Can You Reduce Your Supply Chain Complexity?

Simplify your supply chain to cut costs and improve overall performance.

RICK HOOLE

ith the acceleration of global competition in the past decade, supply chain performance has become a critical source of sustainable advantage in many industries. Total supply chain costs can vary by as much as 5% to 6% of annual revenues between companies in the same industry sector, based on PRTMs benchmarking of more than 500 supply chains. Our research also shows that companies with more mature supply chain practices are reducing costs faster than their lessmature peers and achieving higher profit margins. Industry leaders are using this advantage to increase market share and drive out their competition. Through supply chain innovation, companies like Dell, Wal-Mart, and Zara are transforming the industries in which they compete. The success of these companies stems from their ability to reduce the complexity of their supply chain architecture. All aspects of the supply chain contribute to the complexity: physical breadth and configuration, management, relationships with suppliers and customers, organizational structure, and information technology capabilities. These aspects become complex for several reasons. Competitive pressures constantly drive businesses to expand their capabilities. In addition, most people in large organizations continue to wear functional hats and, as one might expect, strive for functional excellence: As each function does what is in the best interests of its customers or internal stakeholders, it places demands on other functions, which in turn introduces

greater complexity. Finally, complexity simply evolves over time from the cumulative outcome of many seemingly unrelated functional decisions. These decisions leave in their wake supply chain artifacts that service a need that may no longer exist.

The Case for Simplification Often one compelling insight can lead to a multitude of best practices. Complexity reduction is one such insight that can impact the entire supply chain. It is only common sense that if a business process can be simplified, it will usually enhance overall performance, leading to more consistent quality, lower operation costs, and inherently greater responsiveness. That powerful combination will most certainly yield more satisfied customers. A simplified supply chain, like a defragmented computer hard drive, is well worth the effort.

Approach to Analyzing Simplification Opportunities The Complexity Reduction Framework breaks down supply chain complexity into its component parts. Since the supply chain is a process view of a companys logistical activities, it is appropriate that we break the supply chain first into its process elements. The process elements, in turn, can be defined by a number of other attributes, or performance levers that can be modified to increase supply chain performance.
1

2004, 2006 PRTM

The framework of supply chain process elements and performance levers is illustrated in Figure 1. The Supply Chain Operations Referencemodel (SCOR), endorsed by the more than 750 member companies of the SupplyChain Council, breaks the outbound supply chain into four process elements: plan, source, make, and deliver. Plan includes all the supply chain activities related to demand management, sales and operations planning, and overall supply chain strategy planning. Source covers the identification of supply sources and the execution of material and services sourcing on an ongoing basis. Make covers all the conversion activities performed internally. Finally, deliver encompasses the taking of customer orders and their fulfillment, including the management of the distribution infrastructure and outbound transportation. Figure 1: Supply Chain Performance Levers
Configuration What gets done where (Physical assets) Management How we manage Practices (What people do) Relationships Bind partners to organizations (Leverage partners capabilities) Organization Who is responsible (Align performance objectives) Information Get information in time to make Systems decisions (New practices need new information)
Supply-Chain Operations Reference-model (SCOR) is a registered trademark of the Supply-Chain Council, Inc.

Five performance levers have the greatest impact on supply chain performance: configuration, management practices, external relationships, organization, and systems. Configuration addresses the supply chains physical assets and material flows. The management practices lever covers how the supply chain is managed. External relationships deal with how the company leverages its partners and suppliers. Organization identifies who in the company is responsible for what and, perhaps more important, how performance objectives are aligned. Lastly, the systems lever refers to the information retrieval needed to make decisions and support leading practices.

Complexity-Reduction Techniques A number of specific simplification techniques can be applied to the supply chain. The key is to identify those that will improve the different performance levers for each supply chain process element. By creating a matrix, we can begin to develop a comprehensive toolkit of simplification techniques, as illustrated in Figure 2. The term configuration has conditioned us to think of ways to reduce physical complexity. That could mean fewer suppliers (source), fewer plants (make), or fewer distribution layers (deliver). The management practices lever may be the most intuitive one to pull, since we often think of applying new management practices to reduce complexity. Although applying lean manu-

facturing techniques is the most obvious solution, its worthwhile to examine sales practices and the volatility they create. Eliminating the end-of-quarter hockey stick sales spike can simplify production planning significantly. Using the relationships lever to reduce complexity involves sharing tasks with your trading partners. This can be done in a way that benefits both parties. The organizational lever is similar, except it usually refers to the simplification possible from outsourcing work to a more expert third party. To realize the full benefits of outsourcing, however, it is important to have a clear plan for reducing or reassessing the internal resources that previously performed that work. The IT lever is also useful for exporting work (e.g., eCommerce portals) to trading partners. In addition, this lever identifies simplifying features provided by ERP software, such as repetitive manufacturing logic.

Complexity-Reduction Techniques in Action Starting with the plan process element and the configuration performance lever, you might think that there are no physical assets related to planning processes. So what do we plan? Products. And arent products physical assets? It is possible to simplify planning by changing the configuration of what is planned. First, look for ways to reduce the number of shippable products that must be forecasted.
2

2004, 2006 PRTM

Figure 2: Complexity-Reduction Techniques

Supply Chain Process Elements
Configuration Management Practices External Relationships Plan Source Make Product Configura- Part Rationalization Plant Rationalizaiton/Package tion Vendor RationaliRationalization zation Design for Sourcing Lean ManufactPostponement uring Practices Rationalize Terms Customer and Market Segmentation Supplier Collabora- Outsourcing tion VMI JSA Term Codes Organization Sales and Operations Planning Demand Management VMI Deliver Reduce Distribtion Layer Reduce Self-Induced Volitility Promotions Hockey Stick Customer Collaboration JSA Rationalize Terms Codes Outsource (3PL, PL)

number of people involved by combining functions such as forecasting, production planning, and master production scheduling. Make sure the S&OP process and schedule are very clear and tight, without extraneous cycle time. The information systems performance lever can also simplify planning. Use technology to capture your customers sell-through data and get visibility and control of their inventory. The more visibility you can get to true end-user demand and your customers inventory, the simpler it will be for you to plan your own inventory and production needs.

Performance Levers

Information Customer SellThrough Data Systems VMI CPRF

Call Center ConsoliOutsource Procuredation ment Repetitive Manufac- eCommerce Portals eProcurement turing Technologies Tools

Choosing Your TargetsDeveloping a Plan for Reducing Complexity Like any other methodology, supply chain simplification has to be properly applied to the specific situation to be most effective. It is important to choose the appropriate techniques with the greatest leverage. If a particular technique has proved successful in the past, see if it can be applied to another process or performance lever. The framework provided can both help structure your approach and challenge your organization to identify and apply effective simplification techniques. You can also use competitive benchmarking to help establish priorities. The Performance Measurement Group, LLC (PMG), PRTMs benchmarking subsidiary, offers two types of benchmarking that can be used in this manner. Quantitative benchmarking uses the SCOR
3

Consolidating product and packaging configurations will further reduce planning process complexity. Moving to the next performance lever, management practices, we can simplify the planning process by making more products to customer orders, thus eliminating the need to forecast specific product configurations. One important technique employed is postponement, which involves delaying end-product completion to the last possible point in the supply chain. Dell has done this with PCs and, as a result, has greatly simplified its forecasting process while better catering to different consumers needs and reducing inventory costs.
2004, 2006 PRTM

When it comes to simplifying external relationships, it is important to recognize that not all relationships are created equal. Some customers generate greater profits and are easier to service than others. By segmenting our customer base either by market or by strategic value, we can develop distinct, effective policies for each. This strategy could, at the extreme, even involve reducing the customers dealt with directly; for example, by encouraging low-volume customers to use indirect distribution channels. The first step in simplifying the organizational elements of the planning process is to develop a structured sales and operations planning process. Next, reduce the

Level 1 metrics with a balanced scorecard that can help identify performance gaps in each of the major supply chain processes. You can then focus your efforts where the greatest opportunities exist. The second type of benchmarking, also organized by the SCOR process elements, evaluates an organizations process maturity against other companies in the same industry. In many cases, immature processes are the most complex and therefore are the best candidates for simplification. Once benchmarking has identified the priority process areas, the framework can provide ideas on which simplification techniques to try first. Globalization has increased the complexity of virtually every aspect of the business world, and supply chains are no exception. Many company failures can be traced back to an inability to adapt rapidly to changing market expectations. The truth is that overly complex supply chains are not adaptable. Instead of attempting to master complexity with the latest optimization software, take some of the complexity out of your supply chain first. Its that simple.

CONTACTS

PRTM Director Rick Hoole at rhoole@prtm.com or +1 781.434.1200 PRTM Principal Rich Sheinfeld at rsheinfeld@prtm.com or +1 203.905.5600
2004, 2006 PRTM

47581_Nov2006

Measuring Complexity

f you wanted to reduce the complexity of your supply chain, where would you start? Competitive benchmarking is a necessary first step and will help focus your cost-reduction efforts. But does it really tell you where to find the drivers of complexity in your supply chain and which to target for maximum benefit? Measuring a supply chains complexity is difficult and somewhat arbitrary. Every successful manager understands that complexity creates operational inefficiencies; however, is it possible to quantify this impact and draw conclusions that are valid across companies and even industries? To create a set of standards for measuring supply chain complexity, in 2003 PRTM and The Performance Measurement Group, LLC (PMG), PRTMs benchmarking subsidiary, developed a supplemental survey to the widely used SCOR benchmarking framework. Initially targeting process-based industries (e.g., chemicals, oil and gas, and applied materials), the Complexity Survey enables companies to appraise their structural complexity and compare themselves to industry peers. The survey also provides valuable insight into the cost of such complexity by comparing a supply chains total supply chain management cost and process maturity to an overall complexity score. While still

very preliminary, the initial data seem to indicate a correlation between complexity and supply chain costs. We expect that study participants will ultimately be able to use the complexity score to evaluate whether their supply chain costs are appropriate for their supply chain level of complexity. The survey consists of approximately 40 questions divided into five primary segments: Materials, Suppliers, Customers, Manufacturing, and Distribution and Transportation. The survey questions are designed to capture the complexity generated within the source, make, and deliver processes of each segment. Planning complexity arises from physical complexity and as such is measured indirectly. The survey questions were developed from the complexity simplification principles that PRTM uses during supply chain engagements, including: Structural complexity is driven by sheer numbers (the larger the number, the greater the complexity) If a small number accounts for a large percentage, the structural complexity is less, even in cases where a supply chain has large numbers Large numbers of new products introduced to the supply chain per

2004, 2006 PRTM

year (new raw materials, ship-tos, etc.) add to supply chain complexity The data validate some existing principles and challenge others: Supply chain complexity clearly is correlated to total supply chain management cost: The more complex the supply chain, the higher its total cost. In addition, a leverage effect exists between complexity and cost. A complexityreduction effort that targets one aspect of the supply chain not only may reduce cost locally, but also appears to have a similar impact on other operational processes. Thus, total supply chain management cost may be reduced by two, three, or even four times the initial cost-reduction estimates. A complex supply chain can exhibit relatively low total supply chain management costs if mature supply chain management processes are in place. Complexity is not the only driver of supply chain costs. In some instances, a complexity reduction effort may not be the appropriate focus and the implementation of more advanced supply chain management processes would produce a better ROI.

If you are interested in learning more about the Complexity Survey or if you would like to participate in this ongoing process-industry segment complexity study, please contact Robert Chwalik at rchwalik@prtm.com. PRTM and PMG currently offer complexity benchmarking in most industry segments as part of our supply chain performance benchmarking series. Please contact Rick Hoole at rhoole@prtm.com for more information.

Rick Hoole

2004, 2006 PRTM