2006 prtm46130reprinted from prtm s insightwinter 2006 582 - PDF document

© 2006 PRTM46130Reprinted from PRTMÕs InsightWinter 2006 A Leaner, Meaner Brad Householder and Ashok Raowww.prtm.com © 2006 PRTM 461 Reprinted fromPRTMÕs Insight Winter 2006Navigating in a Complex Worlds complexity impairing your supply chain? Youmay not see it happening,but over time,variousbusiness activitiesÑincluding globalization,restructuring,acquisitions,outsourcing,and newproduct introductionsÑadd complexity that canprevent your supply chain from adequately sup-porting your strategic goals.For many companies,fighting complexity is a losing battle.Althoughthey periodically try to simplify their supply chainconÞguration and structure through such one-offtactics as closing plants,rationalizing products,orchanging suppliers,complexity continues to growand performance continues to lag.Some companies,however,are able to strip awayaccumulated complexity and maintain strategicfocus in the face ofa constantly changing busi-ness environment.How? By making supply chaindesign an integral part ofthe ongoing strategicplanning process.In our experience,this meansfollowing three critical steps.First,develop a sim-ple supply chain strategy;second,use analysis todesign a supply chain conÞguration and structurethat will support that strategy;and third,managechange with a simpliÞcation road map.This approach is not easy,but well worth theeffort.More coordinated decision-making,optimalproduction locations,and predictable delivery per-formance are just some ofthe improvements youÕllsee (Figure 1).As the sidebar describes,U.S.Gypsum is one company that has redesigned itssupply chain successfullyÑyours can too.A simpliÞed supply chain starts with a simple,focused supply chain strategy.This may seem obvi-ous,but many supply chain strategies we see lackfocus and attempt to be everything to everyone.The most successful supply chain strategies areA Leaner, MeanerBrad Householderand Ashok RaoRedesigning the supply chain to optimize performance Figure 1: Before and After © 2006 PRTM 461 Reprinted from PRTMÕs Insight Winter 2006among the simplestÑjust think ofDellÕs directmodel,Wal-MartÕs supplier management approach,and ZaraÕs low-cost production method.A sim-ple supply chain strategy helps minimize thepotential for undesirable complexity and ensuresthat supply chain operations ultimately work tosupport your overall strategy.The Þrst step is to develop a clear understandingofyour basis ofcompetition,whether itÕs innova-tion,cost,quality,or service.Then determine whichcharacteristics ofthe supply chain support thisÑcost leadership,asset utilization,traceability,delivery performance,or flexibility and respon-siveness.Only then can you clearly deÞne whichelement/s ofyour supply chain will deliver superiorperformanceÑoperations,outsourcing,channel,and/or asset network (S.Cohen and J.Roussel,Strategic Supply Chain Management,McGraw Hill,Now you can begin designing the supply chain.First,determine what changes are needed toremove unwanted complexity and optimize theperformance ofyour key supply chain elements.This,however,is a complex task.Why? Becauseeven the simplest supply chain is inherently com-plex.Multiple suppliers in multiple tiers producemultiple products in multiple locations to sup-port multiple customers with multiple changingdemandsÑwhich translates into a nearly inÞnitenumber ofpossible permutations ofsupply chaincosts,cycle times,and inventory options.Intuitionalone is not enoughÑyou need to conduct adetailed analysis.This applies to even commonsupply chain issues,such as where to make differ-ent products,which components to source,andwhether to use distribution centers.Thanks to the latest generation ofsupply chainanalytical tools,you can evaluate supply chainalternatives more precisely than ever before.WeÕvefound the best way to address the complex inter-actions ofproduction,inventory,distribution,andservice is to use three different modeling approach-es:network optimization,inventory optimization,and simulation (Figure 2).Individually,eachapproach helps answer a specific set ofsupplychain design questions;used together,they enablecomprehensive and objective analysis ofa largevariety ofsupply chain alternatives with relativeease.Be aware,however,that ease ofuse can oftenlead to ease ofmisuseÑdata accuracy,validation ofassumptions and outputs,sensitivity analysis,andstatistical rigor are as important in designing sup-ply chains as they are in designing products.When developing a design for a simpliÞed sup-ply chain conÞguration and structure,start with aÒclean sheetÓmodel ofthe overall supply chainnetwork.This Òideal stateÓview considers onlytrue physical constraints and not policy or cur-rent-state constraints such as number and locationofoperations.The ideal state picture providesvaluable insight into the key characteristics ofthesimplest and most optimal supply chain conÞgu-ration.It also serves as an important benchmark asyou introduce policies and practical limitationsinto the analysis.By comparing practical alterna-tives against the ideal benchmark,you candetermine the true Òcost ofconstraintsÓand use itto challenge,reÞne,and stretch deep-rooted lim-itations that may no longer be applicable.One ofour clients,a large diversiÞed manufac-turer,learned the value ofsupply chain modelingÞrsthand.The company was convinced it neededto consolidate its multinational operations into asingle facility to reduce inventories and shortencustomer lead timesÑan expensive capital proj- Figure 2: Design Tools © 2006 PRTM 461 Reprinted fromPRTMÕs Insight Winter 2006Navigating in a Complex WorldectÑbecause intuitively this seemed like the rightsolution.The manufacturer,however,had a changeofmind,thanks in large part to network opti-mization modeling,which highlighted otherstructural simpliÞcations and operational improve-ments they could make to meet their strategicgoals without undertaking significant capitalinvestment.However clear the strategy or comprehensivethe analysis and design,implementation ofthenew design introduces opportunities for com-plexity to creep back into your supply chainÑandundo what youÕve accomplished so far.Why?To begin with,the implementation phase raisesa number ofadditional issues that need to be dealtwithÑissues such as facility construction and clo-sure,labor negotiation,hiring and training,andproduct relocation.Often they involve signiÞcantstructural change,which must be implemented instages rather than all at once.But a staged orphased approach increases the likelihood that thenewly implemented change will stray from theoriginal intent ofyour supply chain strategy anddesign.Add to this the fact that the overall businessand competitive environment is also changing.The net result is an overwhelming tendency forcompanies to lose their way over the course ofimplementation and revert to narrow,intuition-driven decisions.To prevent this from happening,you need a road map to help guide the imple-mentation and prevent complexity from creepingWeÕve found a good road map has two key char-acteristics.First,it divides implementation activitiesinto manageable,yet meaningful stages whilemaintaining Þdelity to your overall strategy anddesign.Implementing signiÞcant change in a par-ticular region or on a narrow set ofproducts willhelp you validate the overall design and ensurethe success ofa broader deployment.Second,the road map should balance speciÞcimplementation actions with a general ability toadapt to changes.That is,it needs to include thespeciÞc changes that the strategy and design callfor.At the same time,though,it needs to includecriteria that can guide changes that are difficultto anticipate.For instance,one large industrialmanufacturerÕs road map identiÞed the need for upto four new manufacturing facilities over a 10-year period.Modeling helped identify potentialideal site location alternatives,but Þnal site selec-tion was to be based on pending legislation thatwould affect the availability ofa major bulk rawmaterial.Instead ofspecifying the exact sites,theroad map deÞned key criteria that allowed for ßex-ibility in the face ofchanging local regulations,transportation costs,raw material availability andcosts,and competitive behavior.Both the supply chain design and the imple-mentation road map are living plans that need tobe reviewed and reÞned iteratively to ensure theyconsistently support your companyÕs strategicfocus.WeÕve found it helpful to incorporate thisactivity into the sales and operations planning(S&OP) process.As tactical planning has becomemore automated and information more accessi-ble,many best-practice S&OP process models nowtake a strategic role in supply chain management.Regular use ofan executive-level,strategic S&OPsession as the forum for road map review,deci-sion-making,and reÞnement ensures that the roadmap is an integral element ofongoing businessprocess and mid- to long-term supply chain plan-ning.Supply chain complexity accumulated over theyears can put a stranglehold on your ability torealize your strategic goals.By shedding this unde-sirable complexity and developing an ongoingsimpliÞcation plan,youÕll be best prepared to dom-inate in an increasingly competitive environment. CONTACTS:PRTM Director Brad Householder at:bhouseholder@prtm.com or +1 781 434 1200 View his proÞle at:http://www.prtm.com/experts/householderPRTM Associate Ashok Rao at:arao@prtm.com or +1 650 967 2900 © 2006 PRTM 461 Reprinted from PRTMÕs Insight Winter 2006ounded in 1902,U.S.Gypsum Company,a sub-sidiary of USG Corporation,is a leadingbrand gypsum wallboard.Withrevenues of over $4.8 billion,USG is the largest NorthAmerican producer of gypsum wallboard,producing andCanada.USG built its leadership position through decadesof providing low-cost,high-quality products by manu- A Changing Industry But the building materials industry was changing rap-idly,motivating U.S.Gypsum to explore new ways tomaintain its leadership position.Many of the compa-nyÕs customers,such as The Home Depot and Lowes,higher customer expectations,especially in the areas ofproduct availability and delivery information.As cus-tomer requirements increased,U.S.GypsumÕs competitorswere also making service and quality improvements thatAt Þrst,the company tried to address these challengesupgrading older lines,increasing focus on plant-leveldelivery performance,and more aggressively attackingsources of waste and delay.But this localized approachdid not provide the improvement in customer service thecompany was looking for.The manufacturing networkty to improve delivery performance while maintainingstrong cost performance.Stepping back from the prob-lem,U.S.GypsumÕs supply chain leaders realized thata large,complex network of plants,process technolo-gies,and products.Complexity in the management ofservice performance.What was called for,the company realized,was a fun-strategies.Cost and quality could not be sacriÞced,ofcourse,but they had become Òtable stakesÓin the indus-try.Customer-facing supply chain performanceÑprecise,timely,and reliable delivery of products and informationÑwere the new success factors.But how would theTo answer this question,U.S.Gypsum did a full strate-gic assessment of its supply chain performance.Supplychain benchmarking validated U.S.GypsumÕs best-in-class inventory and cost performance and highlightedery,especially in comparison to retail industry norms.But simply adding inventory to improve delivery per-formance was not the answer.The complexity of products,transportation constraints,plant capabilities and costs,andtory would result in more of the Òwrong products in thewrong places.ÓInstead,they needed a supply chain strat-maintaining the companyÕs strong cost,inventory,andquality position while providing best-in-class service per-formance.The solution? Moving from a local/regional Analyzing the Supply Chain rent supply chain structure and operations,U.S.Gypsumdetermined that the network was performing at near-optimum cost levels,but that both cost and servicewith disruptions in supply or demand.In short,the com-went generally according to plan,but unplanned down-time,demand surges due to hurricanes or wildÞres,and U.S. Gypsum: Designing a Simpler Supply Chain © 2006 PRTM 461 Reprinted fromPRTMÕs Insight Winter 2006locally-driven,uncoordinated responses that had nega-tive ripple effects on cost and service across the entiremodeling,the company deÞned critical changes to moveto a Ònetwork optimizedÓoperating model.SpeciÞcally,centralizing forecasting,integrating supply chain planningand plant-level planning,and implementing policies forplant adherence to the supply chain plans.Productionoptimization lowered costs and improved inventory util-to demand and supply variations.These changes wouldenable U.S.Gypsum to more effectively leverage its broadgeographic presence to improve customer service atlower cost,with far less sensitivity to supply or demand Implementing the New Design Implementation of these solutions,however,posedsome signiÞcant challenges.The company would need toadd new distribution locations and capacity,transitionproducts to different plants,and rationale product varia-tions.It would also need to transition long-standingplant/customer relationships to other locations,changeinternal and customer-facing policies,and add newprocesses and information technology capabilities.Atthe same time,U.S.Gypsum and the industry as a wholesure on plant utilization and product availability.Thisdeliveries and relationships.There was no room formethodically.To manage and mitigate implementation risk,U.S.First,the company made forecasting and planning processnetwork-wide planning.A new distribution center wasadded in a capacity-constrained region,providing supplychanges and of consolidation of low-volume products.TheTo monitor the impact of these improvements on itssupply chain network,U.S.Gypsum introduced new met-rics,including total delivered cost and Òdeviation fromby their ÒidealÓsupply chain model.The company alsomap that might be required.Management of the imple-companyÕs monthly sales and operations planningprocess,providing a clear and regular managementvenue for review,adjustment,and decision-making.The pilot implementations of U.S.GypsumÕs newlyresults.Product delivery reliability is improving,as isoverall product availability.The planning,policy,and dis-tribution improvements are increasing the supply chainÕswith less adverse impact on cost and service.Service lev-els and Òdeviation from optimalÓcosts are holding steadyor improving,even as overall demand continues to exceedsupply.As the supply chain changes are deployed acrossU.S.GypsumÕs new supply chain management systems,the beneÞts are expected to multiply.