Getting ahead through

Six PracticesPractice 3 Creating a balanced and forward-looking supply chain design

Six ‘leading practices’ have been identified by McKinsey & Co and Georgia Tech College of Management, that drive supply chain performance and that allow companies which excel in these areas to dominate in terms of service, cost and inventory. Here, Derek Thomason, Martin Green and Martin Haynes of Unipart Expert Practices look at how the third of these six practices – Balanced and Forward-looking Design – can be effectively implemented. Most would agree with McKinsey’s assertion that: “Many of the companies are working hard to make incremental decisions on where to place new assets, however, the very best organizations make their decisions using a comprehensive and forward looking network strategy.” (1) However, ‘adopting a comprehensive and forward looking network strategy’ is not always easy.

Supply chain networks can be extremely complex, with global suppliers providing materials to multiple manufacturing sites, which in turn ship through many distribution points and channels to a wide range of customers. Synchronising these supply processes across international boundaries, often with long lead-times and uncertain demand, is a great challenge. recent events relating to recession,

political instability in the middle east and disruptions in supply from Japan following the tsunami, have further complicated the situation.

it is this complexity that makes changing a supply chain a slow and difficult process when the business environment changes. thus there is a need to ensure that supply chains are as ‘future proof ’ as possible and able to respond to changing circumstances. Without this flexibility, supply chains can easily become a costly overhead which fails to meet business needs. Hence McKinsey’s focus on a ‘forward looking supply chain design’.

Supply chain Design is much more than just facilities and stock. Good design also includes people competences (which we will look at in the Paper on Practice 6: talent), processes (to be discussed under Practice 4: end-to-end view) and systems and technology. Whilst the latter, according to McKinsey, does not consistently correlate with improved business performance, we believe systems and technology are critical enablers with any shortcomings usually due to poor processes, poor software selection and implementation rather than inherent technical defects.

McKinsey’s implication is that many companies are not making their decisions on a

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‘comprehensive’ basis, and are using narrower and shorter term criteria. For example, moving to low-cost economies may be attractive from a labour cost perspective but such a strategy often fails to take into account customer service or inventory holding costs. these strategies also expose the supply chain to additional risks, such as oil price rises, political instability and exchange rate fluctuations.

also, such a move tends to increase the complexity of the network which can make any necessary changes slower and more expensive to implement. So businesses find it harder to react to changing circumstances and markets.

the best approach is, as discussed in the first paper in this series, Strategic alignment - to devise an overall supply chain strategy that delivers the right service levels to the different channels at the right cost and at the appropriate level of risk. Only then can the network required to support the strategy be considered. in order to achieve that, a business needs:

a deep understanding of its customers needs (recognising that these my change by channel and over time)

an appropriate physical infrastructure appropriate processes operated by competent people robust and reliable systems and technology

this is summarised in the following diagram.

So when designing the supply chain network, businesses need to take account of not just the network and end-to-end cost, but also:

Supply chain strategy - including sourcing, inventory, lead-times etc. risks Flexibility Skills and quality technology - both now and in the future

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Infrastructure

People andProcess

Systems andTechnology

assuming that strategy, risks and flexibility issues have been addressed as part of a strategic alignment exercise, it is then possible to look at supply chain design. a number of tools are available to help model networks, facilities and inventory strategies. these fall into the following categories:

Network modelling Supply chain facility design Supply chain inventory assessment Process design

Network ModellingOne of the issues with network modelling is that, typically within any one company, this exercise is performed infrequently. therefore it may not appear cost effective to purchase the software and train users, and so consultants are employed instead. Within UeP, we use caSt from Barloworld. caSt allows the user to evaluate a number of strategic network options. inputs include the current and projected customer base, service levels and operating costs (including opening and closing costs). Outputs include ‘isochrones’ which show the percentage of the customer base reachable in a certain timeframe, the ‘best’ locations for ‘x’ number of facilities, their associated delivery areas, the total cost of the network and the rudimentary

size of facilities. it can also be used to evaluate alternative fleet compositions. in recent years, where the sustainability of a supply chain has become increasingly important, the system can be used to estimate the transport carbon footprint.

the diagram is an example of graphical output for a proposed european network.

Supply Chain Facility DesignOne size doesn’t fit all when it comes to facility design. When designing production facilities we concentrate on flow and avoiding congestion. Productivity is enhanced when the facility supports rapid change-over and material storage at point of use.

in warehouses, the design needs to reflect the planned purpose of the warehouse. For example, break-bulk, cross-dock or stock keeping. the three functional areas of the warehouse - receiving / goods-in, storage and picking / dispatch - are usually designed independently and then integrated using waste reduction principles. Storage areas may need to be subdivided, based on product characteristics, whilst picking areas and techniques are usually based on speed of movement (lines) and line thickness.

again many tools are available. at UeP we use cLaSS from cirrus. Designs can be established quickly, simulation can be run and 3D representation and fly-throughs generated to aid visualisation. in our experience, this greatly enhances the design process. alternative handling and picking options can be evaluated and costed quickly. Different layouts can be evaluated and the graphical output is a powerful tool for engaging key stakeholders who may not be warehouse design experts.

the diagram is an example of the graphical output for a new facility for a UeP client

Supply Chain InventoryWhen Jaguar wished to change their erP system, Unipart evaluated a range of commercially available inventory management systems for them. None seemed adequate to cope with the complex product characteristics which made up the Jaguar after-market product portfolio. Products ranged from the very small to the very large and from fast moving to extremely slow moving. to address this, UeP developed our own inventory management system (UiS) which is integrated with SaP. Unlike most inventory packages, UiS optimises inventory holding across the entire range to achieve either an availability or investment target. Furthermore, it uses algorithms which are suitable for slow as well as fast moving items.

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this package is now in use across a wide range of Unipart’s businesses as well as being used extensively by UeP to help other clients optimise stock based on key supply chain inventory drivers and characteristics. thus, Unipart are able rapidly to calculate the inventory required to support service given a range of infrastructure choices and service requirements.

the important point here is that inventory is modelled and planned as part of an integrated supply chain process. it will take due regard of the anticipated changes in the market and business characteristics over the medium term planning horizon.

Designing the Supply Chain Process When it comes to designing new processes most companies start with the inputs. this is natural, but it is not the most effective or efficient way of creating new ways of working which serve the recipients of the process outputs. at Unipart we start with the customer (in this case the recipient of the process output), what is critical to them, the preferred format, the frequency and most importantly the value associated with the output. if there is no value then the process is worthless. We then work backwards to decide what is the most effective, practical way of delivering value; the inputs required and who is best placed to provide them. constraints and areas of potential defects are also identified and eliminated. this is referred to as SiPOc analysis (Suppliers, inputs, Process, Outputs, customers) and a schematic example is shown in the diagram left.

there are, of course, other methods of defining (and re engineering) business processes. the key ones are Swim Lane process maps and Value Stream Maps (VSM). the final choice of which tool to use depends on circumstances, but in our experience, the process of developing these maps is a great way of engaging staff in process improvement and realignment.

Once the processes have been designed and ‘balanced’ they are codified in ‘standard work’ form. this makes it easier to audit the work being performed and train new team members. More importantly, it provides a basis against which changes can be assessed and improvements recognised.

in terms of ‘future proofing’, this approach requires that processes are constantly challenged and reviewed. customer requirements are constantly changing, new products and competitors enter the market and supply considerations change. increasingly, companies are taking a risk based approach to their supply chains. Many companies find this process of continuous review and change difficult. Processes are frequently not documented and standard operating procedures are not used or formalised. as a result, processes ‘grow like topsy’. they become poorly defined, there is confusion about roles and responsibilities and errors occur.

One of the typical symptoms is a ‘fire-fighting’ culture where ‘heroes’ flourish. However, this is essentially a high risk and high cost approach to resolving problems.

this issue can be overcome by developing a culture of continuous improvement, driven by teams who are empowered to make decisions at their own level. For a network to operate effectively, it must be staffed by people who have the skills and the authority to make considered and appropriate changes to operational practice. this approach ensures that processes evolve as the needs of the business change.

the challenge for many businesses is how to develop a new culture of continuous improvement, and how to develop a new set of competencies that support it. this issue will be addressed in greater detail in article 6 of this series, the right talent.

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SSuppliers

IInputs

OOutputs

Inputs Outputs

CCustomers

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Developing Supply Chain Competencethe ‘competency’ aspect of supply chain design is frequently overlooked. We know one client who had the strategic objective of developing a ‘world class supply chain’. However, when challenged about the experience and qualifications of both their management team and staff, it was discovered that there were no individuals with formal supply chain qualifications, no facilities for developing the experience of individuals within different areas of the supply chain and no plans to facilitate any formal training. in our experience this is not untypical. a robust network design will place great emphasis on developing and empowering its people and we will explore this in the right talent. We would expect that aLL employees receive training, not just on the technical aspects of their job, but on the necessary skills to operate in an environment that encourages creativity and the contribution of the individual. For example, staff need to be trained in communications, problem solving and workplace organisation.

acquiring and developing these skills must form a key element of the network design. Naturally, this also needs to be supported by providing the time, the budget and the facilities to exercise these skills. Developing a business case for this investment can be difficult, but as the McKinsey paper demonstrates, it is a key component of long term strategic success.

Systems and Technology SelectionMany companies make the mistake of purchasing supply chain or enterprise wide software believing that it will automatically lead to business benefits. they fail to give enough consideration to how the business might need to change to reap those benefits. a detailed definition of the implementation business case and the associated business change processes is as important as the technical implementation plan if benefits are to be realised. this should include a complete, not just cosmetic, review of the business processes to be employed after implementation. it is unfortunate that most businesses that use new software to support heritage processes are unlikely to achieve a return on their investment simply because they fail to adequately address the process issues. (For a fuller discussion on this subject, please see our paper ‘realising the Benefits of an erP implementation’ published in the spring 2011 edition of Living Logistics).

ConclusionsDesigning a forward looking supply network is far more then establishing a series of facilities at the lowest cost. the supply network is the physical manifestation of the supply strategy, supported by skilled, flexible and motivated people and driven by appropriate technology. its design will have taken full account of risks, service levels to customers and costs. But most importantly, the network and the business processes must be under constant review by both its management and staff if it is to remain efficient, cost effective and true to its design aims well into the future.

the next paper in this series will discuss practice 4, establishing a ‘Lean, end to end value chain’. You can download previous papers in this series by clicking on the links below: Practice 1. Supply chain strategic alignment Practice 2. Segmentation

Unipart Expert Practicesas the consultancy arm of Unipart Logistics, Unipart expert Practices (UeP) provides supply chain consulting services. UeP has particular areas of expertise in process re-design, sustainable employee engagement, supply chain strategy, design and operation. UeP’s clients include Shell, Home Delivery, eSaB, Network rail & Sky.

References(1) the race for supply chain advantage: six practices that drive supply chain performance. McKinsey and company, 2008.

the next articles in this series, together with any other publications from our quarterly publication Living Logistics are available from the thought Leadership section of our web site.

www.unipartlogistics.com/consulting

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For more information contact:Unipart expert Practices

Unipart House, Garsington roadcowley, Oxford

OX4 2PG

tel: +44 (0) 1865 384690 uep.enquiries@unipart.co.uk

or visit our website:www.unipartlogistics.com/consulting