When your COO asks you to bring down your operating costs to improve margins, where do you start?
Most of us would begin at precisely the same place. We would meticulously review our own supply chain functional area and determine what is dispensable – for example, reducing our number of suppliers or staff, consolidating incidentals, or forestalling necessary equipment purchases.
But according to the Harvard Business Review, it is rarely possible to achieve cost reductions of 20% or more unless we remove a significant portion of the work content from your department. Doing so would affect not only our own area, but also would reverberate up and down the supply chain. Yet because we all continue to live in siloes, we often do not fully comprehend the impact of our actions on other functional areas within the supply chain.
What is the right way to improve margins? The answer to that question is two-fold: first, we need to understand what demand management is and how it affects the bottomline and then we need to eliminate our siloed thinking and move forward in an integrated and effective manner to achieve organizational goals.
Quite simply, the demand management process is focused on balancing customer requirements with the capabilities of the supply chain. Unless and until we achieve that goal, overall margins will not be increased. Part of this balancing act includes forecasting demand and then synchronizing it with our production, procurement and distribution capabilities.
The demand management process consists of both strategic and operational elements. In the strategic process, the team establishes the structure for managing the process.The operation process is the actualization of demand management. Implementing the strategic process is an essential first step in integrating the shop floor with the other parts of the supply chain. When that is accomplished, day-to-day activities can be executed on an operational level.
To truly ensure that the demand plan is fulfilled, a process team of managers from all business functions – including finance, production, purchasing and logic – must drive the correct information in an integrated manner to ensure that every organizational function is working in harmony. That is what we refer to as the supply chain. This multi-discipline process team is charged with developing the procedures at the strategic level, ensuring they are implemented, and maintaining day-to-day responsibility for managing the process at the operational level. To do so, the process team must execute the forecasting and synchronization as it was designed at the strategic level.
Achieve the Plan and Don’t Deviate Is All Well and Good in the Perfect World But…
In the real world achieving the plan without deviating is an entirely different matter. Integrating and implementing supply chain management processes is a constant struggle, and the main reason is that companies mostly operate through siloes. Each silo is invested in its own personnel information systems (e.g., Excel) or each business unit coalesces around its own best of breed (BOB) software, pretending to integrate it with that of other departments. No surprise, this kind of communication inevitably fails because the siloed business functions confuse the facts with their own specific interpretation of the facts. It gets worse:in these times, the majority of big to middle-sized organizations possess ExcelReplacement (ERP) systems. But it’s impossible to simply replace Excel or believe that all facets of the business supply chain can be integrated in this manner.
To Truly Integrate, We Need Just One Set of Data Driven by the Demand Program.
Let’s look at what a siloed world looks like in reality. In this world, inventory levels are greater than they need to be to hide our siloed inefficiencies.
Obviously, this does not reflect an efficient process. There are just too many different agendas at play and too many different definitions of efficiency, according to department.
Take the shop floor plan, for example. Generally, the shop floor starts out in sync with the demand plan. A group of planners huddle together and interpret the demand signal using their own tribal knowledge. Problem is, since they are not directly integrated with the demand signal (which is not in the same system they are working in), they need to create a spreadsheet to integrate their interpretation with another area’s demand plan. As a result, they are forced to replicate almost everything in the spreadsheet and then manually enter the spreadsheet outputs into the SAP system. Not good.
You would think that planning would be integrated with procurement and that is true to some degree–but not nearly enough Already the confusion that occurs when we confuse facts with interpretations has begun to wreak havoc, slowing down procurement.And so it goes all the way up and down the supply chain. As a result, the purchasing department, who believed they were buying into the demand management plan, miss the mark because the plan has changed—without anyone knowing it.
Without a single source of truth, the supply chain can quickly dissolve into a form of chaos. As production strives to keep lines running at top capacity, they end up making more product than needed in order to use up spare materials. That contributes to material shortages and half-finished jobs. And THAT contributes to the churn that follows on the shop floor. The result is that expediters, fire fighters, and overtime heroes strive mightily to get the original plan and actual attainment aligned–after the fact. We have seen the deviation between plan and attainment range from 50% to 70%, all because some team members preferred too and were allowed to use their own version of the facts.
If everyone adhered to one system of record, all this inefficiency and lack of productivity could be avoided, and the supply chain could run like clockwork. To put it simply: running the supply chain with personal information systems does not work. SAP is the only way to align the supply chain. Consider: if you purchase a multi-million-dollar asset and then don’t use it—or only use 30% of it—what does that convey about your organization’s true commitment to optimizing the investment already made inSAP?
How One Major Manufacturer Freed Itself From Multiple Points of Truth
To illustrate how supply chain transformation can occur by embracing SAP as a single source of truth, we need only look at Moen Incorporated, one of the world’s largest manufacturers. Among the challenges that Moen faced were:
- Limited ability to produce a dependable Available to Promise date, negatively affecting Moen’s ability to increase service levels
- Excessive working capital tied up in inventory
- Limited understanding of SAP and its functionality and analytic capability
- Unclear and differing business processes across the plants and organization
- Component constrained production schedules
- Constant “outside of the system” practices to procure materials and production orders
- A lack of planning inside existing and standardSAP functionality
Sound familiar? For all too many of us, it is.This lack of trust in the system leads to ineffective materials requirements planning (MRP)-generated production, planned orders and purchase requisitions.When an organization is unable to measure the actual costs of a production run and margins, how can it measure actual plan and schedule attainment?
Fortunately, Moen was dedicated to supply chain transformation and utilized our oVo®methodology, focused on improving service levels, optimized inventory, capacity and production planning and data visibility. By embracing ownership and accountability of master data and strengthening the commitment to understanding and using existing SAP tool, among other measures, Moen began to recognize several powerful benefits.
- Schedule attainment for the aggregate Sandford Plant soared from 59% to 93%
- Inventory was reduced at the same time customer service levels rose
- 25%reduction in WIP
- Total inventory reduction of 15%
- Improved and standardized processes resulting in a reduction in planning and scheduling time
- Year over year cycle count adjustment improvements of 55% reduced scrap
- Improved capacity and component constrained schedule to production
The result was a transition to a world-class supply chain delivering improved performance by adhering to its demand management goals. This supply chain transformation, while specific to Moen, is not unique.
The delta of getting to perfect demand is meaningless if we are unable to get our supply chain in order. And that means integrating your supply chain from top to bottom, driven by one system of truth. When we are joined at the shelf, not the hip, the result is high inventory costs and inefficiencies. We can do better–when we synchronize together, with SAP at the core.