Four Deformations of the Apocalypse – By David Stockman

[Editors Note:] The inventor of supply-side economics discusses the failings of tax-and-spend Democrats and spend-without-taxing Republicans… how “Reaganomics” is not what was supposed to happen…

IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.

More fundamentally, Mr. McConnell’s stand puts the lie to the Republican pretense that its new monetarist and supply-side doctrines are rooted in its traditional financial philosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

More

“Supply Chain Manger, Outsource Thyself” –Socrates

One upon a time, companies implemented “MRP” systems. They used these systems to plan the entire materials and manufacturing cycle; from forecasted demand, through procurement and assembly, to shipment out the door and delivery to the customer. About 15% of these companies succeeded with excellent financial performance, while the balance plodded along… either as “average” or failing miserably in their results.

Then MRP became MRPII by integrating finance; and still later MRPII became ERP by integrating everything else. With integrated financials and the incessant crooning of the software industry, the fiction was created that “information systems” was synonymous with “financial reporting”. Operations became marginalized in the system selection process and the sales pitch from ERP vendors continued further down the path of finance and financial reporting. This left finance in the precarious position of being responsible for an “IT” project they knew little about.

Thus, IT departments at many companies found themselves reporting into finance with their priority being financial reporting. IT protested with an “information age” marketing campaign that fought not only to preserve their own autonomy, but to elevate IT to a functional peer of the CFO. The board-level position of CIO was invented; along with  its byproduct of information management for the sake of information management… not accountable to sales, operations or even finance. With a gold-plated job title and a seat at the board of directors, expensive IT projects and preserving and repairing the network became more important than executing business plans and delivering cost-competitive quality products on-time to customers. Do I exaggerate? Compare the size of IT professional staffs including consulting budgets against Operations professional staffs (indirect labor). Within manufacturing companies, IT used to be 10%-20% of operations. Now it is often equal-to or greater-than. [Note: we are comparing IT to operations at manufacturing companies, not businesses that exist primarily as a website and their web strategy is their business strategy.]

And even today, the core MRP planning & execution functionality continues to decline in relevance compared to the ability to create spiffy financial reports or staff large, complex IT project organizations. In fact, many companies are now saying “why bother” to the MRP engine and the vestiges of operational planning and execution systems. We now see a whole generation of ERP products where manufacturing, operations and execution are add-in modules; optional and poorly designed bolt-on functionality.

Nowadays, even if operations is consulted on system requirements for the planning, execution and control of the order to fulfillment process (supply and demand chain), there are few left within its ranks who could even define this. The current generation of operations managers has come to the helm in the age of outsourcing. Many have never managed the actual manufacturing processes they are held responsible for. Fewer still have managed any materials functions beyond purchase orders, contracts and a bit of inventory. They admit freely that this is not their expertise, and see the end-to-end supply chain as a project management problem to be controlled with MS Project, Excel, PowerPoint, KPIs, Metrics and Dashboards. But when that little line on the dashboard wiggles into the red zone, they don’t know what to do other than call a meeting and have the “other” person commit to yet another project plan to get back on track; with of course the inevitable rolling commit date. This is what currently passes for “management”.

Project Management has triumphed over operational knowledge, impeccable execution of business objectives and resolute accountability. KPIs, dashboards and metrics matter more than business acumen, technical expertise and process depth. The blind lead the blind, with the senior management team seeing operations as a necessary inconvenience that stands in the way of traveling the road to greatness demonstrated so clearly in their slide ware. History would prove them right: Few companies have ever run MRP-centric operations & supply chain functions well, and reaped the full benefits that the tool set offers. But this does not eliminate the need for the tools.

In this environment, astoundingly few people can dig down to the fifth “Why?” of causation, and propose game-changing solutions or radical process integration. With the outsourcing of manufacturing, OEMs are no longer staffing the problem-solving and solution-generating positions of material planners, production controllers, master schedulers, and the ops engineering functions… industrial, manufacturing and component. Instead, everyone is a program manager hiring program managers to manage ever increasingly more complex programs. The “how-to” brain trust is decimated: “Supply Chain Manger, Outsource Thyself” –Socrates.

Even the consulting industry has bought into the model. Many consultants recommend software solutions that in turn require the maximum number of consultants to implement; and then they recommend never-ending consulting projects to sustain the software: Are SAP, Oracle and Dynamics really the best one-size-fits-all solution; or simply the best revenue stream for the outsourced operations industry? Does it matter to even ask this question since no one on staff is capable of arguing with the outsourced experts or proposing viable alternatives?

Needless to say, for every dollar a company spends with a software company to buy its ERP program, it finds itself paying another six to a management consultancy to adapt the program for its factories. No wonder these consultancies speak of ERP in reverent tones.

–The Economist, July 5, 2001

In reality, outsourcing hasn’t reduced indirect overhead expenses; it has simply shifted the budget dollars from operations to the triad of finance, IT and consulting. These three groups have taken the budget and tool set; bloating their staffs and leaving the VP of Operations without the resources to be effective. Add to this that Operations has been out-politicked at the executive level by the greater prestige of every other function… sales, marketing, finance and engineering. They all have a professional mystique that when compared to operations makes it seem dirty; the least desirable and most trivial of functions— only worthy of further outsourcing and budget cuts. Disagree? Check out executive compensation for publicly traded companies by job title.

The trade press and scholarship say that we are in the age of globalization, the competitiveness of supply chains and the best end-to-end business processes. How does this match up to the organizational clout, salary compensation and operating budgets of operations & supply chain management when compared internally across functions and externally to benchmarked “best in class” competitors?

Like every other resource and expense a company has, too much or too little operational capability will not make the customer happy. Operating costs go up with too much; performance (schedule, responsiveness, product cost and quality) goes down with too little. Applying the correct amount of operations resources to the most innovative and efficient process delivery systems is what the winning supply chain is all about. If Lean teaches us anything, it is this.

To summarize so far…

• An operations and supply chain management group must have sufficient resources to hold the supply chain accountable for performance, and to be held accountable themselves. If senior management starves operations, then accountability will be outsourced and excuses will prevail.

• Ultimately, it is more fun, less stressful and pays better to crank out financial models and product marketing plans for other people to perform to than to execute them yourself. Operations however must execute flawlessly within the constraints, plans and wish lists of every other organization. Good Ops people are an unusual breed; possessing both technical knowledge and the competitive drive to innovate and succeed. If you meet them, they are worth remembering. Organizations staffed with such individuals will triumph over those that have atrophied into the program management model of outsourced accountability.

• The fully integrated supply chain must have functional experts capable of recognizing and driving innovation and world-class change. Reengineering, Lean, TOC and Six Sigma solutions may temporarily improve some existing business processes; but they regress from “culture” to “project” without a team capable of ownership and an ongoing spirit of creative problem solving. If you are a hardware product company, are you “in the game” or out? If nothing is to be your core competency, fixed cost or strategic advantage; then you have regressed to a marketing channel that selects ODMs for your products. Please call yourself what you are – a retailer. Or, to paraphrase Henry Ford in a moment of sarcasm, “Why don’t we close all of the factories down. Think of all the money we will save!”

All of the original TPS/JIT/TQM/Lean companies from Japan and the U.S. that are held as examples par-excellence use core MRP functionality to estimate component volumes, communicate forecasts to suppliers, negotiate current and forward pricing, plan product transitions and determine medium to long term capacity. Even without the internal factory, MRP remains the essential operations simulation tool for managing the supply chain. But how do you convince a project manager of this? The rarest of jewels is a VP of Operations from the program management / KPI generation that is convinced of this imperative and capable of winning this budget & capabilities argument with finance, IT and the board.

But perhaps the days of “big” ERP systems are behind us. If we don’t need core MRP functionality integrated into “ERP” software, per se; then finance buys a finance package, engineering buys a lifecycle package, sales buys a customer relationship package and ops buys a simulation, planning, execution and control package. With the number of excellent third-party applications increasing and the prevalence of ODBC, API and data warehouse integrations; the best of breed parts are probably greater than the currently bundled whole. With or without a core ERP system, operations will need the extensive simulation planning and measurement capabilities of MRP. Unbundled systems may fill this requirement in modeling flow, capabilities and execution through highly integrated supply chains. It is this process flow that makes us money and retains loyal customers.

For most of our history, executive management managed the performance of functional silos and the handoffs between silos. Then, we recognized that it was the process of adding value itself that needed to be managed. When that process of adding value was extended from within the four walls to the suppliers; supply chain management was born. And since the process isn’t over until the product is in the customer’s hands and the money is paid, the supply-demand “chain” or “network” came to be.

Our understanding of the situation has been deepened by this new perspective, while our ability to execute ever more reliably and cost effectively has atrophied due to the herd mentality of outsourcing everything down to the brand. Few are left who can drive the train of planning, execution and control. Fewer remain who understand how to apply the brakes or switch tracks. Fewer still foresee the game-changing innovations before they become me-too solutions… dumbed-down and pre-packaged with everything you need, except for the knowledge and tenacity to implement them. Who is left that understands why these “lose 20 pounds of inefficiency without dieting or exercise” solutions have failed repeatedly at their own company and across their industry? But from the seller perspective, that’s a buyer problem.

Every nation, every culture and every person places pride on innovation. We inherently trust that innovation will save us and our children from hamburger-and-haircut jobs that can’t be outsourced to low-cost countries in this globalized world. Yet we go to work each day outsourcing our brain trust; and expecting to be rewarded for it.

We have broken the trust that Henry Ford so eloquently expressed: When asked by a reporter, “Why do you pay your workers so much?” he replied “So they can buy the cars I make.” From the early days of the industrial revolution forward, it was recognized that if you simply made a worker do more for the same money, or eliminated jobs thanks to their improved productivity; an implied contract was broken and workers would cease to be the source of productivity improvements as change would be against their self interest. For a number of decades, productivity improvements translated into an increased standard of living for the average American. This is no longer true. The standard of living has continued to decline since the 1970s.

When the age of globalization arrived, the rules changed. Businesses could now take the position, “accept a lower wage for increased productivity, or the job can be moved to another country.” We preached worker empowerment while practicing a psychological war of coercion. In this spirit of fear, and sometimes blackmail, we have drained trillions in profits and livelihood from this country unnecessarily.

Why do I say unnecessarily? Because while U.S. automakers were outsourcing to China; Japanese automakers were increasing production in the U.S. with zero Chinese content. Let’s see… cost, quality, profit; hmmm. The death of American manufacturing was largely a creation of the trade press, me-too academics, outsourced manufacturers, for-profit consultants and inept management that lacked the expertise to argue back in total cost models, innovative process changes and customer satisfaction. Ultimately they succeeded in destroying our capacity to hire domestic talent capable of competing with overseas talent.

We tell our children to go to college for a better life; while going to work and outsourcing our engineering, finance, legal reviews and medical diagnostics to low-cost countries. We emulate “successful” companies that have outsourced everything right down to their IP and innovation (ODM model); and exist as nothing more than an empty shell of a brand, a web page and a sales channel. Eventually, someone else will figure out that a new brand name launched with a half-billion dollar marketing campaign and a web sales channel will take away the remainder of the jobs and profit. Throwing rocks at empty shells is only a matter of time. Dell… you’re next.

We must win the battle of prosperity wages for the average worker (buyer) and reasonable returns for corporations (seller). Productive sellers and qualified buyers are what create an “economy”. In this globalized race to drive everything to a uniform poverty level, we must compete on innovation; not simply cost. As someone once said, “If we all go shopping at Walmart, we will create jobs at Walmart and our children will work at Walmart.” Too many of our businesses have copied bad practices in the name of best practices; short-sightedness in the name of long-term goals. Cost is important. So is economic prosperity, human potential and viable corporate existence. We can achieve this.

Abandoning the fight for intellectual property and innovation will not save us. Outsourcing the competency to manage outsourcing will not save us. Threatening our workers with their jobs and our countries with abandonment will not save us. Retail, hamburgers and haircuts are not a viable end-game for a new American economy.

We are in a battle for the executive mindshare of corporate America. To-date, we’ve trained ourselves to expect failure from insourcing and nearsourcing instead of demanding greatness from each other. Nothing remains our core competency; everything is for sale. After all, shouldn’t everything be outsourced and variable cost? No it shouldn’t: we’ve abandoned our friends, neighbors and children while in blind pursuit of reducing the American engineering & manufacturing economic machine down to three program managers and their PDAs… with direct deposit tax-free to the Grand Caymans.

I have worked in contract manufacturing and competed successfully for U.S. production against China and Mexico. Frankly, for many products, it just isn’t that hard to win. What is lacking is the will on the part of management to question the wisdom of the trade press, gain expertise on the alternatives and intelligently, creatively pursue opportunity. My first boss kept a plaque on his desk: “Luck: when preparation meets opportunity.” If we no longer prepare, we can’t recognize an opportunity that runs counter to the herd mentality de jure. We can’t be “lucky”.

Why does localized manufacturing make sense?

• The U.S, dollar will continue to decline against growing economies; therefore imports will cost more over time.
• Materials are largely at a worldwide commodity price. Offshoring holds no advantage on globalized material costs.
• Offshore is slower to respond to market changes and the demands of key end-customer accounts; leading to lost profits, higher inventory and more frequently upset customers.
• Freight, fuel and offshore labor costs will continue to rise in absolute and dollar-denominated terms.
• Financing four weeks inventory on the water or paying for that 747 shuttling parts back and forth. You pick.
• Duties, Tariffs, etc.
• The ongoing cost of flying technical staff and management to the site.
• Time matters: customer lead time, customer demand change responsiveness, cash cycle, etc. Building near the end-customer market achieves speed and responsiveness without inflated inventories or long manufacturing and transit times.
• Reducing leadtime is the ultimate fix to forecast error and its consequences: lost sales, slow turns and high excess & obsolete. Predicting demand for the coming week is inherently safer and more profitable than committing against the coming quarter or the coming year.

The only meaningful advantage to offshoring is labor content; which is typically a minor portion of the total cost. This is more than offset by all of the other cost components above in all but the highest volume consumer products, where fractional pennies matter. Material and equipment are the same globalized cost. Facilities (including taxes and fees) and a few artificially subsidized commodities may be cheaper; but much of this “benefit” is achieved by avoiding U.S. environmental regulations. This will become more difficult and less acceptable to corporations and their customers in the “green” age. Environmental standards will increase around the globe and become more uniform. Prices will become more uniform.

Ultimately, we are moving into an age were factories will be built near the markets consuming the product rather than in a low-cost country removed from the end market. Fuel, transportation, logistics, and “movement” itself (muda) must be performed locally for service to increase and inventory related costs to go down. The “Global” supply chain will have the glamour of a gas-guzzler when fuel costs double, and double again.

Maybe Henry was right: Products will once again be built in local markets and provide well-paying jobs to local people who can then afford to buy them. Perhaps a good idea can be reused once every hundred years or so. Or as Bill Clinton more famously said, “It’s the economy stupid.” An economy requires sellers that are profitable competing for buyers with disposable incomes. It is in the interest of everyone to achieve both.

© 2009 David Ginsberg

[Filed in the Strategic World View section]

The Panacea of VMI

Much of what is called Vendor Managed Inventory (VMI) in the industry is not really managed by the vendor. The specifics of VMI have become diluted as the term continues to be thrown about generically for every supplier collaboration program inside the four walls.

Let’s look at some of the more common inventory management programs found in manufacturing facilities; and what differentiates them:

• Min/Max: (Line-Side or Stockroom) this program can be managed by either data thresholds or physical/visible replenishment models. In both cases, the customer typically purchases the inventory at the time of receipt.

• Kanban: Similar to min/max in that a two kanban system is effectively a min/max system. However, min and max have been separated into two physical containers creating visual triggers for replenishment.  The return of the empty kanban container or an equivalent data signal is what triggers the supplier to deliver additional parts. Kanban quantities are typically computed to meet the lean inventory requirements of flow scheduling; or alternatively the supplier’s min/mult package quantity. Kanbans can also be used to physically deliver materials from the supplier to the stockroom or the manufacturing floor; or internally from the stockroom to the manufacturing floor. Direct delivery to the manufacturing floor is typically lowest total cost and fewest transactions.

• Bonded Inventory: (aka Sequestered) Inventory is held at the supplier in two forms: physical or computer segregated on-hand balances reserved for one customer; and/or “pipelined” inventory timed to arrive recurrently from the manufacturer. Both physical balances and pipeline allow the manufacturer to order materials to a perceived lead time that is significantly shorter than the factory’s “build from scratch” quoted lead time.

• In-Plant Stores: (aka Hub, Out-Plant) A stockroom or warehouse in which the supplier staffs and owns the materials, and is located in or near the customer facility. The supplier stages materials in this location but cannot deliver or invoice until a demand signal is received from the customer. Typically the stocking levels are expressed as so many days/weeks of forward demand from either an MRP share or production scheduling feed. The supplier will treat this inventory as “bonded” and “pipelined” per above.

• Consignment Stores: An In-Plant stores, but staffed by the customer. Typically the customer will provide the supplier with daily/weekly transaction summaries on the materials taken. This is lower-cost to the supplier but requires a tremendous degree of transaction control and accuracy to mitigate downstream liability and “trust” issues with the supplier.

• VMI: The In-Plant Stores or Hub model, but with the added requirement that the supplier is responsible for monitoring factory usage, projecting forward demand and providing inventory to satisfactory negotiated service levels.

It is this responsibility for forecasting and service-level replenishment that differentiate VMI from prior models. Currently the term “VMI” is bantered about loosely for any and all of the above supplier/manufacturer relationships; but it is an inaccurate use of the term without the required shift of demand management from the manufacturer to the supplier. This is a key point with tremendous ramifications.

It is this responsibility for forecasting and service-level replenishment that differentiate VMI from prior models.

VMI was originally developed as a replenishment method for independent demand items; such as blue jeans sold at Wal-Mart. The underlying assumption was that “Levi’s” would be able to replenish and aggregate current demand and forecast future demand better than either the local store or corporate purchasing organization. This is due to their familiarity with the overall market; including seasonality, fashion trends and marketing promotions. They can overlay their expertise on top of point of sale (POS) data supplied by the retailer. The same can be said of sunscreen sales during a heat wave or mosquito repellant after summer rains. The product marketing team at the manufacturer holds the advantage over the retailer on predicting demand.

These end products, referred technically as “independent demand” items, must be supplied by their factories at lead time; or supplied immediately from buffer inventories that are then replenished through scheduled pipeline orders or at lead time. In any situation where the demand inside of lead time is greater than the buffer quantity (i.e., finished goods); forecast data must be used. The VMI model thus shifts the responsibility for forecasting and inventory replenishment to the party most familiar with the item and its market: the supplier. This often makes sense in retail.

However, in the Electronics Manufacturing Services (EMS) industry, VMI is being used to manage “dependant demand”. Dependant demand items are those that have a direct relationship to a higher-level assembly. For example, if I am building one car then it is certain that I will need one engine, two doors and four tires. The engine, doors and tires are “dependant” on the assembly of one car.

A statistical model calling for 0.98 engines, 2.23 doors and 3.86 tires does not increase accuracy. The suppliers of engines, doors and tires are not going to be able to fulfill dependant demand any more accurately than the manufacturer was able to do. In fact, they will most likely perform worse.

VMI fixes nothing on dependant demand items. It is a convenient tool for masking the problems and inefficiencies of a supply chain organization by outsourcing apparent accountability. It is actually counter to the JIT philosophy of lowering the stream, uncovering the rocks and fixing the problem. It simply blames the supplier for the rocks and makes them pay for the water.

Since inventory has been shifted from manufacturer to supplier; “VMI” amounts to exchanging internal inventory value and carrying cost for higher supplier unit costs or cost of capital charges.

 VMI for “dependant demand” items is both a strategic blunder and a tactical nightmare. Sharing current transactional usage data instead of forward bill of material consumption is a recipe for failure. Having suppliers responsible for building statistical forecasting and replenishment models on top of current consumption data, instead of providing forward-looking bill-of-material demand, replaces good data with less accurate statistical averages in all but the most steady-state production. A “VMI” model in the electronic component supply chain must be founded on the sharing of accurate MRP data for planning, scheduling and capacity; combined with point of use demand for delivery and payment.

 But this begs the questions; “If your data is accurate, then why go to a VMI process? What value can the supplier add to demand management with a VMI program?”

 VMI, if implemented on dependant demand items, is nothing more than a shift of ownership of inventory to point-of-use. In this sense it is nothing more than the latest synonym and buzzword for the in-plant stores and bonded inventory programs of the past. VMI in manufacturing is a cash-management tool, not the material planning and control solution that it is for retail end-item sales.

VMI in manufacturing is a cash-management tool, not the material planning and control solution that it is for retail end-item sales.

 In the incredibly complex environment of electronics manufacturing the distinction between dependant and independent demand must be understood. Then, the right tools can be chosen for the job. For managing dependant demand items consumed in the manufacturing process, “VMI” is not the right tool. This is because the burden falls on the manufacturer to provide current consumption and forward scheduling bill of material demand; not the supplier,  Can collaboration take place and service levels be agreed to? Of course, but the manufacturer must take the lead in this dance.

 If manufacturers take ownership of the data quality they share with component suppliers, then “VMI-like” programs can be adopted as the cash management tool they are; without needing to pretend that they are a demand fulfillment method strategically greater than in-plant stores, kanban or min/max… or that they have any bearing on improved customer service beyond the capabilities of these earlier models.

© David Ginsberg

[Filed in the Tactical Lean section]

 

“…an interesting thesis which is certainly to a large extent right.”
-Vice President Manufacturing and Logistics, Nokia Siemens Networks

The Secrets to S&OP Success

By Maha Muzumdar and John Fontanella — Supply Chain Management Review

Ask any supply chain professional this question: Is sales and operations planning (S&OP) important to your company? The chances are good that no matter what type of company they work for the reply will almost always be “Yes!” But if this attitude is so commonly held, why are so few companies willing to step forward and say they are actually doing something to institutionalize a strong S&OP process in their business?

It is no secret that most companies struggle with even the basics of balancing supply and demand in their supply chains. Retailers have excess inventories for some products while facing high product shortages for others. Consumer products companies are challenged with building ahead of the seasonal curve, which is based at best on questionable histories and more often on uninformed hunches. High tech and industrial companies work hard to put master plans in place only to have them unravel in the face of customer and supplier churn and uncertainty. And distributors must balance not wanting to have an oversupply in their distribution centers against the hefty discounts that usually result from carrying too much inventory of their product in the stores. Even worse, stories abound of companies that were not prepared for the demand created by highly discounted promotions, resulting in product shortages and a record number of unsatisfied customers. 

Could all of these symptoms have a common root cause? Could significant progress be made in reducing these undesirable effects in so many companies? Certainly all supply chain professionals and executives want to reduce uncertainty and continuously improve how they manage risk. If there are so many opportunities for improvement and so much support for S&OP, what are the obstacles and what are the steps to overcome them? In this article, we address these key questions.

More

Character

Author’s Note: This is edited from a year-end letter written to all employees after a long and difficult economic period:

 

We must always remember that any competitor can buy four walls, an ERP system and some capital; and call themselves a manufacturer. What makes a company different is its people. Our suppliers and our customers continually remind us that our people are different and better than at the competition. While there are many reasons for being held in higher esteem, first among them is “character”.

When we hire, we have endeavored to hire primarily based on character; with resume and education being secondary considerations. And once people have come on board, we have tried to provide an environment that allows the cultivation and expression of character to flourish.

Character does not mean being stubborn or arrogant about ones values or opinions. It is about being true to our values and valuing other human beings that are true to theirs. It is about doing the right thing because it is an expression of who we are. It is about doing our best because we want to manifest what we are inside. It is both self-expression and allowing others to know who we really are. It is often called “integrity” as our inner values and outer behaviors are integrated- not in conflict with each other.

Character does not mean being stubborn or arrogant about ones values or opinions. It is about being true to our values and valuing other human beings that are true to theirs. It is about doing the right thing because it is an expression of who we are. It is about doing our best because we want to manifest what we are inside. It is both self-expression and allowing others to know who we really are. It is often called “integrity” as our inner values and outer behaviors are integrated- not in conflict with each other.

People of character often have difficulty with conflict. Not out of fear for their job; but because they don’t want to hurt other people, or harm themselves by lowering themselves to the bad behavior of others. But faced with being untrue to themselves or dealing with unpleasant situations, they take care of business. And they expect the same towards themselves.

Character is different than friendship: it expects things that friendship would shy away from. Character does not place much value on titles or authority, though it values immensely courtesy and respect towards others. Character does not say “yes” just to appease others, or the boss, when saying yes would cause harm. It communicates and trains; escalates and resolves.

Dealing with people of character can be an annoyance and a real pain. But it also stops the reactionary and “forgetful” dead in their tracks; forces conversations, creates new ideas and new solutions- and keeps the whole organization on track. I wouldn’t have it any other way. Thank you to all of you who are true to yourselves and open & honest with me.

Thank you for saying “no” to me, to the management team and to each other; for being demanding on accuracy and completeness; for requiring explanation when you do not understand; for pointing out process problems and mistakes; for looking out for each other and doing it with good cheer- and for keeping the best interests of our company continually in mind.

You have created a unique miracle in this “cutthroat” industry and you should be proud of that accomplishment. At what competitor have the traditional departmental rivalries been overcome? Within the walls of our competition; purchasing, inventory, receiving, manufacturing, material planning and production scheduling, etc. are mortal enemies of one another in a never ending cycle of finger pointing, ill will and verbal abuse. And while we may have a bad day or a particular disagreement; there is an overriding mutual trust, cooperation and respect. You achieved this miracle. No one else could have.

 

© David Ginsberg

[Filed in the Leadership Direction section]

Forecasting: The Black Hole of Time and Money

Buy our new and improved forecasting solution for only $540K! Works on Blue Jeans, Integrated Circuits, Stocks and Bonds! Predicts customer demand before they even know what they want! We know the future – How about you? Integration Teams standing by! Call now!!!

 

For many years now, the forecast has been at the heart of operations management and supply chain solutions. Many vendors are hyping the advantages of their forecasting methodology and their tools that integrate forecasts across the supply chain. These solutions usually come with extraordinarily expensive price tags; and an army of consultants & integrators praising their merits and signing-on for year-long implementations and perpetual customizations.

However obvious this might sound, predicting the future is first and foremost a prediction- it is by definition wrong. It will always be wrong. We could spend the next twenty years exactly like the last twenty years; arguing about forecasting models- and still improve nothing. While reducing forecast error is a worthy goal, what is the relative contribution of forecast error to the total error in the supply chain data?

While reducing forecast error is a worthy goal, what is the relative contribution of forecast error to the total error in the supply chain data?

Shared forecast data will typically be prone to two types of errors. First, the prediction of future requirements will be wrong, resulting in “statistical deviation from forecast”. Second, inaccurate and miss-timed data records will propagate bad information and faulty demand throughout the entire supply chain. While deviation from forecast increases over longer time horizons, faulty demand data has an immediate impact on supply chain deliveries and output. This immediacy and the high-probability of having multiple errors in the perhaps thousands of records and transactions that comprise a single product make data management far more critical to operation’s success than marginal improvements to forecasting deviation.

The forecast software solutions industry typically neglects to tell operations customers that automated forecast sharing will propagate errors throughout the supply chain instantaneously; bypassing all internal process safeguards and human reviews. Forecast integration can actually reduce the performance of a supply chain by delivering unneeded product faster and postponing the delivery of true requirements thru false messaging.

It would be poor salesmanship indeed to promote a system that “shared bad data faster”, but the underlying attitude is, “data is a user problem”. After the sizzle of the sale is behind them, a majority of operations organizations resign themselves to sharing “somewhat accurate” data with suppliers and seeing few tangible benefits. In fact, it could be argued that the majority of the benefits seen by supply chain organizations are due to their efforts to improve data quality as a response to forecast sharing, rather than the features of the ecommerce link itself. “Measuring” tends to change the thing being measured.

It would be poor salesmanship indeed to promote a system that “shared bad data faster”, but the underlying attitude is, “data is a user problem”

Data Accuracy has been relegated to a mundane, uninteresting, un-sexy and inconsequential corner of operations management. And indeed, for much of the computer age, moderate data accuracy has been “good enough” to get the job done. The goal has been to keep the data clean enough, while people and processes fixed the remaining mistakes [Mura causing Muri] as they occurred. While this fire-drill can frazzle one’s nerves, it has been the working and somewhat profitable experience of most manufacturers. Why change?

We must change because “speed” has changed. Waste is unprofitable and “late” does not delight the customer. With the advent of integrated supply chains, data must be correct before going out to supply and demand partners in real-time. The real-time sharing of data means that all existing people, processes and reviews are removed from the live feed. If data is not correct, then internal churn will translate into phone calls and emails to communicate the “real” requirements to suppliers; increasing their disruptions and costs. The automated supply chain then becomes the secondary method, while the human “shadow process” becomes the primary method to trigger action and response. The “automated supply chain” simply regresses to an expensive bit of hype on the marketing brochure.

We must change because “speed” has changed. Waste is unprofitable and “late” does not delight the customer. 

Consider the old EDI model, which assumes that signals will be acted upon per instruction/order; but relies on phone calls and emails for taking exception to the transmitted documents: Look at the size of EDI support in the IS (information system) staff required on both sides of the transmission, and the number of procurement people calling in to cancel, increase or reschedule orders. With so many people, should this be called an “automated process” or an “automation-assisted process”?

Ecommerce is the procurement from one computer by another computer without human intervention. Anything less is not automated and not real-time.

Think about the significance of this distinction- The only difference between “assisted” and “automated” is the quality of the data, and therefore the need for human hand-holding. In this ecommerce age, how many companies can lay claim to having the computer make financial commitments for the majority of the direct materials used by operations- without human review and intervention? We can easily point to the few repetitive large players, but how about everyone else?

It is data quality and timeliness that matters most to real-time ecommerce integration. In comparison to mismanaged data, forecast improvement is the icing on the cake that people see and like to talk about, rather than the quality of the much larger cake hidden below. Forecast error is a manageable problem. Operations and supply chain professionals have been trained to manage forecast error in many ways by using tools such as leadtime reduction, statistical safety stock, safety leadtime, point-of-sale capture, demand-pull systems, order quantity sizing and stock-out exposure management.

We have the knowledge, tools and skills to manage forecast error effectively. But how many in the field find it easier to blame the forecast than to implement the correct tools impeccably? Yes, there will be spikes that cannot be filled quickly. But these are the exception. The day-to-day changes can be managed.

We have the knowledge, tools and skills to manage forecast error effectively. But how many in the field find it easier to blame the forecast than to implement the correct tools impeccably?

Quit blaming the forecast. Deal with it-It’s Your job-You have the tools.

And your job is hard. There is much to be managed, and ERP data is extraordinarily complex and overwhelming in volume. But addressing the mundane world of data accuracy in new efficient ways will pay you back twenty-fold when compared to promises of ever-improved crystal balls. Why settle for perpetual arguements and marginal improvements from forecast methodology when inventory turns, asset utilization, production schedule performance and customer service goals can be revved into overdrive by managing the controllable data and system architecture?

Of course, the best solution is to eliminate the need for a forecast wherever possible. For those items that can’t be built “to-order” and “demand-pulled” (JIT/Lean); forecasting will be required. And even in the built to-order or demand-pull environment, forecasted visibility is required across second and third level supplies to ramp capacity and raw material up and down with sales rates; and to foresee product lifecycle transitions. In those cases where forecast sharing is a must, leadtime reduction typically improves forecast accuracy far more than improved statistical modeling, increased sales force data; or end customer surveys on what they will be buying in six months when everything has changed yet again.

Leadtime reduction typically improves forecast accuracy far more than improved statistical modeling…

First, go to a Lean demand-pull system where possible. Second, shorten the leadtime of anything requiring a forecast. Third, increase data quality to perfection. If, after all this, you still need a six-figure forecasting system; by all means spend the money.

 

© David Ginsberg

http://counterops.wordpress.com/

 

[Filed in the Tactical Lean section]

A Coherent Philosophy

Goals and objectives in themselves are the cause of nothing. They are the endpoint of the actions they inspire. Achieving them is the outcome of the business processes being measured or changed. For example, if one says “the goal is six sigma”, that becomes the target for aiming the arrow. But how are the style of the bow, the quality of the arrow and the skill of the archer decided? Does our choice change for tradeoffs between distance and accuracy? Would our choice change again based on wind and weather?

Many businesses are paralyzed by this confusion over cause and effect; and many more have self-inflicted goals and objectives that are scattered or irrelevant. There are often three groups that contribute to the failures of goal-driven change:

• Executives who read the latest management trends in the trade press, and want “it” for their own business. This is often done without analyzing what types of processes the trendy idea was previously successful at improving; or assuming that a uniform process change will work well throughout a diverse organization.
• Well educated employees (business degrees, professional certifications) who want what they learned in the textbook to be implemented; and almost invariable optimize the minutia at the expense of the organization as a whole.
• Managers with limited experience or education who either measure the “traditional” things that they have been exposed to, or see “measuring” as a way to protect their own department while finger-pointing at other departments. Often they will see all proposed changes as political or useless.

 

These things happen, but the world is filled with caring, hard-working intelligent people; useful knowledge and excellent tools. However, a hammer will not work where scissors are called for. We cannot allow the trend-of-the-day to use us as it sees fit— We must be the ones making the intelligent choices; Choosing the right tool for the job is our job. The wider our selection of tools and the higher their quality, the more successful we will be. And quality in this sense must go beyond the technical expertise of the chosen approach. It includes the understanding of how the individual process or goal effects every other process or goal in the company, and the ability to train and motivate employees into seeing and supporting this larger world-view.

Let’s begin by questioning some goals, objectives, underlying processes and bad habits that often go unquestioned:

Supply Chain:

• For your size and industry, which has better leverage on supplier performance: better contracts with performance and penalty clauses; or mutually beneficial, honest and respectful business relationships?
• Is on-time delivery best improved through reprimanding and expediting suppliers (their fault), or improving the sharing, timeliness and accuracy of demand data (your responsibility)?
• At what point does competing suppliers against each other and moving business around unacceptablyincrease delivery risk beyond the desired unit cost savings? Which is more profitable, frequent shifting or stability of supply?
• If an assembly requires 100 different components, does it matter to manufacturing whether suppliers deliver 90%, 95% or 98% on-time (10, 5 or 2 shortages per assembly)? Is “percent on-time” supplier-performance relevant to process improvement; or only to the blame-game that typically goes on between purchasing and manufacturing?

 

VMI (Vendor Managed Inventory)

• Why is it good that manufacturers are pursuing VMI, which was developed for independent demand items, for procuring dependant demand items?  
• If one car needs four tires, does replacing the if-then certainty of this dependant demand relationship with the forecast error and statistical probability of some VMI modeling increase service levels, or reduce them?
• Why do so many “VMI” programs look like min/max stocking programs from 50 year ago? Why do so many “JIT” programs look like min/max stocking programs from 50 year ago?

 

Materials Management

• All modern supply chain solutions, including VMI, JIT, and Forecast Sharing are second-order systems that rely partially or completely on MRP data. Does adding these projects as a “fix” to prior performance issues experienced with the underlying MRP process actually fix the problem; or mask the problem with added complexity or arms-length outsourcing?
• Since MRP data is extraordinarily complex with typically tens of thousands of records continuously requiring thousands of data updates and changes; is it even possible to run an accurate MRP?
• People are great at decisions and problem resolution. Computers are great at repetitive tasks. Is it possible to automate much of the underlying data processes and perhaps create a self-correcting database?

 

Inventory

• Are the highest possible “turns” best for the business, or are turns the fallout of the desired customer service level and the execution of the chosen manufacturing, procurement and order fulfillment processes?
• Is it the inventory dollars that needs to be controlled, or the service level and processes that need to be managed?
• Many electronic components are purchased in high-quantity tape & reel packages. If there is one reel available for seven orders scheduled to run in any sequence on any of six manufacturing lines; how do you find the one reel and get it to job-three  on line-six, right now; without a fire drill or shortages?
• Cycle counting (ABC Analysis) focuses on high-dollar items. If the low-cost part is “not there” when manufacturing needs it, what is the on-time delivery to the end customer? What is the revenue? Is there a better method of cycle counting to support on-time delivery to manufacturing, customer satisfaction and revenue?

 

Work in Process (WiP)

• Is the goal of a materials organization the on-time delivery of components to inventory; or the on-time delivery of complete sets of material to manufacturing?
• Is it possible to reduce “job shop” work in process to only those items that can be actively worked? If WiP is “work” not “storage”, what type of planning system is needed?
• Is a “schedule” a somewhat rigid document stating what to work on over a period of time; or a flexible ever-changing priority-system that says what to work on next?
• How are jobs with shortages or engineering problems authorized to begin assembly? By whom? In starting work that cannot be completed, who is responsible for delivery and financial performance?
• Is it valid for manufacturing or finance to pursue high capacity-utilization goals, if at the same time there are high customer service goals requiring flexibility and responsiveness inside of leadtime? If customer service is the priority, should capacity utilization be a “not to exceed” number?
• If operations management is actively managing the ever-changing priority and sequencing of work, is “delivery performance” a measurement of the factory floor or the fallout of all the schedules, priorities and changes previously imposed on the factory floor?

 

Management and Employees

• If upstream problems are caused by higher-ranking employees or managers, should “job title” or “I told you to do it” discourage employees from pushing back and having the problem fixed? Should “churn” be allowed to move downstream throughout the organization? If job title and dictates have little bearing, who works for whom?
• If management is responsible for providing all of the tools, information, processes, training and resources necessary for employees to perform their tasks well; then is management a “command and control” position, or a “service” position? For what purposes is each approach better?
• If management is responsible for direction, resources, scheduling and coordination; is the failure of a company to consistently deliver a quality product on-time a failure of employees, or a failure of management? Does the answer change if manufacturing is outsourced?

 

These questions are proposed as a way of introducing some of the topics and themes to be discussed throughout this site. As the questions themselves suggest, please carefully consider which of the ideas and solutions presented apply to your business environment, and which do not. The ones that do not may still prove useful in the future as times and circumstance change.

 

[Filed in the Leadership Direction section]

The Architecture of Planning and Control: Data Speed and Integrity

Data accuracy management has to be the most boring, demeaned and ignored area of operations and supply chain management. Over the years, it has regressed from being a focal point of classes, seminars and certification programs into a more deadly combination of whining, complacency and compromise. Entire corporations have resigned themselves to the poor quality of the data they have to work with. And now, with the advent of ecommerce, we share our bad data faster than ever before!— Then we escape harms way by belittling our trading partners for being unresponsive and promote those who masterminded the outsourcing of blame. Brilliant!  The outsourcing of blame and accountability ranks as the number one business management trend not covered by the Harvard Business Review.

Employees who have been burned from their company’s own bad data (taking wrong action or failing to act) no longer have to participate in those uncomfortable round-robin  political finger pointing meetings; as everyone has culturally conspired to agree that fault lies with the supplier or the customer. Internal problems then become invisible, as do their managers. And if the fire-drill-of-the-day shines the spotlight on an invisible manager, the fire is quickly fixed while the process of starting fires remains.  Everyone waits on “someone” to fix the process.That someone is you.

Failure to manage data accuracy is a complete abdication of the core responsibility of operations management. If your operations & supply chain organization can’t make the inventory accurate; can’t control transaction timing, timeliness and cutoffs; can’t status purchase order deliveries proactively or know what the work in process balances are— then look in the mirror, fix it; or turn in your resignation. If you do hold yourself accountable for this, or need to clean up someone else’s mess— here is a conceptual framework and the tools to implement it.

First, consider materials transactions. There are three elements to any materials transaction:

• A physical movement
• A data movement
• A financial movement

 

All problems occur from these three not being done simultaneously, accurately and close to real-time. If you move it without a transaction, transact it without a movement, or do either without a corresponding financial entry; you have lost control. The three must be choreographed as participants in the same dance. This becomes easier, not harder, with the integration of inventory transactions and financial reporting in ERP systems. When using these systems, it is typically the break between physical and transacted data movements that cause harm. You would have to be very creative and deliberate to force a break between materials transactions and financial transactions when using these systems.

Second, consider the data records associated with a single part:

Part number, part type, lead time, cost, buyer code, planner code, bill of material, where used, inventory balances, purchase order balances, purchase order dates, work order balances, work order dates, sales order balances, sales order dates…

 

This is a selection of sixteen of the perhaps hundreds of data elements affecting a part. And even these 16 “data errors” are perhaps equivalent to 100 “information errors” if you multiply out all the permutations of a wrong purchase order delivery affecting multiple jobs, a wrong job delivery affecting multiple sales orders, a wrong bill of material or inventory quantity affecting multiple purchase orders, work order and sales orders. Then consider that the typical electronics assembly contains 100-300 parts, and each of them goes through these same error permutations. The situation would appear to be quite hopeless.

Product complexity invalidates statistical models. Once assemblies are north of 100 components, a 99% accurate BoM x 95% accurate inventory x 97% accurate purchase orders x 98% accurate WiP x 96% accurate planning data (M/B, Planning Codes, Leadtime, etc); equals  shortages in every single kit. The 90-Whatever percent performance you brag about leads to everything being short and late to manufacturing and the end customer. This is the primary reason for friction between materials and manufacturing. Stop it: You are the source of the problem. If statistical models no long work, then implement “certainty” models.

Then third, to depress you even further, consider the nature of “good” data changing to “bad” over time. While new data is continually added to the database with its own error problems, the old data is becoming invalid and in need of correction: i.e., a delivery date goes past due, a source of supply changes, a purchase order is rejected at receiving, a new sale takes parts procured for a prior sale. Much of what you did right, is now wrong.

And last, even if you do get it right for a particular product; its lifecycle will typically be about 1-5 years; terminating your good work. No doubt you will get to go through several rounds of prototypes and new product introductions— with un-scrubbed engineering data, and quick & urgent delivery requirements.

With all of these ever-changing sources of error, a manufacturer could literally not afford to hire all of the people necessary to police the data before generating and sharing an ERP forecast with suppliers. Faced with the dilemma of ignoring the problem, looking for a scapegoat or hiring a planning/analyst department with a budget larger than your R&D expense for last year— is there another alternative?

Yes. What if the data fixed itself?

 

[Filed in the Tactical Lean section]

The CounterOps Review:

Top Tools of the Trade in Performance, Customer Loyalty and Value.

 

Keep your half-million and buy something that actually works! Software that enables the enterprise, speeds comunications & control, makes employees productive and accurate, is intuitive to use… and doesn’t require the never-ending stream of consultant billings.

All of the solutions below will take a company from $0 to $500M or beyond; and install in 30 days or less. Many are subscription based for a few thousand a month; typically less than the cost of even one headcount.

These are combined recommendations from myself, industry peers and informal surveys of the major accounts these providers service. This list is by no means inclusive, but will get you where you need to go.

More

 

The Self-Correcting Database

The electronic procurement and assembly industry has a variety of complex challenges: Short product lifecycles, complex bills of material, volatile demand, non-existent or inaccurate forecasting, demanding customers, component obsolescence, material lot sizes in excess of customer requirements frequently changing supplier leadtimes, and a never ending stream of engineering changes to the bill of material and approved vendor list (AVL). All of this combines into a soup called “ERP”.

 ERP, together with the MRP engine it encompasses, was supposed to crunch all these numbers and tell us the right part to buy at the right time, the right delivery of that part, the right start date and quantity for the assembly, and the right completion date for that assembly. The problem is that ERP crunches data, not knowledge. To the computer, a bad number and a good number look the same. By the end of the ERP/MRP process, compound levels of bad data have been intermixed with the good data. It is left to the users to police, react, expedite, return and churn. The value added is not very high on these activities. Often this “formal system” trains the users to get the job done through informal processes or going to “the right person.”

If there is any chance for manufacturing systems with millions of pieces of data and hundreds of thousands of transactions and updates to coordinate hundreds of workers and thousands of activities; then the data must be accurate. This is old news and not very exciting.

The old way of accomplishing this was to print out volumes of reports for human beings to mark up and enter back into the system. Then do it again and again. Each week the report would be printed. Each week, hopefully, someone would have the time and expertise to fix what was broken. Each week more broken data would require the same fix to the same criteria by the same person with the right knowledge.

 The obvious question is “If we know how to identify and fix the bad data, why not define the fix and have the computer do it before it ever has the chance to affect any downstream process or decision?” What if each time we were burned by bad data causing us to make an incorrect decision, we defined the problem in a way that a computer can understand it; and then turned the computer on itself?

 The knowledge used by human beings on the back end, can in many cases be defined to fix problems on the front end. This is accomplished through 3 methods:

• The data in the computer can fix another piece of data elsewhere in the computer. For example, perhaps a standard cost can be pulled from the first or most recent purchase order.
• An expert can define the if/then conditions to be run as a routine script in the database: For example, if the leadtime is zero for a purchased part, set to 8 weeks for now so that MRP will run correctly; then dial in the exact number later as it becomes known. Variations can be thought of by commodity classification or integration to the supplier’s database.
• Exception reporting: Last, and least preferred are paper reports and web alterts. These must be kept to 3 pages or less; as most employees do not have time to go through massive tab-runs and corporations can’t afford larger staffs for this type of activity. Define what matters deliver it succinctly and monitor that it continuously improves over time.

 

The results can be amazing. Some of the more tangible real-world benefits have been the elimination of most shortages, false expedites, over/under builds, and the need for status meetings. Why meet when the data is real time, accurate and being acted upon? The few fires that remain are real, and everyone knows they are real. They get undivided attention and support.

Use the computer to fix the computer.

 

[Filed in the Reengineering section]