The Opinion Page
News and comments about the issues facing today's SCM and Inventory Management professionals.
Last week, the World Trade Organisation(WTO) released its report titled “World Trade 2011, Prospects for 2012.”
The report shows that world trade expanded in 2011 by 5.0%. This was a sharp deceleration from the 2010 rebound of 13.8%. WTO economists project that growth will slow further still to 3.7% in 2012. The slowdown is attributed the global economy losing momentum due to a number of shocks, including the European sovereign debt crisis.
This is a robust report, full of data yet easily understood due to liberal use of
graphical illustration. Presentation data over time series is truly dramatic, as
the impact of events surrounding 2008 are revealed with stark clarity. For
anyone deeply involved in international trade, I recommend the read highly.
I am an economist by education, and fully understand the value of macroeconomic analysis and forecasting. As a businessman and supply chain practitioner, however, I have to take the data and projections with a grain of salt. It is always good practice to be aware of the state of the landscape that surrounds you. It helps a person to make informed decisions. However, a litany of micro-trends can be hidden among the high-level numbers. People and businesses too frequently become spooked by bad macroeconomic news and become overly risk-averse or engage in rationalizations for the problems that they face. The truth is that big progress and big money can be made even in difficult economic times, and it is optimism that pulls us out of the troughs.
Further, it is axiomatic that it is easy to post spectacular percentage gains against disastrous performance results in prior years. Sometimes, the only direction is up.
The devil, as they say, is in the details.
That said, the report reveals the fastest growing economies in 2011 were, as might be expected in the Middle East (+ 4.9%), the CIS (+4.6%), China (+9.2%), and South-Central America (+4.5%) and China (+ 9.2%) and the Four Asian NIEs (+ 4.2%).
The slowest growing economies in 2011 included Japan (minus 0.5%), United States (minus 1.7%), European Union (minus 1.5%).
Fourth Quarter 2011 developments (Annual rates) have shown the Euro area declining (minus 1.3%), Japan declining (minus 0.7%), the United States declining (minus 3.0%) and China’s growth softening at +8.2%, (down from +9.5% in third quarter).
Quoting the report,
“More than three years have passed since the trade collapse of 2008-09, but the world economy and trade remain fragile. The further slowing of trade expected in 2012 shows that the downside risks remain high. We are not yet out of the woods,” WTO
Director General Pascal Lamy said.
“The WTO has so far deterred economic nationalism, but the sluggish pace of recovery raises concerns that a steady trickle of restrictive trade measures could gradually undermine the benefits of trade openness. It is time to do no harm. WTO members should turn their attention to revitalizing the trading system and to ensuring such a scenario does not materialize.”
WTO economists cautioned that preliminary trade figures for 2011 and forecasts for 2012 were difficult to gauge due to the extraordinary levels of volatility in financial markets and in the broader economy for the last few years.
The preliminary figure of 5.0% for world merchandise trade growth in 2011 is down 0.8 points from their most recent forecast update in September 2011. These figures are in “real” terms, ie, adjusted to account for inflation and exchange rate fluctuations."
So, world economies can be described in a single word: fragile. And for various reasons, it may stay that way for quite some time. Interconnectedness and globalization have their benefits, but they also leave the entire world sensitive to disturbances in any given part.
In a report released in August, 2011, research firm The Aberdeen Group of Boston, MA found that a formal process of Sales and Operations Planning was a key enabler in companies who were able to achieve best-in-class results in customer service levels, average cash conversion cycles, forecast accuracy at product family levels, and in gross margin rates realized.
Author Nari Viswanathan, Vice President / Principal Analyst, Supply Chain Management at Aberdeen discussed benchmarking survey findings that North American business face three predominant pressures: to reduce supply chain operating costs, to improve the management of increasing demand volatility, and to improve top line revenue. Firms surveyed also reported pressure from customer mandates for faster, more accurate and more unique fulfilment as well as a need for tighter integration between planning and execution. Managing demand forecasts within an S&OP framework, and integrating the financial planning and budgeting processes within the S&OP process were seen to address these pressures.
Top performers – those earning best-in-class status – had an average cash conversion cycle of 46.4 days, a perfect order rate of 92.8%, experienced 75.3% forecast accuracy at a product family level, and enjoyed a gross profit margin rate of 43.5%.
Put simply, Sales and Operations Planning (S&OP) is a business process that facilitates the balancing of supply and demand. Occurring over a monthly cycle, it is cross-functional, involving the participation of staff from various business units within a company, including Sales, Marketing, Production, Distribution, Finance, and Product Development. S&OP is meant to bring together all the plans for the business into one integrated set of plans.
S&OP was first developed by Richard C. Ling in his pioneering work titled Orchestrating Success: Improve Control of the Business with Sales and Operations Planning (1988). Ling devised a process that would improve upon its predecessor, known as “Production Planning.” Production planning is a process that demands that Sales and Marketing devise a forecast and hand it off to Operations, who execute the plan through functions like Master Production Scheduling.
S&OP, on the other hand, requires that the barriers between Operations, Sales, and Finance families be removed – that a single comprehensive plan is developed in a collaborative manner. Forecasts are articulated at aggregate (product family) levels, rather than at item levels of detail. Differences that frequently arise between various functional areas within the business are reconciled before the plan is set to execution. In other words, in a “Production Planning” environment, sales plans and operations plans are sequential; in the S&OP case, sales planning and operations planning occur jointly.
While S&OP was initially targeted to improving business processes in manufacturing firms, the principles apply equally to any firm engaged in forecasting future needs: wholesalers, retailers, and service industries can all benefit from what S&OP has to offer.
Thomas F. Wallace of Cincinnati, Ohio has worked feverishly to promote the benefits of S&OP since 1999. His book, Sales & Operations Planning: The How-To Handbook provides a concise and practical summary of the process.
Wallace explains that the monthly S&OP process occurs essentially in five stages, with Steps 2, 3, and 4 being characterized as the “heavy lifting” activities:
Achieving great customer service is the concern of every progressive supplier.
Firms involved in manufacturing, wholesale, and other similar commercial activities encounter customer service challenges that are distinct from those one might find in business-to-consumer relationships. Ultimately it is the consumer that drives demand up through the chain, although complex sets of linkages exist within B2B commercial markets that impair realization of great customer service.
In their June 2011 benchmarking report titled “Demand Management,” the Aberdeen Group (Boston) identified key criteria that distinguish Best-in-Class from Industry Average and Laggard organizations. Among the metrics was “Perfect orders delivered to customers (complete and on time),” with best-in-class meeting or exceeding a 94.6% success rate.
Leading organizations share several common characteristics. They are two times as likely as other firms to measure lead time from inquiry to order, twice as likely as laggards to include promotions and other demand shaping activities into demand forecasts, and twice as likely as laggards to be able to segment demand forecasts based on key product and customer characteristics.
Fundamentally, business customers such as wholesalers and retailers want to have their purchase orders delivered on time, in full, and defect-free. How might the caring enterprise work to improve its service performance?
Right People, Right Place:
William Blake said that “execution is the chariot of genius.” Properly align your business with your customers by assembling a team whereby employees’ skills are matched to the requirements of the job. This is particularly important in the supply chain. For example, order input accuracy – improved by web-enabled customer-supplier interfaces and EDI (electronic data interchange) – is essential.
Effective communication between supplier and customer is critical. Understand how the customer determines value. Service attributes such as speed of delivery, order accuracy, selection, packaging, security, or appearance may rank differently in the eyes of the customer.
Craft an unambiguous service level contract with customers, detailing mutual expectations. Document agreeable order lead times, planning time fences, appropriate communication channels, parameters that define exceptional demand from normal fluctuations, applicable quality standards, prices, and payment terms.
Develop forecasts of future demand cooperatively, across time frames that are realistic, relevant and promote realization of excellent service levels.
Proactively manage orders that are at risk. Analyze customer backorder files daily, allocate inventory fairly, and disseminate future availability information efficiently.
Having the right product in the right place at the right time in the right quantities facilitates great customer service. Inventory management must support sales while balancing tactical investment against financial constraints and physical distribution realities. Costs of stocking out can be great, and the cost of losing a major customer catastrophic.
Close the loop between supply and demand. Effective enablers include the establishment of a formalized Sales and Operations Planning (S&OP) process. S&OP reconciles supply, demand and new product plans, tying them to the business plan. Key stakeholders such as marketing, sales, manufacturing, procurement, and finance work collaboratively to produce of one integrated set of plans.
The “balanced scorecard” has grown from a simple performance measurement framework to a full strategic planning and management system. The firm becomes viewed from four different perspectives: customers, learning and growth, financial, and internal business processes, with a set of metrics developed for each within a matrix. The importance of customer satisfaction is acknowledged.
Lack of inventory control inhibits great service. Control implies excellent inventory record accuracy, visibility, and saleability.
Customer service operatives need to be confident that availability data is accurate, in “real time,” in order to make realistic order promises. One process enabler called “cycle counting” demands that variances between physical counts and inventory records are analyzed daily, root causes of variances are identified, and process gaps are repaired. Periodic “batch processing” of sales and operations transactions is now considered to be a substandard process, as inherent delays and inaccuracies are intolerable.
Best in class customer service providers will have well-articulated plans in place to mitigate risk in the event of natural disasters, health pandemics, political upheaval or economic disruption to ensure continued supply of critical parts to valued customers.
Seasonality can have profound impact on product demand, and focus on time lines becomes intensified. Project management skills are exceedingly beneficial in securing supply for goods that are linked to specific seasonal events or where demand varies with weather conditions. Establish appropriate milestones and monitor progress with vigilance.
Back in June of this year, I was preparing to write an article about fear and frustration in the workplace. As I was driving along a road close to my home, I had my radio tuned in, as usual, to Q107 in Toronto. I must have been aligned with the Tao that morning, because they played "Maggie's Farm" by Bob Dylan - what a fabulous expression of the ultimate toxic workplace. Here are the lyrics, but you should research the audio for a big kick (it has also been done by The Grateful Dead, among others, but Dylan's original is the best!):
By Bob Dylan
I ain't gonna work on Maggie's farm no more.
No, I ain't gonna work on Maggie's farm no more.
Well, I wake in the morning,
Fold my hands and pray for rain.
I got a head full of ideas
That are drivin' me insane.
It's a shame the way she makes me scrub the floor.
I ain't gonna work on Maggie's farm no more.
I ain't gonna work for Maggie's brother no more.
No, I ain't gonna work for Maggie's brother no more.
Well, he hands you a nickel,
He hands you a dime,
He asks you with a grin
If you're havin' a good time,
Then he fines you every time you slam the door.
I ain't gonna work for Maggie's brother no more.
I ain't gonna work for Maggie's pa no more.
No, I ain't gonna work for Maggie's pa no more.
Well, he puts his cigar out
In your face just for kicks.
His bedroom window
It is made out of bricks.
The National Guard stands around his door.
Ah, I ain't gonna work for Maggie's pa no more.
I ain't gonna work for Maggie's ma no more.
No, I ain't gonna work for Maggie's ma no more.
Well, she talks to all the servants
About man and God and law.
She's the brains behind pa.
She's sixty-eight, but she says she's twenty-four.
I ain't gonna work for Maggie's ma no more.
I ain't gonna work on Maggie's farm no more.
No, I ain't gonna work on Maggie's farm no more.
Well, I try my best
To be just like I am,
But everybody wants you
To be just like them.
They sing while you slave and I just get bored.
I ain't gonna work on Maggie's farm no more
On June 17, I posted an article about the toxic workplace. Here is a follow-up, to provide a few ideas about tools that might help to combat the fear that might be leading to suffering in your business.
Value Statement: Publish a Statement of Values as an integral part of the firm’s Strategic Plan. This provides moral clarity to the firm’s management team. The Value Statement holds managers to account when toxic practices creep into the business’ landscape. Employee awareness is critical.
New Hires: Due diligence with respect to potential new employees should include an assessment of the person’s ability to exemplify company values. Orientation should clearly articulate expectations and responsibilities.
The Employee Engagement Survey: A well-considered employee engagement survey, governed by strict confidentiality rules, allows employees to express attitudes and fears honestly. Results must be reviewed with equanimity. Develop and execute an action plan to address difficulties. For larger companies, a third party administrator helps ensure objectivity.
The Human Resources Manager: The professional HR Manager can act as a strong facilitator, advocate, ombudsman and broker to resolve issues of fear. The HR Manager may act as an unbiased and thoughtful representative of the company who will seriously consider concerns of both employee and manager. The HR Manager can diffuse many small concerns before they become unmanageable.
The Employee Assistance Program: Fear can provoke reactions that range from counterproductive to dangerous. It can manifest itself in afflictions such as depression, substance abuse, absenteeism, and antisocial behaviour. The company-sponsored EAP provides concerned employees with an outlet to express problems, and take positive steps toward resolution.
An Employee Hotline: A company-sponsored 1-800 hotline allows employees and managers to report problematic behaviour and to express a wide range of concerns safely and anonymously. Issues revealed via the hotline must be acted upon with great urgency.
The Joint Health and Safety Committee: The Ontario Ministry of Labour mandates the establishment of a Health and Safety Committee for workplaces employing twenty or more persons. An engaged and empowered H&S team does not focus simply on hardhats and forklifts – it can act upon a variety of counterproductive behaviours.
The economic loss created by fear in the workplace is immeasurable. Employees who labour within a command-and-control management hierarchy are frequently motivated by threat and coercion. Not only does fear destroy any sense of team spirit and pride, but it also shuts down important communication channels, inhibiting the flow of creative, constructive, and corrective ideas upstream.
Just how might the front-line employee fall victim to fear at the workplace? In the 1992 classic movie Glengarry Glen Ross, Alec Baldwin masterfully portrays the character Blake, who motivates a small real estate sales staff through fear and intimidation. The results of Blake’s sales contest, where salesmen placing below second place get fired, are tragic. Indeed, failure is guaranteed and engineered into the process. The characters endure humiliation, desperation, deceit, theft, and scandal as they grasp at dignity and struggle to salvage their jobs, by any means necessary.
Workplace fear and intimidation might not play out as dramatically as it did in Glengarry Glen Ross. Nevertheless, it is real and equally menacing. The weapons of fear include threats, harassment, exclusion, and unattainable goals. The fearful employee worries that he will lose his job, be demoted, be denied salary increases, be assigned menial tasks, or otherwise be constructively dismissed. Working in a constant backdrop of a fearful environment, the employee may become withdrawn, vengeful, depressed, abusive, or even violent.
Quality Management guru, the late Dr. W. Edwards Deming, included “Drive Out Fear” as one of his famous “Fourteen Points” for achieving total quality in business. Deming was concerned mostly about the kind of fear that prevents the average worker from finding out how to do the job correctly. He worried about the fear that prevents employees from asking questions, from rocking the boat, from suggesting new ideas, and from challenging the status quo. "Fear takes a horrible toll,” said Dr. Deming. “Fear is all around, robbing people of their pride, hurting them, and denying them a chance to contribute to the company."
In the 1960’s, Douglas McGregor of MIT’s Sloan School of Management developed what came to be known as “Theory X” of organizational behaviour. The Theory X manager has little respect for employees. He considers them to be lazy, work-averse, and motivated only by self-interest. He feels threatened by the employee who asks too many questions. As such, the Theory X manager institutes a system of close supervision and tight controls, bolstered by a culture of blame. Within this punitive environment, employees learn to mistrust management. They keep quiet. Such a tyrannical manager may be successful in the short term, but fails dismally in the long haul, leaving behind him a trail of destruction and shattered lives. McGregor found that this approach is a major cause of diseconomies of scale in large businesses, and proved it to be counter-effective.
Valuable employees may simply leave the toxic workplace. This is terribly costly to any enterprise. Human Resources expert Susan M. Heathfield of Michigan State University offers advice in her “Top Ten Ways to Retain Your Great Employees”. Gathering data from exit interviews, Heathfield proposes antidotes. She has concludes that in order to retain great employees, firms should:
The enlightened manager encourages participation and input. She fosters an environment of learning and interaction. She is self-confident, but not narcissistic. She puts the welfare of the company ahead of her personal aspirations. She is a team leader. She treats her staff’s opinions with respect. She entrenches processes that allow suggestions for continuous improvement initiative. She knows how to answer questions about methods and procedures, or knows how to get the answers. She takes great joy in seeing her employees grow, get promoted, and get raises in pay. She builds enduring teams of people who love their work. She will succeed.
This is a follow up to my article, "Facing the Reality of Risk" also published in the Durham Business Times, April 2011 edition. Ten Tips emphasizes certain issues that work to enhance the development of a high quality contingency plan.
The continued health and safety of all operatives must be the highest priority. Ensure that all plans recognize this precept.
Clearly define objectives:
The mandate must be unambiguous, specific and realistic. How will your firm define success?
Use cross functional teams to ensure that solutions meet the needs of key stakeholders, and that the tactics presented do not create unanticipated new challenges. Take a broad perspective, thinking in global terms, even while developing specific action plans.
Use Creative Thinking:
Be flexible. Think “outside the box”, especially where unconventional risks such as pandemics are concerned. Existing contingency models - if any exist - may be too simplistic.
It’s Never Too Late:
If your business does not have a plan to ensure business continuity in the event of an external threat, start one now. It is a journey, in the spirit of continuous improvement. To get on base, one must first be willing to leave the batter’s box.
Clearly define risk tolerance:
“Business as usual” is unrealistic. Know what is essential and what is not. Draw lines over which the firm will not cross. Define the term “critical”.
List critical commodities and services:
Not every item and activity is essential. Identify commodities and services that are critical to continued operations. Challenge the lists. In the event of a manifested threat, resources will have to be redeployed to support these essential items and services.
Involve your customers and suppliers in the development of the plan. Understand their specific challenges and requirements.
Understand the importance of the plan. Remove barriers to its development such as denial and scepticism. Involve key stakeholders in the plan’s development.
Show employees how the contingency plans align with their daily activities. Demonstrate its importance. Establish universal understanding and commitment. Keep it simple, and relevant.
The following article, authored by "yours truly," was published in the Durham Business Times, April 2011 edition. I hope that you will enjoy:
That businesses in the Durham Region will face a significant disruption to their operations from some external, uncontrollable threat is a virtual certainty.
The H1N1 pandemic of 2009, the G20 Conference of 2010, and the Great Ice Storm of 1998 are in the past. While Canada remains one of the safest and most stable countries on the planet, we are not immune from the impact of catastrophes, natural or man-made. Now is an ideal time to reflect on what we have learned, to prepare for future challenges. Threats to commerce can include blizzards, tornadoes, floods, blackouts, labour disruption, social unrest, political activism, and even Icelandic volcanoes.
Developing a plan that will help a firm weather the storms of such threats is sound business practice. Well-managed companies have done just that. Indeed, some large industrial customers have demanded it of their suppliers, building it in to vendor quality assurance initiatives. The supply of items that are critical to operations is thereby secured.
Companies’ supply chains present unique challenges to developing a Continuity of Operations Plan. A commercial environment marked by just-in-time (JIT) inventory management, global logistics, and international sourcing makes the supply chain particularly vulnerable. Natural disasters, pandemics, and political unrest can close borders, inhibit the flow of materials, and force enterprises to redeploy resources away from normal activities.
Management at Ontario Power Generation (OPG) have been proactive in the field of risk mitigation. In 2007, Todd Hall, now Director of Sustainable Development at OPG, was assigned to study the threat of an influenza pandemic. His task, as part of a broader team, was to devise a plan that would manage the risk to supply chain operational continuity. In doing so, OPG pre-empted the July 21, 2009 report of the Conference Board of Canada that urged organizations to act in this regard while they still had time in view of the H1N1 swine flu pandemic of 2009. Being a part of Ontario’s critical infrastructure, the pandemic management plan ultimately became an integral part of OPG’s emergency response program.
Hall and his team decided to manage this risk before it managed them. “Planning for any disruption to the continuity of business, influenza pandemic or otherwise, is an exercise in risk management. Simply identify and characterize the risk, and to the extent possible employ existing controls and business processes. While this is simple in principle, it can be demanding in application,” commented Hall.
Fortunately the H1N1 pandemic was relatively mild. This does not undermine the importance of preparation. Simply because H1N1 is over, does not mean that another pandemic cannot strike. They happen periodically. They are unpredictable. Rates of infection tend to be high. A pandemic has the potential to significantly impact business continuity by adversely effecting economics and societal infrastructure.
A future pandemic event could overload an already stressed health care system. The need for vaccine might outstrip supply. Disruption could grow as worker absenteeism becomes exacerbated not only by employee illness itself, but also by caring for loved ones, and through fear of infection. Travel bans may be put in place. Schools and businesses could close.
Some might be reluctant to accept that the occurrence of an influenza pandemic is a certainty. Hall and his team overcame such scepticism and achieved success. Their mandate was clear: provide all available production capacity under all credible risk scenarios. Their task was to establish all reasonable assurance that commodities and services that are critical to the continuity of businesses are available.
To build a successful plan, those items, materials, services, facilities and equipment critical to achievement of the mandate must be identified. Define essential staff positions. Recognize regulatory commitments. Review supplier and customer relationships, including contractual arrangements. The planning team should strive to facilitate effective and ongoing engagement of key stakeholders.
It is important to critically review lists of critical commodities and services, and to recognize that some business units and activities may not be essential. Impacted firms may not be able to operate in a business-as-usual mode. Resources will need to be focused as strongly as possible on activities that deliver the primary objective.
The impact of a pandemic, or other irrepressible challenges, can be reduced if plans are made ahead of time. Such planning activity should be done in the spirit of prudence and continuous improvement.
Hall says, “Establishing a pandemic plan is like buying fire insurance – you may not need to use it, but can you afford to be without it?”
This is a follow up to my article "High Impact Strategic Planning" also published in the Durham Business Times, February 2011 edition. Ten Toxins emphasizes certain issues that work to impair the development of a high quality Strategic Plan:
Do not confuse short-term tactics with strategic objectives. While less spectacular than tactical victories, a long-term view is necessary to win the war.
Core values must be lived every day by everyone. A leader who ignores core values will develop employees who view ethics as mere distractions. Truly believe your Mission.
The Silver Bullet:
Strategy should not be designed around the notion of having, or finding one magical solution that will resolve all the firm’s problems. Solutions are multidimensional.
We live in a world of change, innovation and fleeting fashion. Ensure that your products and services are not designed to meet obsolete demand. Strategy looks forward. Stay current. Remain aware of your products’ life cycles.
All jobs must relate to the strategic plan. Keep constrained resources, including the work force, focused on the plan. By tying performance metrics to strategic objectives, management keeps attention directed at the appropriate goals.
A culture of fear in an organization will prohibit the free flow of information. Encourage employees to provide constructive feedback, without the potential for recrimination.
Beware of exhausting all of your resources fighting tactical battles. Be realistically aware of constraints that face your enterprise. Ensure that you are able to obtain sufficient resources to achieve your strategic goals. If not, modify the objectives.
Not Working the Plan:
A plan will not inspire while gathering dust on the shelf. Communicate it, live it, revisit it, and revise it. Put your work front and centre in your firm.
Complex strategies are difficult to communicate and dilute intent. Employees will be reluctant to embrace them. Craft three to five strategic objectives. Elegant simplicity is the key.
Use straightforward, impactful language. Ensure that the intent of each word or phrase is clear. Remember the SMART acronym.
John Skelton is the Principal Consultant and founder of Strategic Inventory Management.