Building a Healthy Supply Chain

Stephen DeAngelis

October 10, 2011

Although Sue Gillman, Partner and Co-owner of Aveus, a global strategy & operational change firm, believes that Gartner is good at identifying top supply chain performers in its Gartner Supply Chain Top 25, she believes that there is more to say about what makes a great supply chain. She writes, “[The Gartner] list includes many organizations we particularly admire, the big secret is that it’s only part of the conversation.” [“How Healthy Is Your Supply Chain? Four Critical Lenses to Improve System-Wide Performance,” SupplyChainBrain, 13 September 2011] She explains:

“Gartner measures ROA, revenue growth and inventory turns, as well as feedback from the Gartner AMR survey and a peer opinion panel, which provide an interesting ‘end’ of the story. What’s missing from this dialog is the notion of the interconnected system, of thinking of the supply chain as part of a larger performance chain. Missing are the beginning and middle stories.”

Gartner analysts might not agree with Gillman’s assessment, but her point is well made: The story about a supply chain needs to include the first link, the last link, and all of the links in between. She continues:

“The supply chain, the way most of us commonly think about it, is only one thread of a bigger tapestry. Today’s supply chains are a complex tangle of data and relationships, which are all part of the enterprise-wide performance chain – all the tangible and intangible elements that have to move from the split second you trigger demand to the time you have cash in the bank. Whether you’re thinking specifically about manufacturing, suppliers, invoice processing, shipping or forecasting, financial metrics are helpful and clearly objective and unarguable, but they’re lagging indicators. They’re the scoreboard. So where is the system view? How can an organization see how healthy its performance chain is without waiting until the end? Similar to taking a patient’s vitals, looking through four lenses – speed, predictability, flexibility and leverage – provides a way to measure the current health of a system-wide performance chain, as well as help you diagnose where improvements may be necessary.”

I’m pleased that Gillman writes about the inadequacy of “lagging indicators.” At Enterra Solutions® we’re working to help clients obtain real time information that can help keep track of corporate “vital signs,” which we call Market Signals™. Gillman’s four indicators of a supply chain’s health are interesting. Some of them are widely discussed, like predictability and flexibility. Speed and leverage, however, are terms not as commonly discussed. Gillman explains each of her indicators beginning with speed:

Speed: When we refer to measuring speed in your performance chain, we’re talking about the velocity of processes such as turnaround time, closed lot cycle time, time to market and days cash outstanding. When evaluating speed in a performance chain, look for ways to pull time out of the production cycle, reduce turnaround time and drive product through the system faster. Start by mapping your value stream, and focus in on those areas that are slowing down the speed of the system in turning inputs into value for which your customers will pay. Then take corrective actions to break through those constraint areas and reduce your process times.”

Many of the recommendations that Gillman includes under her “speed” indicator are concepts discussed by other analysts but under different monikers. In a post entitled Reducing Supply Chain Complexity, I discuss how some analysts talk about the need to simplify supply chains. Inevitably, reducing supply chain complexity increases speed in many of the ways discussed by Gillman. In another post [Supply Chain Visibility], I mention an interview that the staff at SupplyChainBrain conducted with Steve Hensley, president of Blue Sky Technologies. Hensley talked eliminating wasted time in the supply chain during a discussion of supply chain visibility. Gillman next talks about flexibility.

Flexibility: What creates flexibility in your business? You may need strategic inventory buffers – or just-in-time fulfillment options so that you can respond quickly to varying demand. Staffing on key pieces of equipment may need to vary from the norm. Using Lean and Six Sigma tools, you can diagnose and focus on creating flexibility where you need it most. In a factory or warehouse, cross-training may be far more valuable than one more piece of equipment that adds capacity but no extra flexibility. In a service-driven business, staff flexibility across wage grades may be more valuable than preserving the capacity of higher-wage employees while limiting the ability to respond to dynamic customer needs.

Supply chain flexibility (or agility) is an oft-discussed supply chain management topic. See, for example, a previous post entitled Agile Supply Chains. I like the fact that Gillman talks about using Six Sigma tools to free up assets so that a company can invest in a more flexible supply chain. Too often, you hear consultants talk about using Six Sigma tools to cut supply chain costs, which can actually reduce flexibility. Lean supply chains that get too lean can actually become brittle. Gillman’s next indicator of a healthy supply chain is predictability. She writes:

Predictability: In a plant, warehouse or processing center, predictability comes from consistent flow across the supply chain – more routine and quality repeatability, less variability of external and internal processes. Examples include variation in time or quality, records accuracy, process yield and customer satisfaction. If you are seeing cycle times with wide deltas in your operations, or you have significant gaps between engineered or designed process time and reality, predictability is out of reach. Wide swings in your day-to-day output suggest the standards for performance have not been passed through the chain successfully. To increase predictability, measure the difference or gap between designed process time versus what is actually happening along each section of the performance chain. Then work the issues until predictable routines are planted in institutional memories.”

Whereas Gillman writes about supply chain predictability, other analysts write about the same concerns under the topic of volatility. Gillman’s point is well made. It is much easier to deal with process predictability than with demand forecasting because processes, unlike demand, are under company control. A company, of course, has to work with both sources of volatility, but making processes more predictable is a good place to start. Her final indicator is leverage.

Leverage: Leverage is about making more with existing resources, people and working capital assets. But too often in business the tendency is to run to the capital store to buy more equipment rather than letting existing investments do the heavy lifting. As the rocky economy has taken its toll, opportunities to add capital have become limited and the need for leverage is more important than ever. Instead of adding (and spending) more, when looking for more leverage from existing assets and operations, turn to Overall Equipment Effectiveness. OEE is one great method for diagnosing areas for improvement in existing equipment performance and to ensure, particularly in bottleneck areas, that the most essential equipment is fully utilized.”

For cash-strapped businesses applying this kind of “leverage” is an excellent idea. I would recommend taking the idea a step further and examine how you can get the most out of legacy IT systems. At Enterra Solutions, we apply technologies that complement rather than replace existing systems. That’s a good way to “leverage” those systems. Gillman continues:

“These lenses help to simplify something extremely complex. They allow us to look at the entire system that creates value and then zero in on specific areas of challenge. We work with organizations that start with pieces and parts of a complex performance chain. They dig in by saying, ‘we need to increase manufacturing and fulfillment,’ or ‘we need to streamline our invoice processing.’ They’re trying to react to and solve a local pain point. This is completely understandable and yet, may not at all solve the real, root issue limiting performance of the supply chain – or the larger performance chain.”

One method that creativity gurus recommend using to get to the bottom of a “local pain point” is to ask “why” at least five times. Using a mechanical rather than a process example, here is how that method works: WHY did the machine stop? (Fuse was overloaded) WHY was there an overload? (Bearings weren’t lubricated) WHY was lubrication insufficient? (Pump was underperforming) WHY was pump pressure low? (Shaft abrasion caused vibration) WHY was there abrasion? (No oil filter to prevent contamination) The real answer to that “local pain point” is not to replace the fuse but rather to put an oil filter on the pump. I think that is what is Gillman is recommending that companies do to get to the “real, root issue limiting performance of the supply chain – or the larger performance chain.” She continues:

“We feel strongly that these four lenses can help companies get up out of local optimum, see the bigger picture and answer the critical big question: How do you make that all add up to improved system-wide performance? Nobody can work on the whole system at the same time. We all have to pick places that are tangible, most important and impactful at any given time. Using these four lenses is a way you can work on something specific to a part of the performance chain AND make sure you are staying connected to and driving the overall health of the performance chain – and working within the context of the system.”

Gillman insists that these four “lenses” should be used to provide a new perspective for looking at supply chain challenges. She cautions against putting “an industrial engineer” in charge of a program to put hard numbers against the indicators. “They’re lenses that allow you to ask basic questions and use example metrics as indicators of the health of the performance chain,” she writes. “Every organization has its own profile of speed, predictability, flexibility and leverage. All four are always present in every organization to some greater or lesser degree.” She concludes:

“You’re not looking for infinite speed, predictability, flexibility and leverage; more is not always better. Once you can see the health of your performance chain through these four lenses, match your goals to what your customers value most within these metrics for maximum results.”

Since I mentioned the Gartner Supply Chain Top 25 at the beginning of this post, I’ll conclude by mentioning that Gartner has also released a Top 10 list for industrial supply chains. According to Supply Chain Digest, this list in an extension of the process that results in the Top 25 list. [“Gartner Names Top 10 Industrial Supply Chains,” 17 July 2011] Gartner uses the same metrics to determine the results of this list as it does to determine the Top 25 list. The article continues:

“Though not providing a clear definition of what ‘industrial’ means, the names on this year’s list are characterized by what are generally viewed as discrete industrial products companies, including several conglomerates that operate across multiple industries.”

The Top 10 companies in order are: Emerson (electrical and power equipment); Hyundai Heavy Industries (a ship builder); Caterpillar; John Deere; Danaher; Johnson Controls; Illinois Tool Works; ABB; Schindler Group; and General Electric. The Supply Chain Digest staff concludes:

“Interestingly, … these top industrial supply chains were rated relatively low in terms of the overall top rankings. … ‘I applaud Gartner for both calling out industrial supply chains, which tend to not get much exposure, and also for using a mostly objective methodology in determining the top performers,’ [Dan Gilmore, Supply Chain Digest editor,] said. ‘But the reason industrial companies may rank low overall may just have to do with the nature of this sector, which could for example require lots of assets and space parts, which would impact their ROA and inventory turns numbers. A sector’s revenue growth also comes in to play. Does this mean their supply chains are not as good as say a company in consumer packaged goods? Not necessarily.’ Gilmore added: ‘Does that mean these supply chains aren’t as good as those in other sectors? Not necessarily. But the fun is in the debate, and that’s what these kinds of lists stir up.'”

Gilmore’s point confirms something that Gillman stated, “Every organization has its own profile of speed, predictability, flexibility and leverage.” You really can’t compare supply chains across industry sectors. Within sectors, however, ratings like those provided by Gartner, offer a good standard against which other companies can measure the health of their own supply chains.