I recently had the opportunity to catch-up with a former AMR Research colleague, Roddy Martin.  Roddy is well known in supply chain circles and needs no introduction as an extraordinary thought leader. He recently joined consulting firm Competitive Capabilities International (CCI) as their senior vice president of global supply chain consulting.

CCI is a global operations and manufacturing management consultancy with a 20-year reputation of collaborating with companies to help them become and remain world class. The firm features a stellar group of clients and caters primarily to process manufacturing based firms, many of which are noted global brands.

I always look forward to conversing with Roddy about the challenges and developments related to supply chain transformation, and our conversation was, as always, invigorating.

CCI provides a continuous improvement framework which is termed TRACC, which is not software, but rather a well defined framework of codified best practices addressing the various stages of maturity of a firm’s overall supply chain and manufacturing capabilities.  What I like about the TRACC methodology is that it recognizes that sustainable transformation requires engagement at multiple areas of change, and each stage of maturity is evaluated in the context of management operating practices, enabling systems, and process based tools. The framework is also complementary to the Supply Chain Operations Framework (SCOR) methodology. The TRACC methodology was designed to help firms self-manage their own supply chain transformation utilizing a well defined framework of evaluation, management themes and maturity benchmarks.

Beyond any singular transformation methodology, Roddy and I discussed the challenges that many firms have in building and sustaining the supply chain capabilities required in this new post-recessionary era of different norms of business variability, velocity and rates of change. Too often, supply chain teams have tended to be driven by project-based vs. broader process based initiatives for change.  Roddy and I discussed several examples.  For instance, many companies embraced individual project-based lean or continuous improvement initiatives, perhaps without an overall context of an end goal for cross-functional and cross-business supply chain capability needs.   Similarly, the past severe economic recession drove many organizational teams to be driven solely by supply chain cost saving objectives, sometimes at the expense of overall needs for enhanced agility, consistency in quality, or overcoming the increased complexity involved with supporting global based supply fulfillment needs.  In our overall Supply Chain Matters Predictions for 2011, we noted that these singular cost-reduction initiatives may have taken a heavy toll, one that is manifesting itself in increased incidents of quality process breakdowns and increased supply chain disruption. While the past severe recession had various economic and cost control impacts for business, it should not have served as the singular goal in supply chain process and transformational activities.

Beyond individual initiatives lies the umbrella need for an Integrative Improvement Framework that addresses the end-to-end, extended supply chain, involving internal and external based teams.   This is not software, or another management buzz term, but rather a comprehensive framework addressing the maturity of various process capabilities throughout the supply chain. The reality is that many firms need to once and for all move beyond the functional silos of individual project or functional driven goal performance, toward a more comprehensive framework of joint and complimentary competencies.  The keys to an Integrative Improvement Framework are:

• Top level leadership and commitment to organizational and process change management needs.
• Engagement and participation of all levels of supply chain, both internal and external.
• The notion that this is a journey, with multiple stages of maturity involved in the overall journey.

Supply Chain Matters will provide more ongoing commentary regarding this key topic in the weeks ahead, so stay tuned.  In the meantime, you are welcomed to share your own observations or experiences regarding this need for a broader Integrative Improvement Framework approach to supply chain transformation. Please utilize the Comments section blow this posting.

Bob Ferrari

It is once again time to pen another commentary regarding consumer electronics provider Sony and its ongoing supply chain challenges.  In our last Supply Chain Matters commentary in March of this year, we noted how Sony’s senior management had set a rather aggressive target relative to Sony’s television business, a planned 70% ramp-up in production in the upcoming fiscal year that ends in March of 2011.  This challenge was especially difficult for two primary reasons.  First, Sony had recently outsourced most of its previous owned manufacturing away from Japan, favoring instead an outsourced contract manufacturing deployment model.  Achieving such an aggressive ramp-up of production in a newly implemented outsourced environment would certainly test various aspects of external supply chain synchronization and control.  Second, the demand for high-definition or even 3D televisions has been tepid, especially in the previous core markets of North America and Europe, as consumers continue to cut-back on certain discretionary purchases.

The latest news from Sony reflects some of this reality, and adds an additional supply chain related twist.  The good news was that Sony returned to profitability in the latest quarter ending in September, reporting a $384 million profit compared with a previous loss.  Previous restructuring efforts, including supply chain outsourcing have paid-off in an environment of a stronger Japanese yen.  The company however acknowledged that a tepid market and cutthroat competition may cause its television business to again lose money in this fiscal year.  Sony also raised its net profit outlook by 17% for the fiscal year, but lowered its annual revenue forecast by 3%, a continued aggressive stance on the part of Sony’s senior management. Competitors such as LG Electronics, Panasonic, Samsung and Sharp however remain somewhat concerned about future results in light of an environment of tepid demand, intense competition and rising supply costs.

A Wall Street Journal article, Sony to Corral TV Inventory, (paid subscription may be required) further indicates that the company plans to maintain tight inventory controls heading into the holiday shopping season.  Sony’s CFO, Masaru Kato, is noted as indicating that the company has no intention of being “adventurous” in its supply chain management.  On the one hand, the company is banking on a big December quarter to meet its goal of selling 25 million LCD televisions, but the CFO is cautioning that pursuit of a volume number at the detriment to sound financial performance is not a sound strategy.  Mr. Kato is quoted: “Pushing products into the market without consumers is not the business that we are in.”  The WSJ article further notes that Sony has slashed inventory from 61 to 38 days, however in the September quarter Sony’s inventory stood at 59 days, in preparation for the upcoming holiday surge. Mr. Kato is also cited as indicating that he believes that this level of inventory is not too heavy at the moment, but this is not the time to be “adventurous” in adding further inventory.

In our view, Sony’s television-related supply chain team remains in a rather difficult and tough position.  The previous strategic plan was to drive significantly increased volume growth leveraging a newly outsourced contract manufacturing model.  The reality of today’s global market has added a significant other challenge of increased price competition, as multiple consumer electronics manufacturers compete for a limited pool of potential consumer sales, especially in the upcoming holiday driven quarter.

An environment of severe price competition either means that Sony maintains a pricing model based on consumer loyalty, or that consumers will forego brand loyalty in favor of more attractive pricing choices.  In either case, Sony’s supply chain team has made a bet on hopefully having the right inventory levels and mix to pull-off a robust quarter, and flexibility to respond to any sudden market changes may have been limited by edict.  We trust that teams have the right capabilities to quickly shift existing inventory and synchronize contract manufacturing with geographic and channel market demand.

It will be rather interesting to observe how this newest Sony supply chain capability chapter plays out over the remaining weeks of 2010 and 2011. Stay tuned.

Industry observers are welcomed to add their observations in Comments realted to this posting.

Bob Ferrari

We believe that one of the unique differentiators of Supply Chain Matters vs. traditional media has been our ability to monitor and provide ongoing commentary on supply chain successes and/or setbacks across many industry settings.  We literally tie existing news and developments with some form of context, whether crisis, transformational or renewal related.

Earlier in the year, I penned a somewhat lengthy commentary, Can Home Depot Close it’s Supply Chain Gap? This commentary was on the heels of a Wall Street Journal write-up that noted that Home Depot was challenged with playing catch-up with rival home improvement retailer Lowe’s, and that current executives conceded that because of lack of actions from prior senior management, the company’s supply chain capabilities had a long way to go to become industry competitive. Our previous commentary also noted that previous attempts to implement a “big IT’ an approach that scoped very large projects in scope and budget had very mixed results. Rival Lowe’s on the other hand, practiced a more pragmatic and managed scope of supply chain transformation.

With the endorsement of CEO Frank Blake, the Depot embarked on a $260 million investment in improved supply chain capabilities through 2010, which included moving the majority of inventory through regional flow-through deployment centers, shifting inventory replenishment to the RDC’s themselves. There were also investments in supply chain network design and inventory optimization capabilities, and in January of this year, a $60 million investment in hand-held terminals to improve customer-facing capabilities.

A few weeks back, I made it a point to review Home Depot’s Q2 2010 financial results, and in particular, the transcript of the earnings briefing.  I did not have to go far in the transcript to find mention of the supply chain transformation effort.  Besides a relatively optimistic report on sales and earnings growth in a tough economic environment, CEO Frank Blake noted that RDC’s 14 through 16 were opened, and that the overall RDC network now serves over 80% of U.S. stores.  The goal remains as 100% support by the end of 2010, which is more aggressive than reported earlier in the year. Craig Menear, Executive Vice-President, Merchandising noted that U.S. market share had improved 28 basis points on a 12-month rolling basis, that in-stocks were at record high levels and the combining of import and domestic distribution centers were yielding benefits in more simplified product flow.  Also mentioned was the rollout of a Teradata DCM forecasting tool to enable better inventory decisions and respond more quickly to sales needs at store SKU level.

CFO Carol Tome noted that gross margins had increased 41 basis points from last year, and that retail inventory was reduced $38 million from a year ago. During the Q&A sessions with analysts, Tome was asked directly as to what gross margin benefits were directly related to supply chain.  Her response was that supply chain was doing a great job of driving the business but the true benefits from the transformation will come next year.

Having Home Depot’s senior executive team endorse the initiatives and accomplishments of the supply chain transformation team is noteworthy, and on the surface, a lot of progress is underway.  We trust that this continues, and we extend our Supply Chain Matters ‘thumbs-up’ salute to the entire Home Depot supply chain team for their transformational efforts.   We will continue to monitor this effort and hopefully have more detailed commentary in the coming months.

Bob Ferrari

On his Supply Chain & Technology blog, Christian Verstraete provided rather insightful commentary in his Procurement vs. Supply Chain, what a match posting relating to the continuing conflict of goals among procurement and the broader functional supply chain community, and I cannot agree more with his observations. 

“Unfortunately, we are still measuring many procurement specialists by how much they can reduce the cost of supply,” notes Christian. “Taking an end-to-end look at the supply chain and analyzing the implications of such decisions, are typically not within their scope (procurement) of responsibilities.”

During these past weeks and months I have noted how so many companies continue to set rather aggressive supply cost reduction goals in spite of evidence that the global recession has reached bottom, even with some industries on the path to recovery.  Too often, the pattern seems to be one where incremental savings driven from supply cost reduction initiatives are utilized to fund other business initiatives such as increased marketing or sales activities, or even acquisitions of other companies.  To make matters even more challenging, the increasing need to exploit new growth markets in the evolving global economies seems to be blind to realities of more complexity in overall supply chain risk.

No doubt, during the dark days of the recession when few companies were spared the ravages of alarming reductions in sales volumes, supply cost reductions were a necessity, and obviously non-negotiable.  As we have noted in a number of our own commentaries on Supply Chain Matters, companies managed to maintain some levels of profitability leveraging large scale headcount, overhead and supply cost reductions.  This movement toward even leaner supply chain, supplier oversight and quality management processes has alarmingly increased supply chain risk exposure as witnessed by weekly occurrences of product contamination and recall incidents involving any number of global companies. 

The tides of business change however are moving more towards recovery, and the organizations need to shift focus towards insuring supply chain agility.  Agility includes the sensing of shifts in customer demand, the ability to adapt quickly to changes in supply or occurrences of overall risk.

As Christian further points out in his posting, we should not cast a totally negative eye toward procurement groups, since they are only responding to what senior management has mandated and rewarded.  Christian argues that cost reduction goals must take a broader product life cycle perspective that weighs the total contribution of component parts to end-item and overall warranty costs. That implies a cross-functional collaborative participation that includes product management, supply planning, finance, as well as procurement.  I would also hasten to include a broader cross-functional focus on supply chain risk management.  Too often of late, procurement oriented blogs preach that supply chain risk equals supplier risk management.  It is much broader than just supplier risk identification, and procurement professionals need to either step-up and take broader cross-functional leadership for risk mitigation planning, or recognize that supply chain risk is a cross-functional responsibility with strategic, tactical and operational implications.  Risk is not another chapter of supplier scorecarding, but rather a comprehensive view of the entire supply chain risk exposure.

As Bob Dylan’s famous 1964 title exclaimed, “The Times, They are a-Changin‘ “.   In the post recession recovery, companies will need to refocus on broader organizational measurements and outcomes, those that weigh the needs for cost control with the needs for increased supply chain agility and responsiveness.  We cannot slip back to functional stovepiping, since the overall risks are far more harmful to the overall business.

Where does your organization line-up with these needs?

Bob Ferrari

Note: This posting can also be viewed and commented upon within the Kinaxis Supply Chain Expert Community web site.

Over these past months I’ve penned a number of Supply Chain Matters commentaries concerning Sony Corporation‘s massive restructuring across its electronics related global supply chains. In the last commentary in early February, we noted how this company had cut costs by $3.63 billion USD in a relatively short period of time.  Sony closed 20% of its manufacturing plants, eliminated 20,000 jobs and targeted additional supply chain cost reductions.  The most interesting part of this story thus far has been that most of these radical cuts, by Sony management’s own admission, have been primarily driven from top-down management directives.  There was a further acknowledgement that no business processes or system changes have been involved to this point.

An article in yesterday’s Wall Street Journal (paid subscription may be required) reflects yet another supply chain challenge. Sony announced that its television business, which has lost money for six straight years, will shift to an aggressive attack mode in the coming fiscal year in order to recapture lost market share to Samsung and LG Electronics. How aggressive? The article notes about a 70% ramp-up in production, to exceed 25 million units in the upcoming fiscal year. Once more, the company wants to gain the upper hand in the emerging 3-D television segment, thus one can further speculate that the planned ramp-up will include a lot of new 3-D models to make their market introduction.

The WSJ article specifically cites Yoshihisa Ishida, the architect of Sony’s prior supply chain cost cutting efforts, as the person who will lead this new ramp-up challenge in the television business.  He is described in the article as a no-nonsense cost-cutter who ran Sony’s personal computer business.

In previous commentary, I noted that the real work of supply chain transformation still remains a work-in-process for Sony.  I must now admit, that might have been a heck of an understatement, given these new ramp-up challenges.

I once worked for a very talented CIO in charge of all U.S. IT operations who was challenged by the existing senior management to reduce overall IT costs by at least 25%, and at the same time insure that existing up-time KPI’s remained in the high nineties.  He communicated that challenge to his senior management peers as the following: What you are really asking us to do is the equivalent of attempting to change one of the engines of a 747 aircraft while it is still flying.  Somehow, that same phrase came back to me when I reflected on Sony’s new challenges.

Mr. Ishida and his supply chain team indeed have a significant challenge in light of the need to complete a supply chain restructuring while insuring that the television business meets very aggressive market ramp-up goals.  One would hope that this team can quickly address business process and system changes, particularly in the area of broad supply chain visibility and responsiveness. This is a story that the supply chain community as a whole should keep eyes upon.

If you were asked, what advice would you provide to Sony’s SCM management team?

Bob Ferrari

The January/February 2010 edition of CFO Magazine features an article The New Normal: A Spot Check. The article itself highlights results of a December survey of senior financial executives regarding their views on “the new normal” of post-recession recovery. My sense is that supply chain and supporting IT professionals should take some note of the prevailing finance opinion, since it may bite you in the proverbial butt.

On the one hand the majority of the survey respondents do not see a sustained recovery in product demand occurring until at least Q4 2010 or beyond.  That should be of no surprise, since that sentiment appears to be a cross-functional one, but it was the other two responses that really captured my interest.

When asked if the recent severe economic downturn had led to a worsened relationship with stakeholders, damaged supplier relationships only managed to come in third with a 13% response rate.  A damaged employee relationship seems to be the overwhelming consensus.  I would have thought that frayed suppliers and/or partner relationships would have scored a higher response as well.   Perhaps many CFO’s are shielded from the day to day supplier relationship view?

Regarding the question that the decisions they made during the downturn had any negative consequences, a whopping 66% responded that these cuts had few negative consequences, and 63% indicated that they were well coordinated.  The survey seems to indicate that only 42% feel that cost-cutting decisions will have a negative effect to meet future strategic objectives.

In many industry settings, a lot of cost savings came under the umbrella of supply chain, and it goes without stating by me, that these decisions were painful in terms of lost people and process capability.  It amazes me that the financial side of the house doesn’t seem to see any long-term implications. Continuous cost-cutting within supply chain is an obvious requirement to sustain business in severe economic times, but to believe that prevailing opinion points to minimal consequences is rather startling.

Here’s a suggestion.  If you have not done so already, make sure that you meet and communicate regularly with the CFO and his team.  Take them to lunch, even if it is on your dime.   Educate on where operational and supplier capabilities really stand.

While you think you may be protecting your butt by not making waves, you may be in for a rude awakening when the recovery actually makes its presence.  By then, the prevailing opinion may well be that the supply chain did not respond adequately.

It seems that the notion of the functional stovepipe lives and breathes.

What’s your view?  Do you have the same reaction to these survey results from the CFO side of the house.

Bob Ferrari