by LORA CECERE, Altimeter Group, www.altimetergroup.com

In the movie Snow White, the Queen possesses a magical mirror that answers any question, to which she often asks: “Mirror, mirror on the wall, who in the land is fairest of all?” …to which the mirror always replies “You, my queen, are fairest of all.”

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Companies want to know “who has the best supply chain?” Unfortunately, there is no supply chain magic mirror;  however, each June we can get summarized financial data.  While not a perfect mirror, it is a partial reflection. It is definately more accurate than mistakenly believing that each supply chain is as good as it gets (e.g. the Queen’s magic mirror in Snow White).

The normal cycle of financial reporting makes June a perfect month to review the past year.  So just as students gather around bulletin boards at the end of the school term and check their grades, in June, I scour websites to understand how supply chains stack up. Luckily, two articles –the CFO Magazine’s Working Capital Survey (http://www.cfo.com/article.cfm/14499542) and the CSCMP Annual State of Logistics Report (http://cscmp.org/memberonly/state.asp)– are published in June to serve as year-over-year guideposts to answer the question, who does supply chain best?

2009. A Year in Review

2009 was a true litmus test.  It was the height of the recession. Aggregate volume declined 23% and fundamental demand shifted.  Despite investments in technology, in aggregate, the supply chain response was slower in this recession than in the prior 2001 recession.  There is a growing gap between leaders—companies that really understand and practice the concepts of supply chain management—and laggards.  Companies that excelled at supply chain management sensed demand changes 5X faster  and realigned network decisions than their peer groups (http://www.supplychainshaman.com/category/supply-chain-economic-recovery/).

For many, 2009 was a working capital hangover as companies reeled in the recession aftershocks.  It was the worst year ever, in this writer’s history, for working capital management.  For 68% of the Fortune 1000 companies, Days of Working Capital (DWC) grew. Facing new market obstacles in collections, payables and inventory management, companies buckled their belts and scrambled for cash. As inventory levels climbed during the first part of 2009, tension grew in supply chain discussions.  This was the most problematic –even desperate– for companies when high asset utilization was mistakenly defined as supply chain excellence.

The tightening of credit through 2010 put the spotlight on inventory management (even for companies that had never cared about inventory before). The bloated inventories of 2008 through early 2009, sent a shock wave through executive discussions; and even though business inventories dropped for the first three quarters of 2009 and rebounded in the fourth quarter below pre-recessionary levels, executive teams remain on edge.  As the curtain rises for the last half of 2010, the links in the supply chain are weakened. Capacity is tightening and prices will rise.  The termsdemand sensing, demand shaping, and demand orchestration have a new meaning for battle-weary supply chain veterans.

2009: How did we do?

The good met the test.  The average and poor supply chain processes were not equal and succumbed.  What made a difference?  Companies focused on traditional supply chain planning and tight integration of planning processes to Enterprise Resource Management (ERP) did the poorest.  Companies with an outward-focus on market drivers and building strong what-if analysis to understand demand uncertainty did the best. Leaders have the right stuff. Laggards have a new respect for supply chain excellence.

Let me preface this analysis with a caveat.  I do not believe that you can throw all industries in a spreadsheet and declare a supply chain victor. Since value drivers within each industry are different; I think that true supply chain leadership can ONLY be seen when you compare companies within peer groups.

In this downturn, supply chains experienced a seismic shift.  Using the earthquake analogy, it was an eight or nine on the rector scale.  As I thumbed through the CFO magazine results, I considered many; but settled on three stories:

Containers & Packaging:

Suppliers, at the end of the supply chain, are whipped hard by economic downturns.  When it comes to fighting this bullwhip effect, supply chain excellence matters.  Contrast the stories of Sonoco Products and Owens Illinois. Sunoco Products, a 3.6 billion dollar company, located in South Carolina, manufacturers packaging film for the consumer products industry.  The company has been on a four-year journey to become more demand driven with a strong focus on S&OP.  Owens Illinois (OI), a manufacturer of glass containers with US headquarters in Ohio, has been more focused on transactional efficiency, procurement and IT standardization.  Sunoco has outpaced OI in learning how to be a supply chain leader. Their 2009 numbers speak for themselves.

Table 2: Comparison of 2009 Results of Sonoco Products and Owens Illinios

High Tech & Electronics

When it comes to high tech & electronics, my favorite story of a company successfully navigating the downturn is Cisco Systems.  Cisco took its bumps in the 2001 downturn, did a mea culpa with a 2.25 billion dollar inventory write-off and swore never again.  They redefined supply chain processes under the banner of Customer Value Chain Management (CVSM), successfully integrated 138 acquisitions over  15 years, and built systems to mitigate risks—simulation of 4300 inputs by a team of 10 people—and build supply chain resiliency in the supply chain from the outside-in.  Motorola, on the other hand, has focused more on IT standardization and procurement excellence.  The numbers speak for themselves.

Table 3: Comparison of 2009 Working Capital Results for Cisco and Motorola

Semiconductor

Intel is my pick within the semiconductor industry.  Their focus on supply chain talent development and steadily improving supply chain capabilities helped them through the recession.  They made a conscious choice to not be aggressive on DPO to ensure a strong supplier base. This focus on supplier development built resiliency into the supply chain. Again, supply chain excellence matters. Contrast Intel with Fairchild Semiconductor. Fairchild Semiconductor has a strong focus on IT systems, is building supply chain talent and is early in the execution of S&OP.  Likewise, while Texas Instruments has a deep legacy of supply chain planning excellence, their focus has been more vertical (source/make/deliver) than horizontal (e.g. Sales & Operations Planning, order to cash, etc).  Consider the working capital impact of three companies in the same industry at very different points in supply chain maturity.

Table 4: Comparison of Intel, Freescale Semiconductor and Texas Instruments

What is next?

The only thing certain for 2010 is uncertainty.  The litmus test—2009 results at the height of the recession—supports that true supply chain excellence matters.  However, the best working capital numbers do not make the best supply chain.  It is about conscious choice.  Just as Intel made a choice about paying suppliers quicker to improve reliability, companies need to make similar choices about the alignment of working capital targets into supply chain strategy, setting targets for each and active management of the horizontal process that underlies each of the metrics. For leaders it is deliberate; for laggards it is largely uncontrolled.

These lessons are even more important as the recession hangs over us like a black cloud with the possibility of a double dip recession. No doubt about it, we are writing case studies in supply chain excellence. If only there was a magic mirror…. I hope that you do not become a supply chain casualty.

What do you think?  Did I miss a great story in the data published by CFO magazine? Is there a story of supply chain excellence that you would like to share? Please share your thoughts with the over 2000 readers of this blog.

Footnote:

Definitions of Days of Working Capital (DWC), Days of Sales Outstanding (DSO), Days of Inventory Outstanding(DIO) and Days of Payables Outstanding (DPO) and the numbers contained in this article are sourced from CFO Magazine’s June 2010 article on Fortune 1000 company working capital performance.

The stories shared on these supply chain leaders are based on publically available information: investor calls, public presentations, and public forums.  While I have personally worked with all seven of the supply chain teams listed in the article; and there is much more to share on each of these stories, I have limited my comments to publically available information.

The names of specific technology providers are deliberately omitted from this article

Note: This article provided by courtesy of Lora Cecere, Altimeter Group,  www.altimetergroup.com

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Those following Supply Chain Industry Analyst Lora Cecere’s new Supply Chain Shaman blog (http://www.supplychainshaman.com) have read with keen interest her observations about SAP’s progress in the area of Supply Chain Planning.  Lora points out that while  SAP has made tremendous progress in many areas it is also struggling with integrating its many components – specifically Lora says that the “integration of business intelligence and performance management is moving [too] slowly.”    Her notes on the growing disappointment with SAP APO – from within and outside the SAP organization – are also worth noting (http://www.supplychainshaman.com/2010/04/inside-insider:

“I leave the event with two major disappointments.  The first is that the integration of business intelligence and performance management is moving slowly. …too slowly for this curmudgeon analyst.  I was hoping to see the results of the Teradata/SAP Business Objects integration and the launch of a new generation of predictive analytics.  While there is some progress in Performance Management, it is largely traditional reporting/dashboards.

The second is that SAP APO—SAP’s supply chain planning suite—was  largely business as usual. At the event, I saw small, incremental changes, but no major innovation like I saw in MII, PLM and transportation management.  I keep crossing my fingers. I would love to see  SAP have the courage to blow up APO and start again.  Who knows if it works for PLM, maybe there is a chance to bring innovation to a solution — and the larger Supply Chain Planning (SCP) market– that sorely needs to be redefined.”

As SAP friends and partners know, SAP has some truly outstanding employees and the SCM Product Group continues under the brilliant leadership of Lori Mitchell-Keller.  Yet, overcoming legacy products and dated, mis-guided inertia is difficult for even the most effective of executives.  The great news is that a whole new generation of cloud-based supply chain planning and S&OP applications that integrate tightly into the SAP suite are now available.  These applications are changing the game and will ensure that SAP users are well supported well into the  next generation or whenever it is that SAP is finally able to overcome its legacy and move forward.

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Implementing an effective S&OP process requires effective management of personnel, systems, and process issues. Of these three areas, the change management aspects of personnel issues are often the most challenging. Organizational change strategies fail most frequently due to the inability of management to lead their teams through the transition process. Are supply planners and demand planners communicating? Is sales operations providing timely input? Are issues being resolved in a timely manner? How will disagreements be resolved?

As a corporate process, S&OP requires strong leadership and a keen understanding of change management.

Understand Change

There are two elements to organizational change: Personal transitions and Organizational transitions.

An old paradigm in change management was that it was only the organizational that was going through the change, de-emphasizing the personal aspect. But an organization is made up of a triad of people, process and technology. We understand that the only part of that triad that might have resistance to change is the personal. As a result, an organizational change strategy must focus not only on organizational transitions; it must also focus on personal transitions. From a leadership perspective, this means proactively understanding the affect on various stakeholders and leaders, for example looking at:

• Who in the organization is going to gain and lose power – S&OP team? Supply team? Demand Team? Sales. Has a fully powered S&OP team been created?
• Who in the organization might experience a positive or a negative careers move
• Who might be exposed when the changes show how poorly things were done in the past
• Who has the most to risk by making these changing and why

In order to understand, from each of their perspectives the perceived risk, time should be spent conducting interviews as well as a leader and stakeholder analysis. The reason this is critical to building sustainable change is that you will then know what the objections are and how best to be proactive in handling those.

From this process one can gain buy-in with the people who can give or decline support for the project. If the stakeholder or leader feels as though you have their best interest in mind, they are more likely to support suggested changes down the road. If they do not feel included, they can block the project altogether, even if the changes make good business sense. The leader interviews and analysis is a process that needs special attention, unique planning and tailored action to ensure that more resistance is not created

Next, leaders need to understand the three phases of personal transition, none of which can be skipped or discounted if they want a positive return on the investment. The three phases include:
• Endings
• The Neutral Zone
• New Beginnings

Many leaders ignore the first two, expecting employees to be in the new beginnings stage right after a change is announced. However, this means ignoring how humans process change. Since all humans go through this process, it needs to be acknowledged as part of the leadership activities.

The financial impact (business performance/productivity and project time line) to the transition phases can be significant. The depth (loss of productivity) and width (increased time line) of the transition phases is directly proportional to how well the change is handled by leaders. If leaders do a poor job of leading change, the Valley of Despair will widen and deepen, meaning that the project will run over budget, over schedule and the scope will creep. However, if leaders have been trained in change management, research shows they can skillfully lead employees through the transition phases with the least amount of impact to the project.

The stages of managing the personal transitions include employee:
• Awareness and Understanding
• Buy-in
• Ownership.

When leaders have mastered leading personal transitions, they can lead the overall organizational transition. When they have mastered organizational change leadership, they will be able to reduce the time and productivity dip as seen in Figure 2. The goal with teaching leaders to lead change is to reduce the personal transition dip and thereby reduce the organizational transition dip.
Pursue Transformational Leadership Skills

In order to be successful with transformational scale change, leaders must deploy different skills, some of which they may need to add to their current skill set. Some leaders may also need to evaluate their attitude and beliefs about how to handle change. Through an edification process, leaders can begin that shift.
We have found that the leadership skills required for leading large-scale change versus day-to-day management are in fact very different. One of the first aspects of leading change is to understand that 80 percent of any group will resist change. The other 20 percent are those that will get behind the change and pull the other 80 percent along. In order to motivate those 20 percent and eventually enroll the other 80 percent, a leader may need new leadership skills. What you don’t want is to create resistance in the 80 percent group, because no matter how excited the 20 percent group is, negative group-think is nearly impossible to overcome.

Research also shows that one of the primary reasons that so few programs produce the expected results is that change leaders don’t understand the distinction between asking versus telling, when they lead. The traditional methodology used for leading change projects requires these steps:
1. Identify the problem
2. Tell people how to do their jobs differently
3. Spend huge amounts of time, energy and money trying to overcome resistance and recover from decreased morale

Many leaders tell people what they need to do differently, versus spending the time to enroll and engage the employees in an interactive dialogue where they are asked what they think. The telling is part of what puts people in a threatened mode I it is easier when someone else, especially an expert, gives us the answer. The problems come later when resistance develops and someone else’s approach does not work for us. Asking versus telling is one of the keys to reducing the resistance to change.

An effective leader of change also understands that change naturally creates conflict. A leader’s ability to handle conflict will directly impact their effectiveness in leading change. As agents of change, a leader’s responsibility is to take the change, which is normally thought of as crisis, and communicate it as an opportunity. In order to do that, they need to have an understanding of what makes the conflict improve and what makes it worse.

3. Develop an Leadership Engagement Action Plan

With an understanding of how change works and the skills necessary for effective transformation, Project leaders and executives can assess their own change leadership skills and create an engagement action plan for the lifecycle of the initiative. This plan should deal with clearing organizational resistance, participating in early visioning sessions, supporting the project delivery team, communicating clearly and repeatedly on the reason for change, articulating and supporting the business case and truly being engaged in the transformation effort.

Experience has shown that leaders get actively involved when there is a crisis in an S&OP project are able to quickly resolve issues. A reflective and pro-active leader in this situation should recognize that earlier involvement – real involvement and engagement many times can prevent serious issues. However, a formal change management process properly initiated early is the best way to prevent such issues from occurring.

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Through the S&OP process, the organization sets a projected business level that balances expected sales and production capabilities with financial and inventory implications. The constrained demand plan reflects a demand plan aligned with the supply plan.

Do we need both?

Many companies find it useful to distinguish and track the gap between unconstrained and constrained demand plans. An increasing gap may indicate lost opportunity to realize sales that exceed current capacity. Companies should scrutinize unconstrained demand signals to verify demand is real versus “pie-in-the-sky”. Long term capital improvements aimed at increasing capacity need to be aligned with realistic projections of future demand.

Finally, the constrained demand plan feeds a consensus plan to which the organization agrees to execute. Our Sales and Operations VPs need to stop fighting and starting aligning. S&OP facilitates this necessary collaboration.

Reduce Surprises. Reduce Inventory. Improve Operational Efficiency. Increase Sales.

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SAS70 has become the gold standard for the auditing of service organizations,  especially for providers of Software as a Services (SaaS). Steelwedge, the leading provider of Cloud based Sales and Operations Planning (S&OP) Services, has successfully completed the SAS70 Type II audit.

The SAS70 Audit is performed in two steps, each resulting in a report that’s issued by an independent and certified auditor.

The Type I Report describes the control objectives and controls that have been put in pace by the SaaS provider. The auditor renders an opinion on whether these objectives and controls are suitable for the type of operation the SaaA provider is offering. As Steelwedge’s controls and objective have been based on relevant ISO and COBIT guidelines, a positive SAS70 Type I report was easily issued in August 2009.

The Type II Report investigates actual compliance with Type I controls. In the Type II Report, issued to Steelwedge in January 2010, the auditor confirms Steelwedge’s adherence to established and documented industry standard processes. The auditor’s opinion was formed over a five month period through on-site visits, investigations and reviews.

The SAS70 audit offers piece of mind for our customers, knowing that their data is secure with Steelwedge. Our data center, our applications and our processes conform to the highest level of industry standards, and will continue to do so as Steelwedge continues to undergo Type II Audits in regular six month intervals.
Steelwedge customers and prospects alike can rely on the opinion of a certified and independent auditor to ensure compliance with their internal data and security needs. This eliminates the need to conduct individual custom audits, saving both time and money.

Steelwedge’s regular SAS70 Audits do more than simply check the box on the currently popular topic. As the business world evolves and security requirements continue to increase, Steelwedge empowers its customers to stay ahead of the curve.

Also, Business Continuity Planning (BCP) and Disaster Recovery Process (DRP) have increasingly gained significance over the last six to twelve months in the SaaS world. Companies continue to trust Steelwedge with their S&OP needs due to our ability to provide a rapid fail-over solution in the unlikely event of disaster, enabling them to continue to run their business on Steelwedge.

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Chomping on the last bagel in the breakfast laid out on the conference room table,  the CEO stands up, stretches, and comments “Excellent presentation,  S&OP really drives change… cutting edge ideas…this will definitely work.”   The scene has been set.   Following lots of nods, another three million in cash is headed down the drain.

Does this sound familiar?  The launch of yet another change initiative triggered by a compelling presentation from external consultants, software vendor or even the latest best selling business book. However, after years of initiatives being unleashed on organizations, senior managers should understand that certain success factors must be in place to enable successful change.

1. Provide Strong Leadership

Sales and Operations Planning (S&OP) transformation initiatives are rarely sustainable unless they are led from the top.  There is a direct linkage between the success of a change management program and leadership capabilities.  An effective leader must demonstrate vision, courage & conviction

• A willingness to take both personal and business risks.
• A demonstrated commitment to change, not simply demanding it of others.
• Organizations such as Motorola and GE that have implemented exceptionally successful change programs include the development of key elements in their leadership training.

2. Develop a Compelling Vision

Developing a clear vision is important in making a culture change a reality.  With an inspiring vision, people can visualize exciting possibilities and begin to act in accordance with them.  Keeping the vision in the forefront of an organization’s thinking will ensure that energy and focus are sustained.

• What will the organization look like during and after the change program?
• Why should individuals and teams be engaged?
• What’s in it for them?
• What are the concerns that will emerge and how can they be addressed?

These are all critical questions that a powerful vision can address.

3. Ensure Team Commitment

• Whether it’s the CEO or department heads, committed managers are a key to successful change programs.
• Managers who only pay lip service to change are one of the swiftest ways to undermine transformation.
• Building a supportive team is an essential part of the early stages of any effort to restructure, re-design, retool or improve.  John Kotter, in his best-selling book Leading Change, refers to such a group as a “Guiding Coalition.”

John Kotter chose his terminology carefully.  The word “guiding” defines the group as one that will not actually be implementing change, but rather removing barriers and creating an environment where responsibility is spread throughout the business.  Any change program that will be sustainable must involve the full organization.

4. Build a Coalition

A “coalition” (from the Latin coalitus, meaning to grow together) is an alliance.  It is a group that has completely aligned objectives.  Putting in place a credible group that acts as one and drives change relentlessly is critical.

• Unfortunately, many senior teams struggle to act as a coalition, often pulling in different directions. The biggest threat to any change initiative is when this is done underhandedly, with leaders saying one thing in the boardroom but really challenging the decisions in the corridors. In a true coalition, there is not only unity of thought on the overall objective, but also an environment where differences of opinion on lesser issues can be aired constructively.

• Real change can be particularly threatening to managers. After all, they reached their positions by doing things in a certain way. At a fundamental level, senior people have to review their roles, responsibilities, attitudes, behaviors, personal leadership styles and above all – their relationships with each other.

• Some of this is uncomfortable. Experience shows that a true coalition will learn how to work through conflict to get a shared view as to the best way forward. Training and development play a critical role in facilitating this “growing together” of the coalition prior to launching any initiative.

• Middle managers need to be on board early. Directors have a key role to play in leading from the top, but the attitudes and behaviors of middle managers also are vitally important. During the initial stages of a change program, there can be a great deal of excitement and activity. Keeping middle managers fully informed can ensure there isn’t a feeling of being marginalized.

• An ignored manager can end up undermining and blocking the change progress. Process improvement teams with good local management support tend to go from strength to strength. Conversely, such teams fizzle out and have to be rekindled when managers aren’t interested or see teams as a threat to their role.

5. Identify and Train Change Facilitators

Engaging people throughout the organization in change activities is a departure from the old directive style of leadership. The best way to enable broad-based action through teamwork and securing the success of change teams is by trained facilitators. (The word facilitator comes from the Latin facere, meaning to make easy or simple.)  Armed with powerful tools of problem-solving and an ability to inject energy and enthusiasm, these individuals can be the catalyst of any change initiative. By seeking volunteers from the organization who, with training, can be capable and credible agents of change, the backbone of change will be in place.

Meanwhile back in the boardroom, the coffee has been cleared away and the meeting is beginning to wrap up. Then, one by one, board members begin asking questions:

• “How will we communicate this to the business?”
• “How can we engage our middle managers?”
• “Has anyone thought about how we can resource it with trained facilitators?”
• “What exactly do we expect this will achieve – what will the business be like in two to three years as a result?”
• “What capabilities will I need to develop to make this change program a success?”

6. Communicate and then Communicate Again

All organizations know that communication takes time and effort – but the investment is worthwhile.

It is critical for people to be reminded of the vision but also how far they have come. This helps maintain morale and belief in the change process. Positive evidence that things are changing will combat any cynics.

Communicate ten times more frequently than you think is necessary.

• Recent research shows that on average the total amount of communication going to an employee during a three-month period is 2.3 million words or numbers, transmitted in meetings, notice boards, bulletins, etc.
• The typical communication of a change vision during a period of three months is approximately 13,400 words or numbers.
• So on average the vision communication captured only 0.58 percent of the company communication market share – nowhere near enough.

Communication is not through words alone – it’s the dance and it’s music too. Clear messages are sent through actions. It never ceases to amaze that companies struggle to re-launch an improvement program after just having concluded a downsizing where change facilitators were first on the list to go.

7.  Measure Performance, Track Process, and Ensure Accountability

Ownership and Accountability is the key to any successful initiative.  While ownership requires empowerment, accountability requires the development and use of key performance metrics that enable everyone to monitor progress and identify bottlenecks.

So what’s next?  Time to finish breakfast and get to work on building your world class Sales and Operations Planning (S&OP) Process (S&OP Process)!

Note: This article was created based on work by Steelwedge (www.steelwedge.com), John Kotter, the Kaizan Group, the Six Sigma Institute and others.

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