Operations Consulting - PwC Finland

Supply Chain Management is a Board Room Issue

The domain of supply chain management has evolved greatly over the last few decades. It is no longer isolated to the back office but viewed in a more strategic light. A lot has been written about supply chain management’s impact on quantifiable measures such as shareholder value, profitability, return on net assets (RONA) or return on capital employed (ROCE). Many top corporate executives and board room members have taken notice and now view supply chain management as a critical end to end process that could ensure their future success and competitiveness in the market. As a result, leading business organizations have integrated SCM into their strategic agendas. As supply chain and logistics professionals, we should welcome this trend as it gives rise to our work on a more high profile strategic stage.

As markets are dynamic, a firm’s supply chain should be responsive enough to take into account market variation and remain continuously adaptable. In addition to this, the design of the supply chain strategy should be flexible enough to handle market capitulation, yet simultaneously embeds a level of advanced foresight that addresses longer term structural business issues and objectives. A fundamental question businesses need to answer is: what supply chain resources and capabilities will need to be developed in the near to medium term, in order for the firm to compete effectively and efficiently in the future? A thorough analysis of the firm’s global operational footprint and relevant supply chain actors is a good starting point. This includes several tiers of suppliers, customers and third party service providers, as well as the locations, productivity, throughput flows, volumetrics, fixed and variable costs of production and distribution facility network. Companies should also address make or buy decisions and weigh the trade-offs between transaction and production costs, as well as understanding the lead time and service implications of their decisions. This analysis should take an end to end system wide / network view of the supply chain, as opposed to a fragmented “piece-meal” view. The latter approach can result in a sub-optimal design of the operational footprint and create serious service and cost implications for the future.

Cranfield University conducted a study about supply chain strategy in the board room in 2010. Researchers identified two main functional drivers of supply chain strategy, which were 1) customer service and 2) corporate strategy and three main performance drivers which were 1) cost focus, 2) customer lead time and 3) customer quality. One can deduce from this study that the centricity around the customer is crucial to the formulation of the supply chain strategy. This should not come as a major surprise as one of the core design drivers of business strategy is also the customer. If business strategy seeks to answer the question of “what”, then the operations / supply chain strategy should seek to answer the question “how”. These distinct strategy processes are not mutually exclusive to one another but very much inter-related. Therefore, it is paramount that the alignment between the corporate strategy and supply chain strategy be tightly coupled.

The inter-organizational and cross functional nature of supply chain management dictate a level of collaboration, integration and coordination required for the successful execution of the overall business strategy. The role of supply chain management in achieving competitive advantage should not be underestimated, as it can play an important role in attaining cost leadership or differentiating positions in an industry marketplace. As board room members and C-level executives now see supply chain strategy as a critical component to their business success, it is up to us as supply chain & logistics professionals to raise our game to the next level. This means being able to engage in strategic discussions with the executive team on how the supply chain can be used strategically to enhance value and ensure the delivery of superior performance.  

 

Until next time,

Gautam Basu
+358 (0)50 401 6830
gautam.basu(fi)fi.pwc.com

Sales and Operations Planning Revisited

The current global economic environment is characterized by uncertainty. When the marketplace becomes more volatile, many businesses respond in an intuitive manner and lack a data driven / fact based approach. In these situations, an agile and adaptable supply chain is critical, in order to respond rapidly to changes in the market. One process that can aid in achieving this responsiveness is sales and operations planning (S&OP). A structured and well defined S&OP process acts as the foundation for a business to achieve alignment and agility within their supply chain.

Hidden functional silos within a company inhibit effective corporate performance management. A well defined S&OP process can break down functional silos by creating a platform that encourages collaboration and information sharing across functions. In a typical sales and operations planning cadence, members from marketing, sales, product development, sourcing, production, logistics and finance departments participate in cross functional meetings to align their respective plans with the objective of achieving a demand – supply equilibrium. Examples of the types of information that gets shared during these planning meetings include, but are not limited to: market intelligence updates, new product introductions, sales forecasts, capacity, materials, distribution and resource plans, and optimized inventory positions. Demand and supply plans are aligned through this structured monthly cadence with particular attention to rigorous follow up on specific key performance indicators (KPIs) such as forecast accuracy, order fulfillment rates, inventory levels with a comparison between planned versus actual performance. Through the introduction of cross functional collaboration, information sharing, plan recalibration, consensus management, and the clarification of measurements & business objectives, functional silos tend to get reduced dramatically and planning performance tends to accelerate.

The S&OP process links the demand and supply plans with the overall corporate business plan/budget. By consistently measuring performance, the S&OP teams can track and respond more effectively to changes to economic conditions and marketplace volatility, as well as help mitigate “bull-whip” effects within the supply chain. Firms that have implemented S&OP have received tangible benefits which include: increased demand forecast accuracy rates, reduction in inventory levels and expediting costs, higher levels of customer service and lower order fulfillment costs. Sales and operations planning encompass critical components of process, people and technology, therefore can lead to transformational changes within organization.

As market uncertainty and volatility is not fully abated, it behooves businesses to revisit S&OP, in order to improve their supply chain agility and adaptability to market conditions. If your business is interested in learning more about sales and operations planning (S&OP), then please contact a PwC operations consulting specialist.

Until next time,

Gautam Basu
gautam.basu(at)fi.pwc.com

Managing Operational Complexity for Margin Improvement

During the last 10-15 years, there has been a trend for businesses to increase the number of customized products and services enhancements to their product portfolios. Many firms introduce new product customizations, in order to differentiate themselves from the competition. The proliferation of these new products and services has resulted in increased operational complexity and higher cost bases for many firms. This stems from the additional management and allocation of R&D, materials, production, inventory and engineering resources needed to support the enhanced service and custom product.  In many cases, the additional revenues captured from these products do not fully cover the incremental costs associated with the additional layers of design, sourcing, production, and logistical changes. Hidden tiers of complexity that have accumulated over time create additional variations in the product or service typology which can result in inefficiencies within the supply chain,  damage resource and asset utilization and undermine sales and marketing effectiveness. By managing complexity levels within the product and customer portfolios, businesses can improve their EBIT margins and become more competitive.

In order to better understand the dynamics of portfolio complexity, companies need to take a value chain approach. By decomposing the various functions, activities and locations within the value chain and allocating the costs of custom products, firms can understand the drivers behind the cost of the complexity. As a starting point, businesses will need to capture, collate and analyze critical data which includes sales revenue and costs by product group (preferably down to the SKU level), historical production volumes by product line, capacity utilization of equipment & associated costs, logistical costs and capacity and overhead related to support functions. After the analysis, managers can better understand the drivers of cost related to economies of scale and scope that relate the complexity of their product and customer portfolios. Once the business has a better idea of product profitability, executives will need to ascertain the competitive advantage of each product within the marketplace and map this against profitability targets.

It should be noted that there is good and bad complexity. Good complexity adds value for the customer base while simultaneously improving revenue and margins for the firm, while bad complexity adds little to no value within the market and contributes to excessive waste and a higher cost base. There are several operational strategies that could be deployed in managing complexity such as leveraging the same production, logistics and packaging platforms, reusing designs and components, and continuously measuring costs and benefits of product portfolio complexity. Some of the benefits of effective complexity management include: increased operational efficiency, better economies of scale in purchasing, decreased inventory levels and costs, reduced shipping and expediting costs and improved return on assets.

If your business is interested in learning more about complexity management, then please contact a PwC operations consulting specialist.

Until next time,

Gautam
gautam.basu(at)fi.pwc.com

Operational Restructuring in Tough Times

In volatile and uncertain times, there is a major need for corporations to carefully review, assess and potentially restructure their global operations, in order to be more responsive to the business environment. Typically, restructuring a business involves legal, financial and operational considerations. In some cases, a business will require all three components to be implemented simultaneously. Where as in other cases, there may be only one or two restructuring components needed for corporate renewal.  In this blog, we will touch solely on the operational aspects of business restructuring.

Restructuring corporate operations encompasses significantly more than just cursory changes to business functions, like moving to vendor managed inventories, introducing key sales account management principles to the sales-force or employing electronic reverse auctions. Operational restructuring involves a fundamental alteration in the value chain of the firm, affecting all functions and activities. Although every case is different, typical operational restructuring activities include:

• Thorough review and optimization of the supply chain network, whereby certain unprofitable or cost heavy manufacturing / production or distribution sites may be rationalized or restructured
• Implementation of action plans related to improving working capital positions (AP, AR, Inventory) coupled with relentless tracking and continuous follow up
• Reduction in direct and indirect sourcing and procurement spend through rigorous analytics and potential rationalization of the supply base
• Realization of logistics cost reduction and performance improvement opportunities in inventory, transportation, warehousing and order fulfillment costs
• Elimination of waste through lean manufacturing & production operations principles
• Review the effectiveness of the R&D function through more effective product lifecycle management processes and killing non-promising R&D “pet” projects
• Transformation of service operations and reverse logistics processes to ensure tighter operational discipline & reduced cost base
• Implementation of tax efficient supply chain operations through better transfer pricing, VAT and international profit allocation schemes

By reconfiguring & optimizing supply chain network structures, streamlining operations, reducing redundancies and changing trading relationships with key partners, companies can unlock hidden value by releasing tied up working capital in inventories, containing excess operational costs and improving service performance.

Until next time,

Gautam
gautam.basu(at)fi.pwc.com

Utilizing Scenario Thinking for Managing Uncertainty

During the last several months, economic markets have displayed a level of uncertainty that has not been seen since the 2008 economic crisis. Historically high unemployment and anemic growth in the western developed economies coupled with the EU and US debt crisis have resulted in greater uncertainty for the future. Concurrently, all of the above variables have contributed to increased pressure on the international operations of private and publicly held businesses. Many business and operations professionals are bracing for hard times ahead by retrenching their efforts in managing their cost bases more efficiently, reducing levels of operational complexity in their product & service footprints and keeping a watchful eye on their working capital levels (much like they did in the 2008 crisis). A basic question comes to mind: How do business organizations manage uncertainty?

Traditional operations research and econometric methods are based on quantitative models designed to find optimal solutions for mathematically formulated problems. Optimization typically leads to deterministic solutions that fail to address uncertainty in a realistic manner. When the market environment is highly uncertain and volatile, traditional trend extrapolation techniques and optimization models produce lower rates of forecast accuracy.  One powerful tool that can be utilized in times of uncertainty is scenario planning. First introduced by Herman Kahn (RAND Corporation) in the 1950s and then used extensively by firms such as Royal Dutch Shell and GE, scenario planning offers organizations a more flexible planning method. The philosophy around scenario thinking is that it is not a single point forecast or prediction about the future but instead “narratives” about multiple plausible futures. Noted foresight author Peter Schwartz describes the output from a scenario planning exercise, “The end result is not a more accurate picture of tomorrow, but better decisions about the future.” The flexibility that scenario techniques offer can be applied to almost any competitive strategy, marketing, financial, operational, technological, or organizational issue.

From a supply chain operations point of view, scenario thinking links operations strategy with corporate & business strategy. Operations professionals must manage an environment that is dynamic, uncertain and complex. All too often, a “fire-fighting” mentality is prevalent in response to the latest operational failure within the supply chain. There is a need for more long-term thinking when it comes to supply chain and operations management. Scenario based thinking can offer some recourse to this endeavor. It can aid supply chain executives in where to allocate resources in order to build future operational capabilities that could result in competitive advantage, which risks to be prepared for in the event there is a potential for a future disruption in the supply chain, determining what could be potential ideal designs for future supply chains,  and most importantly, how supply chain and operations leaders pro-actively think about volatility and uncertainty and react more quickly with solutions & processes that are innovative, cost efficient and robust in their implementation.

PwC Strategy and Operations consultants are experienced in scenario based thinking and facilitating scenario planning workshops for their clients. If you are interested in learning more, then please contact Mikael Guarnieri or Gautam Basu.

Until next time,

Gautam

Are we more secure and safer in a post 9-11 world?

It has been ten years since the September 11th attacks on the World Trade Center and Pentagon. Many of us remember that fateful day like it was yesterday. First, American Airlines flight 11 crashing into WTC 1, then United Airlines flight 175 into WTC 2 fifteen minutes later. Finally, American Airlines flight 77 hitting the Pentagon and United Airlines flight 93 crashing over Shanksville, Pennsylvania. We all watched in horror and disbelief, as the images of planes exploding into the WTC towers were broadcast on heavy rotation in the news media. Approximately 3,000 people from over 90 different nationalities were killed in the attacks, so it was not only an attack against the US but the entire world. On the anniversary of this tragic event, I reflect on the various changes that have occurred as a result of 9-11 and contemplate the fundamental question: “Are we really any safer today from purposeful man-made attacks than we were 10 years ago?”

The impact of the 9-11 attacks have affected global society, international economic institutions, transportation systems, trade and commerce, national security policy, law enforcement & intelligence operations on multiple levels. As a direct result of 9-11, we have seen increased transportation security in our main logistics hubs through more stringent passenger screening and profiling. Multiple public-private partnerships have been created to secure global supply chains through programs like Customs Trade Partnership Against Terrorism (CT-PAT), Authorized Economic Operator (AEO), Container Security Initiative (CSI) among others.  Financial flows that support illicit activities (namely money laundering and terrorism) are under greater scrutiny. Complex information technology and artificial intelligence applications have been put to use by governments around the world to combat malware and the hacking of national interests such as food, water, energy sources and critical ICT and logistics infrastructure assets. One can also recognize the trade-off between these increased security measures vs. the relaxation of privacy protections. The later is a controversial topic but global citizens seem to be fairly content in giving up a bit of their privacy to assure a more secure world, although there is always a risk of a back-lash.

The fundamental question still remains: “Are we safer and more secure today, as a result of the additional enhancements to security policies and processes that have been implemented post 9-11?” This is a complex question that does not have a black or white answer. One can state empirically that there has not been a major foreign terrorist attack on US soil since September 11, 2001. However, there have been multiple coordinated attacks that have occurred in Madrid in March 2004, London in July 2005, Mumbai in November 2008 and most recently in Oslo in 2011. The last event raises the specter of domestic based terrorism. This emphasizes the complexity in risk identification, prevention, preparedness and rapid response to emergency crisis situations.  The difficulty in combating terrorism is summarized by former UK prime minister Tony Blair, “Fighting terrorism is like being a goal keeper. You can make a hundred brilliant saves but the only shot that people remember is the one that gets by you.” One can argue that as a global society, we have become more used to security screening measures in transport hubs, sharing of critical information about terrorist cells  and overall more vigilant about terrorism since the advent of 9-11. This in itself is an evolution when thinking about security threats and its associated risks. However, it must be noted that there is no 100% fool proof security solution that would prevent another terrorist attack from happening. Constant vigilance, effective risk management, proper coordination between public and private institution, robust emergency planning are critical in increasing our odds in successfully responding to a future crisis situation.

PwC’s Transportation and Logistics 2030 series volume 4 explores the topic of Supply Chain Security. The report was an output of a real time Delphi study completed by over 80 supply chain security experts from 29 different countries. It offers insights into the future of securing global supply chains and presents readers with several “wild-card” scenarios of what might transpire in the years and decades to come. We encourage you to download the report here.

Until next time,

Gautam Basu
gautam.basu(at)fi.pwc.com