Chapter 3: Week One: Planning and Organizing - Supply Chain Excellence [Electronic resources] : A Handbook for Dramatic Improvement Using the SCOR Model نسخه متنی

Chapter 3: Week One: Planning and Organizing

Decide what to work on and how to get started.

Understanding the business reasons for a project and then properly defining the project''s scope are critical steps to a successful launch. There are three primary deliverables for this phase. They are 1) the business context summary, 2) a supply chain definition matrix, and 3) an approved project charter. A third deliverable in the first week of active project planning is a complete package of information to be used in the project kickoff meeting.

The Business Context Summary

You''ll start with a checklist, which outlines information that needs to be reviewed and summarized to gain a full understanding of the business context for supply chain improvement. This information eventually helps to set the direction for supply chain focus.

Just as important, though, are the soft benefits of working through the checklist. By involving the business leaders in this process, they will help set the agenda for the company''s supply chain. Getting these important people engaged in the earliest stages of a project has untold value in the change management challenge that all companies face. Understanding their problems, asking for their point of view, and acknowledging their good work goes a long way toward positioning the supply chain as "our thing" versus "a corporate thing."

Assembling the business context summary involves several techniques, including interviewing key stakeholders; scouring the company''s website and 10K earnings reports; reviewing existing business plans as found in the annual report or any other big-picture document; locating and reviewing competitive analyses that have been conducted internally or by any external entity; and checking out the reviews of financial analysts readily available on such websites as hoovers.com, forbes.com, marketguide.com, and reuters.com.

Why all the emphasis on public documents and financial statements? Because the important step you''re taking is to create the often-overlooked connection between the company''s operations and the real-world business goals as defined by the people who hold the purse strings. There''s always a temptation to dismiss investors and bean counters as being out-of-touch and unrealistic in their demands. But by understanding their goals and creating a bridge to operations, you can establish the basis for high performance at all levels over the long term.

There are four categories of information that make up a business context summary: 1) strategic background, 2) financial performance, 3) internal profile, and 4) external profile.

Strategic Background

Strategic background summarizes the business and its status in a competitive environment with respect to meeting customer needs and compared to competitors.

A business description is the first component of the strategic background. It describes the enterprise, its businesses, and a high-level view of the competitive landscape. It''s the kind of information that managers should be able to develop off the top of their heads, or by drawing from the dozens of such descriptions that probably reside in brochures, memos, and written documents throughout the organization.

A SWOT analysis (strengths/weaknesses/opportunities/ threats) is another source of information that describes the relationship between the enterprise and its marketplace. First it outlines where the company surpasses direct competitors and where it falls short. Then it projects ways in which it might grow and ways in which it is most likely to be overtaken by competition. On its surface, the SWOT analysis is a simple, four-point document. But for large or diversified organizations, this can become an intricate document with information on each major product or served market.

Another piece of the strategic background is a value proposition statement, which describes the competitive value of a business from the customer''s point of view. Inherent in a good value proposition is an intimate understanding of the business requirements of each major customer or customer segment.

For example, a company such as Procter & Gamble—with a broad range of consumer products sold primarily through large retailers—might view its relationship with Wal-Mart as deserving its own value proposition, owing to Wal-Mart''s particular requirements of suppliers. At another level, it might include Wal-Mart in a "large retailer" value proposition, while developing a separate value proposition for its network of distributors that serve grocery chains and small retailers.

Common requirements in a value proposition statement are price, product quality, technical innovation, customized packaging, delivery reliability, order lead-time, strategic relationship, and value-added services like inventory management. Customer value propositions are most frequently found in a market segment analysis; in some cases they are explicitly referred to as customer value propositions; in other cases, they need to be interpreted.

The last important components of the strategic background document are critical success factors and critical business issues.

Critical success factors describe three to five variables most central to an organization''s success. (Success is defined as thriving—not merely surviving.)

SCOR defines the following as critical success factors in supply chain performance: delivery reliability, order flexibility and responsiveness, supply chain cost, and effective asset management.

Critical business issues describe how well an organization stacks up against the competition for each of these factors. In each category, the comparative performance level will be rated as disadvantage, parity, advantage, or superior. Sources for these perspectives are not standardized. Good places to look for ratings include annual business plans, quarterly business reviews, annual reports, analyst webcasts, and regular company communications.

Fowlers Inc. Strategic Background

Here are highlights of the strategic background for Fowlers, from the business context summary developed by the core team. (For a complete version of the Fowlers business context summary, see Appendix B.)

Business Description

Fowlers Inc., is a billion-dollar conglomerate with worldwide leadership in three businesses: food processing (food products group), optical technology products (technology products group), and business services (durable products group).

Fowlers'' food products group is a leading North American supplier of premium fresh and frozen meat products and management services to the food service, retail, on-line retail, and government sectors. Customers include SuperValu, Wal-Mart, Aramark, Simon Delivers, and thousands of independent grocers and specialty restaurants.

Fowlers'' technology products group is one of the world''s largest independent suppliers of optical storage products and services such as CD-ROM replication, CD-read and CD-write media, title fulfillment and distribution services, and optical drives. Customers include retail leaders like Wal-Mart and Target as well category leaders such as Best Buy, Circuit City, Office Depot, and CompUSA. Fowlers is also a major supplier to the North American original equipment manufacturers (OEMs) for the personal computer market. Customers include Compaq, Dell, and Apple Computer.

Fowlers'' durable products group was formed by acquiring one of the fastest-growing suppliers of business services, providing personalized apparel, office supplies, and promotional products to more than 14,000 companies and a million individual wearers. Using a dealer franchise as the route delivery mechanism, Fowlers'' durable products group has gained a competitive edge by being both knowledgeable and responsive to individual customers in the markets it serves.

SWOT Analysis

Key points in the SWOT analysis include:

Strengths

The company has superior product quality in the food products group and technology products group.

Low-cost manufacturer status in the technology products group existed prior to outsourcing several key items in the product line.

The durable products group is perceived as the most responsive group in its chosen geographic markets, often delivering products and services on the same day as ordered.

The food products group has a reputation of having superior delivery performance, mitigating criticism of its premium prices in a commodity marketplace.

The company''s growth in durable goods exceeded expectations.

Weaknesses

There is a lack of organization-wide assimilation of the new Tier One Enterprise Resource Planning (ERP) system, due to acquisitions and the diversified nature of the company.

Delivery performance is inconsistent, especially in the technology products group. Customer complaints in this market are especially high. Because the market visibility is so high, Fowlers is developing a reputation in customers'' eyes as being tough to do business with (hard to place an order with, having incomplete and incorrect product shipments, inaccurate pricing, poor order status capability, and so on). This is negatively impacting overall satisfaction ratings.

Operating income of the food and technical product groups is eroding due to price pressure and too flat of a cost reduction slope.

The company has high, indirect purchasing costs, despite lower cost of sales.

The company''s rate of cost increase for customer service is significantly higher than the rate of sales growth.

In spite of sales growth, Fowlers'' stock price has taken a hit due to five quarters of poor profit-after-taxes and a bloating cash-to-cash cycle. Analyst criticism focuses on the inability of Fowlers to effectively manage return on assets and integrate profit potential of the business services acquisition.

Opportunities

Leverage commodity buys across all product groups to improve gross profit.

Improve effectiveness and efficiency of order fulfillment to improve customer satisfaction and reduce rate of spending on indirect goods and services (those that don''t add value to the product being produced).

Develop more advanced knowledge management capability to add financial value to customers beyond simple price-cutting.

Accelerate market share in the durable products group by introducing an online catalogue for its end customers.

Leverage cost-to-manufacture leadership in the technology products group to increase profits.

Threats

Key competitors in the food products group are buying their way into the marketplace with a "lowest list price" strategy.

While the overall market for the technology products group has been in a period of decline, the group''s market share is declining even faster; customer satisfaction scores put this group in the lowest quartile of performance.

Price point in the technology products group is getting too low to meet profit targets with the current cost structure.

Established catalogue apparel companies are potential competitors to the online sales channel being introduced this quarter.

Fowlers'' Value Proposition

The Fowlers Inc. corporate value proposition is summarized by profitable growth as the preferred supplier of customers in targeted markets, driven by exceeding customer requirements.

Fowlers'' Critical Success Factors

The critical success factors for Fowlers include:

Maintaining revenue contribution by increasing the share of the food products group in existing markets

Driving revenue growth by introducing durable products in the direct-to-consumer market and capturing targeted share

Achieving overall revenue growth for current year, targeted at 10 percent, and achieving targeted after-tax profit of 7 percent

Maintaining an image as technical leader in the technology products group and food products group, while improving overall return on assets and aggressively driving costs out of operations

Improving overall cash-to-cash position

Optimizing the newly implemented Tier One Enterprise Resource Planning system

Effectively integrating assets of the new durable products acquisition

Fowlers'' Critical Business Issues

Fowlers'' critical business issues are:

Customer satisfaction from all channels in the technology products group is negatively impacting sales.

Profits are disappearing from the technology and food products groups due to higher direct and indirect costs.

Revenue is targeted to grow to $1.02 billion, but actual projection after nine months is $1 billion.

The durable products group integration of online capability is behind schedule.

Inventory and receivables are expanding, seemingly uncontrollably.

Key customers in the food products group are leaving based on price-only criteria.

Financial Performance

Finding information about a publicly traded company''s financial health is as easy as knowing the stock symbol and logging on to hoovers.com. There you can find all the ratio statistics, share price analyses, profit reports, and cash flow data necessary to paint the relative financial picture of a company.

To complete a current-state summary, you''ll need information about income and cash position. The income statement contains revenue, cost, and profit data. The balance sheet looks at the right-now cash position by documenting assets and liabilities, including inventory.

In the business context document, profit is considered three ways, and each will eventually have its place in planning a supply chain project. First is gross margin: revenue less the cost of goods sold. This picture of profit is usually stated as a percent of total revenue. The second picture of profit is the operating margin (also referred to as operating income), which is gross margin less the costs of sales and administration. In effect, it''s the gross margin with all indirect costs removed. It, too, is usually represented as a percent of total revenue. The third picture of profit is economic profit, which is operating margin less taxes and interest expense. The interest expense is impacted by the amount of cash tied up in the business through inventory, receivables, and payables. By using these industry standards for developing your profit picture, you''ll gain a better understanding of how your business fits into its competitive environment—an important piece of the business context summary.

In Fowlers'' case, the business context summary contains consolidated income (Table 3-1) and balance sheet data (Table 3-2) from the 2000 and 2001 financial reports. In addition, because each operating unit of the company may have its own supply chain requirements, the business context summary contains product group revenue and operating income financial reports for 2000 and 2001 (Table 3-3). This kind of information can be harder to obtain, because not all companies report division financial reports separate from the parent company.

Internal Profile

The internal profile summarizes the physical aspects of the company and other performance measures that influence results. The first physical aspect is the organization chart. In a publicly held company, you can find this at the top level—usually down to the management of operating units or divisions—in the executive profile section of a corporate-reporting website like hoovers.com. Many companies also share this information, including names, titles, and brief biographies, on their own web-sites. Good starting places for this website hunt are the "invesFigure 2-1) reflects that sales, operations, and finance are controlled at both the corporate level and the business unit level. Note that the chief operating officer is at the same hierarchical level as the product group presidents; corporate directors have potential for conflict with the vice presidents of operations in each product group.

Most companies have such intricacies built into their reporting structures, and it can lead to overly complicated supply chains and delays in making improvements, as politics of control get in the way.

Fowlers'' physical locations contain similar quirks. Each product group manages its own manufacturing locations (see Appendix B). But the distribution locations are a mix—some are managed by a product group, and others are managed at the corporate level, demonstrating previous efforts to manage efficiency.

A final element of the internal profile is how success is measured. At Fowlers, there are five key performance indicators, and the project team assessed how each was being managed overall—with a plus indicating meeting or exceeding expectations, and a minus representing performance below expectation.

Unit Cost -

Line Item Fill Rate -

Operating Income -

Revenue +

Backorders -

External Profile

The external profile categorizes customers and suppliers. To keep it simple, the customer is defined as the entire buying organization, rather than a collection of individual ship-to locations. Market is defined as a group of customers and potential customers who operate on similar business models, (i.e. direct-to-consumer, retail, distributor, and original equipment manufacturer). The external profile also summarizes basic characteristics and requirements of customers and markets. For customers, you can apply the 80/20 rule—those representing 80 percent of the revenue and those representing 80 percent of the profit. For the largest customers, performance criteria is most often found on some kind of report card, master agreement, or purchase order. Also seek to understand how much revenue and profit the company derives, as a percent of your total revenue and profit, from each major channel and market. Assess typical order methods, requirements, and most frequently used terms.

A supplier profile groups the supply base from three perspectives. First, use the 80/20 rule to identify the largest suppliers— the 20 percent that get 80 percent of your material spend. Second, identify the largest suppliers for each major commodity type, such as packaging; tooling; process materials; maintenance, repair, and operations (MRO); value-added service; and so on. This identifies the variety and complexity of the spend. Third, group the supply base in relation to strategic value in the product life cycle. Some suppliers provide the research and development expertise to launch new products quickly and effectively—best at the beginning of the product lifecycle. Others will provide the cost advantage that''s important in the product''s midlife commodity phase. Still others will provide end-of-life services, such as outsourced fulfillment, to maximize profit during the final decline of the product. This identifies potentially different supply chain requirements and perhaps uncovers some suppliers that are trying to do it all, whether or not they are succeeding.

In Fowlers'' case, the customer profile summary yielded seven market/customer channels across all of the product groups:

Retail markets, including mass merchant and category killer

Distributor/wholesaler markets

Direct-to-consumer markets

OEM/key account customers

The U.S. government

Home delivery/route sales markets

International markets

Fowlers'' key supplier profile included raw material commodity types of resins, packaging, electronic components, live produce, hard goods, and apparel. In addition, the supply base included several contract manufacturers that supply apparel, optical media, precooked food, and computer hardware.

How To Define a Supply Chain

Up to this point in the discovery process, the emphasis has been on gathering individual pieces of information. Now that work starts to show results as the team begins to develop a consensus on how, in the big picture, the company''s supply chains are defined. That''s an important piece in defining a project''s scope—how far it will reach throughout the organization and what functions and processes will be included.

In most cases, a supply chain is defined by a combination of product, customer, and geography. It can also include financial reporting and other factors. To create its definition, an executive team must take into account all points of view and prioritize the importance of each. Regardless of the outcome, all factors in your defined supply chains need to be aligned and organized together.

Using a matrix can help. To keep it simple, assume that each major geographic market should have its own matrix; for companies with lesser reliance on global business, each major geography might instead be included as a customer channel with its own column. (See Table 3-4 for an example of Fowlers'' supply chain definition matrix.) Use the financial reporting perspective to help identify "major" geographies of the world. For example, if a company has profit-and-loss (P&L) reports for Europe, Latin America, the Far East, North America, and Japan, then start with five matrices. To start, choose the geography that either has the most sales, or that is the headquarters'' location.

The columns of each matrix represent the customer''s point of view, while the rows represent the product point of view. To build the columns on your first matrix, look at how sales regions are tracked, market channels are organized, and customers are segmented. For each customer type, know the delivery requirements (i.e., lead-time, on time-in full, etc.) and the product mix that the customer buys as stated on the purchase order. The goal is to group customers into similar requirements with similar product mix.

To build the rows, look at the highest level of product families or groups. Sometimes this lines up with how the business units are organized and managed, which would be the financial reporting perspective. More often, though, a complicated web of products is mapped to the financial reporting. So the goal is to identify meaningful groups of products or services and link them to financial reporting hierarchy. This is unique to each company and each project.

Most companies seem comfortable defining their supply chains solely by product and financial definitions, regardless of the customer. They worry about how the product is made, what suppliers are involved, and where the revenues and earnings are credited, but they don''t build in concern for the customer. This can derail a supply chain''s success. First, customer requirements are key factors that drive supply chain performance; while the gross margin may look good, the net profit might suffer due to high SGA (sales, general, and administration) costs of meeting customer requirements. Second, manufacturers are often indiscriminant about what items of the total product line should be available to a particular customer segment. Third, with a product-only view, supply chain costs can evolve to support the delivery requirements of the most aggressive customers—meaning the manufacturer provides superior delivery performance even where it is not needed or valued.

At Fowlers, supply chains could be defined in more than one way. If defined by product, the company would have three supply chains: food, technology, and durable products. If defined by market or customer channel, there would be seven supply chains: retail/mass merchant, distributor/wholesaler, direct-to-consumer, original equipment manufacturer (OEM), U.S. government, home delivery/route sales, and international. Fowlers could also define supply chain by geography, in which case there would be two: international and North America. Lastly, Fowlers could say there are ten supply chains defined by customer and product (count the X''s in Table 3-4).

After some sparring, the Fowlers core team used the last approach to identify ten supply chains (Table 3-4). In narrowing the scope for its supply chain project, team members agreed to work with the six supply chains defined by the U.S. sales of technology products and food products (Table 3-5).

Now, with the four basic components of a business context summary complete—strategic background, financial performance, internal profile, and external profile—the team was able to complete their summary (see Appendix B for sample Fowlers'' business context summary) and move ahead to the project charter.