Most manufacturers today — even a sound, well-respected organization like Krustharden Hydraulics — have seen better days. The poor economy is sweeping through our industrial, refinery, and construction markets, forcing customers to delay or reduce purchase decisions and putting a crimp on capital. The costs we pay for components, subassemblies, and distribution and logistics are stripping profit from our bottom lines. Fuel costs and their impact on distribution have been particularly damaging, since our large hydraulic systems were subject to substantial freight costs even before recent oil spikes. Similarly, shipping costs for subassemblies and components have risen, and now suppliers are passing those costs on to us.
Krustharden has worked diligently over the past decade to apply continuous improvement methods, such as lean manufacturing, to our internal production and support functions. We also have pushed many operations improvements out to suppliers. As the owner and founder of Krustharden Hydraulics, I am proud of how well we and our supply chain build products. Simply put, we’re world-class manufacturers. But I also believe that, separate from production, many untapped areas of improvement still reside hidden in our supply chain and the systems we use to manage and execute as a supply chain. Capturing those opportunities (from suppliers to customers) may enable us to further trim our costs and endure the current economic conditions.
I am confident that Krustharden will be satisfying customers for many years to come. But, in the short term, I don’t want to strip the company down to the bare bones (employees, locations, products) to make that happen. That would be a huge step backward. We must explore deeper how we interact with our suppliers and customers and find cost-savings and operations gains.
* The Challenge incorporates hypothetical persons, companies, and products and does not portray the actions of any actual persons, companies, or products.
By Julie Fraser
Having made the journey to become a world-class manufacturer, Krustharden knows the value of a coherent set of practices for operational excellence. To improve supply chain and value network operations, as with lean in production, you must move to a true to-order model and use resources exactly as demand dictates — you need to develop a demand-driven industry network.
However, uncovering hidden inefficiencies in the supply chain can occur at all management levels — operational, tactical, and strategic. Carving out time for higher-level analysis beyond day-to-day operations is particularly challenging for companies like Krustharden that operate within the supply networks of other manufacturers and service providers — where price and margin pressure provide a powerful incentive to drive business improvements but little opportunity for reflection.
At the operational level, the number one way to eliminate inefficiencies in the supply chain is to create coherence and visibility. This means ensuring that business processes extend across departments as well as out to suppliers and customers. Providing all participants with a complete and accurate view based on actual demand is easier said than done. Neither lean line-of-sight nor traditional enterprise-focused supply chain software will provide that. However, some specialized software for a supply network does address those needs.
With this essential foundation in place, other business processes will need attention, such as:
- Aligning metrics for maximum financial gain,
- Creating a consistent, single-number plan — usually through sales and operations planning (S&OP), and
- Efficiently managing exceptions, analyzing options, and taking adaptive actions.
Some of the inefficiencies that may arise in these areas are:
- Metrics: Each organization in the network will have its own preferred ways of measuring performance. Our research shows that companies that demonstrate the most improvement against their metrics strive for alignment of performance measures and report against them routinely. This must be internally true, then extended to align with partners.
- S&OP: Many industrial equipment companies are finding good success with S&OP, which brings together executives with finance, sales, demand planning, inventory planning, procurement, and operations staff to develop a one-number plan. Leaders have moved this to a higher-frequency process. As that happens, more are seeking software that supports not only distribution of data, but iteration and collaboration based on all of the inputs.
- Adapting to exceptions: Planning is easy compared to executing when exceptions to the plan arise, as they inevitably do. Few companies can adapt or make changes within the planning cycle. Most companies are not able to conduct response processes quickly and across the network, and few have visibility across the network. As a result, the network is only demand-driven to a certain point. Eliminating inefficiency here means driving up the proportion of transactions that require no intervention and reducing time spent on the remainder. Clearly, software can provide a great tool for that — but traditional enterprise and even supply chain software may not help if exceptions are during the planning horizon. The tools must deliver alerts, allow scenario analysis, and support rapid collaborative decisions about what action to take.
Moving from the operational issues to a tactical view requires a willingness to challenge the values and costs associated with established practices and the initiative to consider alternative approaches. An example of a tactical initiative would be to adopt a more aggressive stance toward poorly performing suppliers or streamlining the processes by which new suppliers are on-boarded — both potential sources of inefficiency.
Another good example of an issue requiring a tactical response is, as you mention, rising fuel prices. This cost crisis exposes a range of potential inefficiencies in both inbound and outbound networks. The response might include either changing packaging design to reduce freight and product handling costs or reviewing order quantities and priorities for freight vs. inventory cost tradeoffs.
Finding the time for a strategic-level review is perhaps the hardest step of all. Going back to first principles and reestablishing the value of current business models requires an objective view. It takes time to look outside the business for examples of best practice or to find benchmarking data to enable comparison of company performance against industry peers. Examples of strategic-level responses are:
- Shifting supplier selection criteria to favor those closer to facilities and capable of sharing their information effectively,
- Creating new business lines to utilize excess capacity,
- Creating services to accompany products for higher-value solutions, and
- Pruning underperforming providers.
Taking the time to shift the business focus above the daily imperative of “business as usual” is unquestionably difficult, but it is essential. Krustharden will almost certainly find that taking a more holistic approach to your supply chain and overall value proposition will bring the company closer to customers and suppliers, thus reducing costly inefficiencies. Having decided what changes are required to remove inefficiencies, the next step is to insert the disciplines and software to support staying healthy in these challenging times.
Julie Fraser is Principal Industry Analyst at Cambashi, which provides independent research and analysis of the business reasons to use IT in industry worldwide. Fraser has been an industry analyst, consultant and marketer for over 20 years, specializing in manufacturing value network processes and systems. She can be reached through Manufacturing Business Technology or at Julie.fraser@cambashi.com
By Randy Littleson
In these challenging economic times, you’re not alone. Many companies are trying to find further efficiencies they can squeeze out to avoid much more fundamental cuts that could alter their competitive position in the marketplace. As you’ve no doubt seen, a lot of progress has been made over the last several years in reducing costs, which leaves few low-hanging fruit to be plucked from the tree.
With that said, there are things that Krustharden Hydraulics can still do. One of the most fundamental drivers of unexpected costs in a supply chain is the overhead costs of poor response to change. There is a lead time associated with responding to change. With faster response comes a reduction in expediting and, thus, a further reduction in shipping costs. But where to start?
A prerequisite to driving faster response is ensuring that your front-line responders have visibility into your entire supply chain. This provides them with proactive alerts that sense unplanned events and a clear warning of events that can negatively impact your business. With this insight, your front-line responders are exception-driven rather than inspection-driven, enabling them to swiftly see the lay of the land and take the right corrective action.
In order to determine the appropriate response to any given situation, they are going to need an integrated view of demand and supply since any action has an equal and opposite reaction. This means that any change in demand is going to have an impact on supply, and vice versa, so the only way to act quickly and accurately is to immediately see that interaction as you evaluate action alternatives. Lastly, you need to ensure front-line responders have the tools to evaluate each action alternative against Krustharden's corporate metrics; the only way to drive the right actions that support your business priorities is to ensure that each decision is viewed against them.
The ability to quickly respond to unplanned events will have an immediate and measurable impact on your operating costs. If you’re like most companies, you have inventory throughout your supply chain that is not being properly leveraged in such situations. This has the dual consequence of driving inefficient response to the given situation (e.g., a customer orders more than the forecast and you are short parts to satisfy their demands and, instead of leveraging existing inventory throughout the network that you can’t see, you expedite parts at high costs) and leading to excess and obsolete inventory (e.g., compounding the first problem, this unused inventory ultimately becomes excess as your product team rapidly innovates to keep up with the competition).
While ensuring quick response to change provides both short- and long-term rewards, there are other actions you can be putting into place right now that will yield longer-term benefits. One of the earliest concepts of lean was the idea of geographic co-location of suppliers, manufacturers, and customers. In other words, move your plants close to your customers and your source suppliers close to your plants. This provides a number of advantages:
- Significant savings in transportation costs and an associated reduction in the carbon footprint.
- Easier communication and collaboration. With lean, you fix Krustharden processes first, and then you help your suppliers to streamline their processes. The idea here is that the suppliers pass the savings on to you (doesn’t always work that way, but you can frequently realize savings). This process is much easier when your suppliers are close (i.e., it’s easier to go next door than around the world).
- Reduced lead time — one-day shipping (or even more frequently) rather than multiweek shipping.
While many costs savings have been realized through the great efforts of supply chain professionals over the last several years, opportunities do exist for additional short- and long-term benefits if the right actions are taken.
Randy Littleson is vice president of marketing with Kinaxis (www.kinaxis.com), the provider of an on-demand service that empowers multi-enterprise manufacturers with the integrated demand-supply planning, monitoring, and collaborative response capabilities required in today’s complex and dynamic world. Randy can be reached at rlittleson@kinaxis.com