How to build your triple-A supply chain

Success is often the result of multiple factors*** working together. The success of Haier, an outstanding representative of Chinese companies, can be attributed to many factors, the most commonly cited of which include the company's reputation for quality, innovation, branding and responsive customer service. When the reasons for Haier's success are explored, one of the most popular things corporate observers talk about is quality. Haier's CEO, Zhang Ruimin, once smashed a refrigerator that had just rolled off the assembly line with a sledgehammer-an act that showed Haier would not tolerate poor quality products. His act has become a popular story in the Chinese corporate world. Now it's time to bring it to life. Imagine Zhang Ruimin swinging a sledgehammer and smashing Haier's old supply chain. It's a bit of an abstract image compared to smashing a real product. But the results are just as effective. Haier's success in both domestic and international markets has another factor at play, and that is supply chain management. In order to improve supply chain management, Haier has taken a number of actions. According to a case study done by SAP, Haier took the following approach: - Shifted from a push strategy of production to sales to a pull strategy of demand to production. This shift ensured that production always kept pace with customer demand. - Establishing procurement and production processes based on lean manufacturing principles. - Redesigned the factory layout so that raw materials could circulate better according to needs, while reducing inventory build-up. - Turning warehouses into logistics centers so that raw materials and products can actually be moved through the system. - Discontinue production of slow-moving products and introduce new products to meet changing customer demands. " In the home appliance industry, companies are not only competing on price and quality, but more importantly, winning on the speed and efficiency of the supply chain." So says Liang Haisan, vice president of Haier Group (taken from SAP's case). This statement by Liang Haisan can be extended to any company in any industry. Regardless of the product, the impact of supply chain management on a company's success is not just important, it is a matter of life and death. This has been rightly recognized by the industry. In addition to Haier, there are many other great companies that recognize the importance of the supply chain. Like Dell, whose operating income per capita is much higher than the industry average; Wal-Mart, whose revenue has exceeded the gross domestic product of many countries; Toyota, now the world's second-largest automaker; and Cisco, which dominates the network communications market. What **** do all these companies have in common? According to Boston-based consultancy AMR Research, "What has created the dominance of these companies is precisely their excellence in supply chain management." In addition, these best-in-class companies are well aware that they can't just pursue a high-speed or low-cost supply chain, but that it must also be "efficient," as Haisan Liang puts it. Now, more specifically, efficient means agile, adaptable and collaborative (Agile, Adaptable, Aligned). An agile supply chain is high speed from start to finish. It is flexible enough to adapt quickly to changes in the business environment. This flexibility is important to all parties in the supply chain - from suppliers to end users. "Flexibility, adaptability, and collaboration" represent the best of what supply chain management can be today. Stanford University professor Hau Lee is a strong advocate of these three words, which he has shortened to 3A and written a series of studies on the subject. The benefits that companies can derive from a 3A supply chain are clear (see sidebar: "The Benefits of a 3A Supply Chain"). The risks are equally clear if your supply chain fails to be 3A. In Mitigating Supply Chain Risk Through Improved Confidence, a study co-authored with Prof. Martin Christopher of Cranfield University, Li noted that when many companies When companies begin to worry that raw materials, parts and products won't arrive on time, or even at all, they may switch to inefficient methods such as increasing inventory levels, increasing the number of warehouses, extending delivery times to customers, and replacing top suppliers with low-quality ones. These practices not only waste money and alienate customers, they also put the organization at risk of losing money and can mislead and distort the entire supply chain. In discussing such lessons, Lee cites the example of Cisco. In the 1990s, the company was unable to meet market demand for its networking equipment products, so various parts of its supply chain placed extra orders to cope with the situation. This caused Cisco's inventory to surge, and when actual market demand suddenly dropped in 2001, Cisco still had $2 billion worth of excess inventory on hand. In order not to repeat Cisco's mistake, companies should look at the three components of the 3A supply chain-flexibility, adaptability, and collaboration. One of these three elements is indispensable. The absence of any one of them will disintegrate the supply chain. Look at Haier's action steps listed above, which together make up the 3A's. This reflects the holistic approach behind the 3A supply chain. A company with a 3A supply chain is able to adapt its operations to cope with unexpected situations such as surges in demand or backlogs in inventory. The need for flexibility and collaboration is even more pronounced now that supply chains are longer and more global in scope. Organizations are expanding their supply chains to support their business activities in the global marketplace, which requires more efficient supply chains within the 3A framework. Now, let's break down each of the 3A's and see how best-in-class companies manage their supply chains. The first element: Flexibility The supply chain of a best-in-class company is able to respond quickly to changes in the market. According to Lee, flexibility is critical to supply chains because demand and supply fluctuate rapidly and dramatically in most industries. The popularity of customized products is one of the main factors causing fluctuations in demand and supply. This trend has resulted in shorter product life cycles. The direct impact of this on manufacturers is that the products have limited time on the shelves. Faced with this situation, companies like Haier work closely with their channel partners to stock marketable products, thereby reducing inventory costs for both channel partners and manufacturers. However, it is easier said than done. To stock only marketable products means that raw manufacturers must produce on demand. Traditionally, manufacturers have produced to obtain "sufficient" inventory. By doing so, however, they take the risk of not being able to respond to sudden changes in demand. According to CFO Magazine, P&G paid a heavy price for this. On the eve of a holiday, one of P&G's factories shut down early for a break. Historical sales data indicated that the plant was producing enough Tide detergent to meet holiday demand. But the weekend before the holiday, P&G executives got a surprise - one of the company's major retailer customers had just placed a surprisingly large order for detergent. Unprepared, P&G took the order and immediately got the plant back to work. But because it was a holiday, the company had to pay overtime to its employees and arrange for expedited shipments to meet the customer's needs. P&G ended up paying more than a million dollars in costs to take this one order. Disasters such as these can happen when managers rely solely on making sales forecasts based on historical data. For some companies, the solution is to maximize the accuracy of their forecasts. But who can actually predict sales accurately? That's like asking how you can accurately predict the weather - it's a meaningless question. The right question is: How fast can we react when demand changes? To answer this question correctly, companies need to have real-time data from their point-of-sale and suppliers. Once the data shows a sudden change in demand, companies must be able to take stock of the situation and quickly adjust their supply. It all starts with getting data from the point of sale. Managers feed this data into their production schedule planning, which then drives purchasing. In this way, the end-of-sale data becomes a pointer for suppliers to fulfill their responsibilities. Now, instead of stocking inventory, companies are stocking information. This is the effect of demand-driven production at its best, but it is not the same as just-in-time manufacturing. Typically, just-in-time manufacturing is simply about reducing the waste that occurs when inventory is passed on to suppliers. Demand-driven manufacturing is about passing customer data to the supplier so that the supplier can determine production based on that data. To ensure that demand-driven production works, manufacturers must focus their efforts on improving the operational efficiency of their factories, ensuring that inventories of raw materials, work-in-process, and finished goods are kept to a minimum. Manufacturers must also pay close attention to procurement management to control the cost of goods sold. It is not only manufacturers that benefit from a flexible supply chain, but also retailers. 7-11, Japan's most profitable retailer, makes full use of the latest demand information from the point-of-sale to determine how quickly stores are replenished, which is updated on a minute-by-minute basis. Companies can make a lot of money if they can produce only what sells, and AMR Research reveals that companies that have adopted a demand-driven supply chain collect accounts receivable 70 days sooner and bring new products to market 70 percent faster than their competitors. The second element: Adaptability Best-in-class companies can also adjust their supply networks when markets or business strategies change. This allows them not only to react faster, but also to reduce inventory costs. This is a significant amount of money - inventory costs can represent 30 to 40 percent of the total cost of manufactured goods. With the rapid growth of business in China over the past decade, it is easy to see how inventory cost control will become an increasingly difficult challenge for companies. One of the supply chain management methods used by companies to control inventory costs is called the "delay strategy". To implement this strategy, these companies work with logistics service providers. The logistics service provider is able to gather product components from different sourcing locations and prepare them for shipment based on actual demand. When an order is received at a certain location, the basic components of the product are shipped from a central location to the place where the order is received. This practice can even operate across borders. By adopting a delay strategy, companies are able to ensure that production and delivery are based on local end-user requirements. In Asia, FedEx is one of the leading providers of support services for this strategy, according to Business Asia magazine. "If a product is indeed needed by a customer who has placed an order, we can help and support its manufacturer to increase its capacity to produce it." A FedEx representative said. As a result, there would be no need for companies working with the company to stock inventory for every order. Another variable that companies need to face in order to improve the adaptability of their supply chain is site selection. Companies need to decide where their main distribution centers should be built, while considering whether this is the most cost-effective location. Business Asia cites the example of Australia's Brisbane Airport Corporation, which is trying to attract new businesses to its business district that integrates airlines, freight forwarders and warehousing and distribution centers. This type of locational arrangement can speed up the process of getting goods from the airport to customers. Placing all three touchpoints - airlines, freight forwarders and warehousing centers - in the same area is a great way to save money and be efficient. Another way to improve supply chain adaptability is to outsource logistics so that companies can focus on managing the rest of the supply chain. DHL is one of the specialized logistics companies that provide outsourcing services to other companies. DHL's revenue is growing at a double-digit rate as many companies recognize the need to outsource complex and labor-intensive logistics operations. If your business is an OEM manufacturer, you must revisit your supply chain strategy to ensure that it is still relevant when the demand or supply situation changes, advises Li Hao Liang. To do this, you can choose to adjust your supply base, change production locations, establish new distribution channels, or adjust product design. Lee cites Flextronics International Inc, a provider of electronic equipment manufacturing services, as an example. Initially a pure contract manufacturer, the company adjusted its business model and began building industrial parks to house a large supply base. More recently, Flextronics has also ventured into providing product design services. It is because of this strong adaptability that Flextronics has been able to jump from the world's twenty-second position ten years ago to the world's first position in the ranking of electronic equipment manufacturing service providers. The third element: Collaboration The last point is that first-class enterprises will combine the interests of their supply chain partners with their own. Li Xiaoliang believes that this is important because each enterprise is only concerned with its own interests, and if its goals are not aligned with those of its supply chain partners, the effectiveness of the collaboration will be greatly diminished. Like any form of chain, the supply chain has its own fatal weaknesses, and a single misstep can lead to a total loss. Collaboration means helping to strengthen every link in the supply chain. So how can you be collaborative? First of all, you can enjoy information about markets, sales and production schedules with all your partners*** in the supply and distribution channels. Here, the Internet is a very important tool. According to Li Xiaoliang, using the Internet*** to enjoy real-time information "is very important for building trust, on the basis of which companies can solve practical problems in the market". Equally important is the need for all parties in the supply chain to work together-especially within the organization. Some companies have merged the supply department (e.g., purchasing) with the demand department (e.g., distribution). Some companies have successfully accomplished this reorganization, such as Qualcomm, mentioned in CIO Magazine. In order to better handle supply and demand, the company decided to merge the supply planning group and the demand planning group to form a complete supply chain department. Qualcomm executives recognized that to improve the company's order fulfillment rate, it needed to make long-term demand forecasts, which required the company to take into account the capacity of its suppliers. To do this, the company needed to encourage cooperation not only within the supply chain department, but also throughout the company. Like other leading companies, Qualcomm requires its supply chain, finance, product marketing and sales executives to work together to develop more accurate demand plans. Executives in charge of supply chain and executives in charge of sales and marketing meet at least once a week to review forecasts and prepare for larger monthly meetings. At the monthly planning meeting, executives from the company's finance, sales, marketing, and supply chain departments come together to discuss and analyze the overall demand forecast. A Deloitte client has had similar success in this area. The company is a division of an international engineering group that specializes in medical devices. Its problem was that many of its processes were very fragmented and siloed. Worse, each product line was like a small business, with each business unit doing everything it could to improve its own performance without considering the overall performance of the company. Deloitte helped it establish standardized processes across the company. This opened managers' eyes to why the company had previously failed to realize its full potential. Today, each of the company's departments considers the entire sequence of company activities-from market intelligence to planning, to purchasing, to production, and then to delivery and service. In this way, they are able to focus on implementing a strategy of leading production with need. These practices help you to be internally collaborative. But don't forget there's another key component: reaching external collaboration. To do this, you must treat your customers as part of your supply chain. Indeed, for the best companies, the supply chain doesn't stop at their end customers, but extends to their customers' customers. Dow Corning knows this. Dow Corning has more than 25,000 enterprise customers, and more than half of its products are sold to customers outside the U.S. domestic market. According to an SAP case study, Dow Corning has learned from its customers that the best service for them is to help them gain a competitive advantage in their markets. To accomplish this, Dow Corning developed a strategy to help customers create their future by giving them innovative, ever-improving raw materials at competitive prices. To do this, Dow Corning has improved its supply chain program to make it more relevant to customer needs. The company makes decisions based on data, which in turn uncovers potential orders and improves responsiveness to changes in customer needs.