A very interesting statistic – the Purchasing Managers Index (PMI) for August 2011 – caught my eye this morning. This metric tracks the financial activity of purchasing managers connected to their acquisition of goods and services. It is calculated on a monthly basis through a survey conducted by the Institute of Supply Management (ISM).

Surprisingly, the statistic concluded:

“Economic activity in the manufacturing sector expanded in August for the 25th consecutive month, and the overall economy grew for the 27th consecutive month,” say the nation’s supply executives in the latest Manufacturing ISM Report On Business^®.”

A visual representation of the metric is below. Please note that the way the metric is captured, any value above 50 percent is an improvement and a 100 percent value indicates that everyone in the survey indicates an improvement. The degree of change month-over-month is reflected in the actual value. For instance, 65 percent PMI for a month is a bigger change than 55 percent PMI.

Figure: PMI for 2010-2011

Source: Institute of Supply Management

So what does this mean for the supply chain executive who is looking at S&OP and IBP initiatives?

1. Need for Operational Efficiency: According to the ISM survey, the overall sentiment is one of concern and caution. In this sort of a situation, increasing operational efficiency and reducing waste in the end-to-end value chain is the best approach that companies can take. S&OP and Lean are two weapons that companies can adopt in this endeavor. In fact ,we see that these two initiatives dovetail into one another when the S&OP plan needs to be executed.

1. Multi-business S&OP: According to the ISM survey, respondents in general are reporting reduced domestic sales and increased international sales. This implies that large multi-national companies need to look carefully at balancing their supply towards demand and look at their S&OP process as more of a multi-enterprise/multi-business process rather than within their silos; for instance, being able to position supply in tax efficient countries and moving it closer to customer when the demand signal arrives (looking at building capacity in Eastern European countries, etc.). IBP processes should allow visibility not just at the divisional level but at the corporate level too .

1. Working Capital Management: According to the ISM survey, respondents are reporting that their inventories are in general higher than their customer’s inventories. This is of course a result of network wide inventory reduction efforts that have gone on for many years. What it has really resulted in is pushing out of inventory upstream into the supply chain where every node believes that they are at the receiving end with respect to holding inventory. Companies need to really look at inventory from a working capital standpoint and as part of the IBP process. The working capital is dependent on the customer sales, supplier purchases and inventory – the IBP process is the only process that provides visibility to all three. These three variables have to be looked at holistically and not in silos. So, implement IBP processes that  can model supply, demand, finance and inventory in a holistic fashion

Figure. ISM Inventory Index for Manufacturers and their Customers

What are your thoughts? Do you agree with the analysis? Also, more importantly, why are the unemployment numbers so high when manufacturing is apparently growing? I have thoughts on this but would love to get your feedback.

But when the staff at London’s biggest department store was faced with a question from a man who was to later become President of the United States, they weren’t the least shocked. They could have balked, of course, when Ronald Reagan asked a salesman at Harrods if they sell elephants, but more surprised was Mr. Reagan himself at the salesman’s immediate response  – “Would that be Indian or African, sir?”

This anecdote wouldn’t have traveled the globe had Harrods replied with the more expected — “Sorry sir, we do not sell elephants.” The store no doubt never forecasted the demand for elephants but their planning provided for unexpected customer requests.

Last week, we hosted a webinar on the topic of “Incorporating Supply and Demand Uncertainty in Sales and Operations Planning” featuring Stanford University professor Blake Johnson. An internationally recognized expert in the field of supply chain risk, Blake explored how S&OP allows companies to balance supply chain trade-offs against the value of improved market responsiveness and customer service. Blake, like the adroit Harrods clerk, knows that planning for the unknown and unpredictable is an indispensable part of supply chain management, particularly in today’s uncertain climate.

The webinar was recorded and is available for on-demand playback.  Click here to learn more.

Until a few years, most of us thought of piracy as a quaint problem from the distant past – a romantic time for most of us.  From a historical perspective, piracy in the USA is most associated with the period when Thomas Jefferson was sending American warships to the Barbary Coast to fight and payoff pirates that were disrupting American trade.

However, in the last ten years piracy – largely centered off the horn of Africa has again risen to the forefront – no longer a romantic notion of times past.  Today’s pirates were born of a vicious brew of our contemporary world – rising global trade, technological advancement, post-Cold War politics, poverty, violence and terrorism.

One may not consider it the foremost supply chain risk, but piracy endangers civilians, disrupts economies, encourages corruption, and could trigger an environmental disaster.    Acts of piracy — boarding a ship to commit theft or other crimes — totaled 2,463 incidents between 2000 and 2006 according to a report published by the RAND corporation. These trends are the result of a range of phenomena, including a surge in maritime traffic and a decline of coastal security.  The overall problem is almost certainly even greater than the figures suggest as researchers suspect nearly half of all piracy attacks are not reported, usually because of fears about subsequent investigation costs and increases to insurance premiums.  Pirate attacks have also risen steadily in 2009 and 2010 in spite of international efforts to protect shipping.

From a supply chain point of view, there are two key risks to manage. The most remote but most serious risk is the potential for a port or majoring shipping channel blockage due to the sinking of a ship or open armed conflict.  While this type of risk is not high, the consequences for companies that depend on specific suppliers or trade routes is huge.  The second type of risk – disruption of a specific shipment – must be considered in light of key resources with long-term lead-times and limited alternatives.  For these products, contingency plans must be considered.  Weathering supply chain risk – like managing piracy – is about understanding and tracking the fundamentals of your supply and demand chains and developing contingencies in your Sales and Operations (S&OP) plans for managing worst case events.

The Tony award winning musical Memphis includes a song titled “Change Don’t Come Easy”.  Oh how true that is.  In social norms and in business, change can be slow and painful.  So what’s a successful recipe for S&OP change?  Although every enterprise has its own unique characteristics that will influence its approach, here are five observations we see when assisting clients to employ best practice S&OP processes and tools.

Top Management Support: Do your senior executives know what S&OP is?  Do they understand the value of S&OP?  How committed are they to making S&OP truly ingrained in the culture of your organization?  When S&OP implementations fail, often the root cause can be traced back to a lack of senior leadership.  At all levels of the organization, it must be clear that the whole organization is committed to making necessary changes.

Company Goals Above Individual or Department Goals: What’s the goal of S&OP?  It should be to drive strategic business decisions that benefit the entire company NOT one employee or department.  Too often personal goals conflict with the greater good.  Strive to minimize such incentives that detract from the overall goals.

Make Decisions and Keep Moving Forward: Cross functional representation is required to get buy-in from all business disciplines.  One person will not implement S&OP on her own.  Assemble a group of knowledgeable doers who have the company’s interests at heart and know their functional area well.  When this group reaches an impasse, a single S&OP sponsor/leader should step in and make key decisions.  Keep moving forward.  Don’t let anything stop progress.  S&OP is an iterative process and changes you make today may need to change again later.  Keep moving forward.

Clear Expectations: What is S&OP?  Why do we need this?  What’s wrong with what we’re doing today?  If your employees are asking these questions, you better have the answers.  Make sure all participants see the forest.  What are the major benefits to collaborative planning?  What is each person’s role in the process? How will S&OP make us better at our core responsibilities, drive demand, supply and financial plans and increase profitability?  Employees should feel empowered by the process not burdened.

Training: Make sure that ample training is provided to solidify new processes and tools.  What ‘sticks’ is often what has been practiced.  Comfort with the new process and tool comes with experience.  Create those initial experiences through training.

Tips to remember:

• Change don’t come easy
• Top management support is required
• One person will not do it alone
• Cross-functional participation is mandatory
• Make decisions and keep moving forward
• Paint clear expectations
• Solidify change through training

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

“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.