating loading or unloading costs at a warehouse. A conversion to a pull system may not deliver the cost reduction benefit, but is unlikely to increase overall costs if the frequency and inventory level maintained is the same. A pull system may still be advantageous for the other benefits that it provides.

So what are the benefits?

The immediate and probably most talked about benefit is the reduction in inventory. What is probably less considered is that this is brought about only by a significant reduction in the supply response time and without which it is not possible. Supply reliability needs to be high for the successful implementation of any pull based system. In a pull system, there is no opportunity to pass on supply unreliability to the sales forecast inaccuracy, thus key supply issues are exposed.

An organisation should look upon this as an opportunity to resolve its delivery capabilities, which will improve service levels in terms of stock availability and reduce unplanned inter warehouse transfers. This happens because stock is now available to sales people based purely on sales and not on promises or their ability to put pressure on the supply team.

One often overlooked benefit is the huge improvement in planning productivity and efficiency as much less time is spent negotiating the forecast. Normally an organisation spends a large amount of time on this. Paradoxically, the stronger the processes in an organisation, the larger the time probably spent on negotiating, reviewing and correcting the forecast by managers at all levels. The fight typically extends across the supply chain – sales, planning, manufacturing and procurement. This is particularly so where there is a misalignment with the “budget” for which another large chunk of time is devoted to once each year. Without this daily ‘tug of war’, managers can concentrate on the only thing that really matters – focusing on servicing the end customer.

As simplistic as this may sound, for many manufacturers it seems to make more sense to focus on what it takes to implement pull, rather than trying to ‘guess’ what demand will be.  What do you think?  I’d be interested in hearing about your efforts – successful or unsuccessful – in implementing a pull based system in your supply chain.

Until next time,

Richard

But 75 or 80 percent of them are wrong, according to Gilmore.

As you would expect, Dan gets a lot of push-back when he’s written on this topic! The arguments go something like:

1. A general rejection of the observation just because some people don’t like the ramifications; they just don’t want to talk about it;
2. The difference between the top and the bottom is very small, so that makes it seem like everyone is near the top; and
3. Of course everyone thinks they are doing a great job, what would you expect?

Now, by definition, half of all companies must be in the bottom half of performance, whatever the metric and standard deviation may be. (And, not surprisingly, in every comparison survey, a normal distribution exists between leaders and laggards). In fact, very large differences in performance exist between leaders and laggards, in every benchmark.

I’m interested in this topic because, in my 15 years as a consultant, I’ve formed a similar opinion about this propensity to overstate performance when it comes to supply chain. So, when I read Dan Gilmore’s piece, it confirmed my experience.

I understand that ‘everyone is different’ and it is alright to be satisfied with performance ‘in the bottom half.’ It is quite likely that this is the result of doing the best you can given the resources and issues you may be dealing with. But it is easy to confuse that with high level performance in the way that most of us consider it. Many people overstate their health, their finances etc. and the result can be disastrous. I guess I’m in favour of facts and reality (granted not always comfortable) and then the opportunities are clear.

After all, if there is one thing I have learned in my 20+ years working in supply chain, it is this: there are no right or wrong answers; some are just better than others. It is not about right and wrong; it is about being willing to consider alternatives, ‘opening our minds’ to new ideas and input.

And, when it is all said and done, acknowledging that there may be opportunities to improve in ways we may not be aware of  is quite likely one of the biggest challenges many of us face in improving our supply chains.

Food for thought.

Until next time.
Richard

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