Guide to Supply Chain Management

by David Jacoby

  Manufacturers have been adopting yield management pricing approaches, techniques and software in order to shed obsolete inventory and control demand during successful new product launches or seasonal surges. Companies that have implemented yield management pricing include Emerson, Honeywell, Sun, Hewlett-Packard, Seagate, Owens-Corning, Grainger, Eastman Chemical, Georgia-Pacific and British Petroleum.14 Wal-Mart uses a form of yield management when it updates its prices in real time based on demand patterns observed through its worldwide system of point-of-sale scanners.

  Lead time and other order criteria can be used in addition to or instead of price to stimulate sales or to shift sales from one product to another. For example, if laptops with the latest processor are not available, customers may opt to buy a slightly older model with a less powerful processor for less money.

  Revenue management

  Revenue management goes a step beyond demand management by determining the profitability of individual customers and transactions before committing to an order. Software computes the marginal cost of capacity and the marginal revenue that would be earned by the transaction and if the marginal revenue exceeds the marginal cost, it proceeds with the transaction. If the profit margin is below a predetermined threshold, it calculates the probability that another order will arrive that is more profitable. And if there is not enough capacity to fill the order or if the customer is not willing to pay a profit-making price, it directs the customer service agent to ask if customers could defer the commit date, effectively preserving orders that otherwise might have been lost.

  In the business-to-business environment, air cargo carriers use software to decide whether or not to accept off-contract shipments. In the business-to-consumer environment, Travelocity, an online travel reservations system, asks the introductory question: “Are you flexible on your dates?”

  Product life-cycle management (PLM) can be combined with revenue management to maximise yield over the life of the product or category. Using a form of yield pricing that is specifically related to product life-cycles, some companies lower prices at the end of the product life-cycle to clear out merchandise that is no longer profitable to keep in stock.

  The ultimate goal of revenue management is for the staff who perform management analyses “to disappear”, says Jamison Graff, solutions director for JDA Software, a US company. As scientific management is now simply called management, Graff sees revenue management eventually blending into the information systems of all businesses.

  Mercator, the IT division of the United Arab Emirates-based Emirates Group, provides revenue management services to Emirates SkyCargo, the air cargo division of Emirates Airline.15 It linked 19 different data systems together into one application with 31 modules. The system combines revenue planning, with capacity and cost management, and cargo rating (pricing). It also interfaces with the online reservation system and tracking and tracing systems. The system has improved response times to booking inquiries and communication with the airline. It has also helped the carrier introduce new products to market more quickly, reduced under-pricing and enabled Emirates SkyCargo to look at profitability by individual freighter aircraft.

  Mass customisation

  As part of a growing trend towards mass customisation, companies have increasingly been customising their products and services to generate more sales, more loyalty and higher margins.

  Sampo Bankas, a Lithuanian bank, trains its branch personnel to ask potential customers a sequence of questions in order to tailor financial products to their circumstances. Sales of new products to existing customers have grown sevenfold since it began the process. According to a 2007 Economist Intelligence Unit survey, nearly two-thirds of senior executives said that customisation of their products or services had resulted in “somewhat higher” or “much higher” revenues.16

  A personalised supply chain must be capable of delivering one-off orders quickly and efficiently to many customers, so it needs to be capable of producing unusually high volume with unusual configuration flexibility. The problem is that lean – that is, efficient – supply chains and agile (flexible) supply chains are normally viewed as polar opposites. Efficient supply chains are often inflexible because they are engineered to provide a consistent throughput level, and flexible supply chains are often costly because they are built with enough capacity to handle the peak workload.

  Different customers generate different demand patterns, and some companies have demonstrated a good ability to increase customers’ satisfaction by tailoring service characteristics for each type of demand pattern and establishing operations to serve each one separately. For example, customers with few but large orders and long lead times are usually handled through a separate process from the one handling customers with one standard order placed at a constant rate. By treating these flows differently, companies can plan production more efficiently, set different internal process expectations and meet customers’ expectations more effectively. They do this by establishing different order types, terms and conditions and customising the product or service.

  In conventional production operations, high production requires standardised processes. There are seven sets of processes that align revenue per order, the speed of information flow, the production process, performance measurements and a corporate culture that consistently satisfies customer demands at minimal cost as laid out in Figure 8.2:

  Figure 8.2 The seven production process models

  Source: Adapted by the author from original concept by Hayes, Robert and Wheelwright, Steven, Harvard Business Review, 1979

  The job shop model, for low volumes, produces a series of individual, customer-specific products or services. Each job contains information that is exchanged once at the outset of the project. The objective is to satisfy the order criteria.

  The make-to-order (MTO) model, for slightly higher volumes, processes a higher volume of inputs and outputs and has more standardised processes and information flows. The objective is to fulfil each order within predetermined cost, quality and lead-time parameters.

  The assemble-to-order (ATO) model, also for slightly higher volumes, prefabricates components and assembles the right combination of components when an order is received. The objective is to fulfil orders rapidly and cost-efficiently.

  The make-to-stock (MTS) model, for high and consistent volumes, produces products or services for consumption by multiple customers. The product is standard or occurs in a discrete number of configurations. The objective is to replenish inventory to the target levels.

  The continuous flow model, for extremely high and consistent volumes, produces a standard product without stopping. The objective is to maximise asset utilisation. Outside the conventional relationship between volume and production organisation and offering special solutions are the following:

  The engineer-to-order model produces individual customer orders, but often involves complex, long lead-time products such as locomotives, aircraft and ships. The objective is to manage the order book to smooth the workload over time.

  The mass-customisation model, for very high volumes, produces many varieties of the same core product or service in mixed sequence. The objective is to produce the right number of items of the right configurations within the target lead time.

  Dell popularised the configurability of computers and electronic equipment during the ordering process. Since then, other companies have established web-based ordering interfaces that allow customers to easily custom-order their product.

  Jabil Circuit, a US manufacturer of semiconductors, uses sales patterns by industry and customer segment to design tailored global supply chains for its customers. “We use a volume-mix matrix,” says Courtney Ryan, senior vice-president of global supply chain. By dividing its customer orders into quadrants (high-volume low-mix, high-volume high-mix, low-volume low-mix and low-volume high-mix), it has been able to treat each type of flow differently and achieve a better service for all of them. For example, for high-volu
me low-mix products it sources at low cost and routes production in a straight line to keep material moving quickly. For low-volume high-mix products, it sources opportunistically and organises its assembly in a square, so that workers at every station can access material at every other station. Jabil’s revenues grew by 20% per year between 2004 and 2008.

  Well-known companies regularly adjust their production strategies in search of the optimal positioning on this chart, as these two examples show:

  Harley Davidson, an American motorcycle manufacturer, moved from a MTS to a mass-customisation operations model. The move allowed it to tap into latent customer satisfaction enough to increase the market for motorcycles. Harley-Davidson’s revenue increased by 11% per year on average from 2001 to 2005 in a market that most people thought was mature in the 1960s.

  General Motors failed to move from a high-volume low-mix MTS model to a high-volume high-mix mass-customisation model while attempting to become competitive with the Japanese production system that had been popularised by Toyota.

  Modularisation

  Modularisation and postponement, which were introduced in Chapter 7, are essential tools in achieving mass customised products. Don Peppers says:17

  For agile manufacturers that wish to become continuous inventors, the path is clear. It begins by embracing the principles of mass customisation.

  Modular design, also called component modularity, is a critical element of mass customisation because it enables people to customise at minimal cost. This is especially feasible for software because, as Peppers succinctly explains, “anything that can be digitised can be customised”. This explains why internet products have led the way in customisation. But modularisation is common in manufacturing environments as well. Kitting, the assembly of pre-prepared sets of material in a midstream process, is an example of modular production. Auto companies have assemblies and sub-assemblies ready to bolt together to speed up the production of vehicles. IKEA and The Container Store, Swedish and American home furnishing products retailers, respectively, sell modular furniture that consumers can quickly assemble and configure in whatever combinations they please.

  Modularisation is also a form of postponement in which final assembly is delayed until the details of individual customers’ orders are clear. For complex production sequences, anticipating the demand for SKUs at varying levels of assembly comes down to a gamble on probabilities. Electronics can consist of hundreds of parts and intermediate components. This is partly why electronic contract manufacturers (ECM) have become so dominant in this field. For complex situations, Monte Carlo simulations (see Figure 7.6 on page 119) and “real options”, a financial decision analysis tool that uses methodologies invented for financial options to make decisions about real assets, can be used to help determine the cost and benefit of varying levels of build-up.

  Available to promise/on-demand availability

  “Available to promise” is a term that stems from materials requirements planning (MRP) in the 1970s. It refers to the mathematical calculation of when any given order can be promised for delivery to the customer. It was originally based on algorithms that considered the production backlog and cycle time as well as the availability of raw materials and inventory of intermediate components or parts.18

  Today, the notion of available to promise has been reborn as on-demand logistics. It is no longer the manufacturer telling the customer when the product can be available, but the customer saying when he wants it and the supplier (often of services) producing it by that time. This short lead time, instant production approach requires highly integrated logistics and a can-do customer-focused attitude. To claim on-demand availability, companies must have one-piece flow, flexible manufacturing and total quality management (TQM) in place.

  IBM led the way with its on-demand supply chain strategy. According to Ian Crawford, vice-president of global procurement sourcing, IBM acts as an intermediary to link its customers to its suppliers. “This completely changes how you put the supply chain together,” he said in a 2005 interview with the author. By using the principles of rapid, on-demand response, IBM was able to help a customer avert a shortage while its competitors could not obtain enough supply for the next six weeks. IBM’S rapid response gave it an important competitive edge.

  Personal interactions

  Mass marketing is to rationalisation and synchronisation as one-on-one relationships are to personalisation strategies. If the objective is greater customer mindshare, then personal interactions are definitely the right choice. A Singapore-owned shipping line, APL, segments its customers into high-touch and low-touch customers. It addresses the high-touch customers through a direct sales force and the low-touch customers via a web portal, according to David Noe, vice-president sales and marketing at APL logistics.

  For the high-touch customers, three aspects of the customer interaction are the most critical, according to a study by the Economist Intelligence Unit: the moment of customer enquiry, service delivery and post-sale support.19

  Personalisation is not only nice; it also helps get the job done better. Being able to get logistical questions answered quickly is important to delivering packages efficiently, and it is usually a lot easier to get a quick answer from a friend than from a stranger. That is why the most productive UPS drivers know their customers’ employees at each location by name – and maybe their birthdays and a few other personal things.

  Responsive delivery can make valuable connections with customers. Delivery drivers for bed specialist Dreams place a mint on the newly delivered mattress and take away the old mattress. Road Runner Sports finds out which running races its customers will be taking part in, and then calls them to find out how they did. Life Fitness, an American sports equipment manufacturer, connects with its customers during the delivery of the product. A delivery for Life Fitness often provides opportunities for interaction with the customer, by including not only a delivery, but also installation, servicing and removal of pieces of equipment from a gym. Therefore, the company plans the visits carefully.

  Companies in higher-value, longer-term relationship industries such as consulting, financial services and systems integration go beyond the interaction. IBM, Siemens and other large multinationals working under multi-year contracts use relationship marketing. Baran specifies criteria for fruitful interactions in a relationship marketing setting:20

  individuals on the supplier and the customer side are clearly identified;

  all parties can participate in the dialogue;

  all parties want to have the dialogue;

  dialogues can be controlled by anyone in the exchange;

  there is certainty that the dialogue will result in actionable change;

  a dialogue should pick up where it last left off.

  Personal interactions are critical means of gathering customer feedback that helps to up-sell, cross-sell and continuously improve the relationship. This would meet two customer relationship management21 goals: having a high percentage of customers with more than half of their needs data collected; and having a high percentage of customers providing customer service feedback within the last year. If the staff are responsive and customer-focused, they can also contribute towards a third metric: a high percentage of customer enquiries that resolve the customer’s concern at the first contact.

  Document management customisation

  DSTS, a spin-off of the Portuguese national postal service, is a direct-mail third-party document management service in the United States. It offers full document life-cycle management for electronic and multimedia documents through infrastructure and information management of the documents. DSTS develops personalised document programmes such as individually packaged promotional inserts for a major retailer. As an outsourced provider in the supply chain, it uses a mass-customisation process to execute personalised fulfilment for its clients.

  On-demand availability

  Having products and services ready when customers demand them is an impor
tant element of customisation strategy.

  The Wilh. Wilhelmsen (WW) group makes about 6,500 products for the marine market, especially for the maintenance of vessels and cleaning tanks. It also provides on-board fire and rescue safety items, environmentally focused services, ship agency and logistics services. As a logistics company, its principal benefit is responsiveness, so management started from the premise that all parts should be available worldwide at any time. The problem was that the overall delivery service level was only 87–90%. After studying the issue, the company differentiated between customers and items with different frequency of demand.

  “You have to differentiate,” says Sten Vedi, director of supply chain, echoing one of the core principles of customisation. SCM identified key customers’ “core” products based on total global demand, frequency of ordering, the number of locations they are used in, profit margins and sales. All the high-demand products are tagged in the system and are available to customers 97% of the time they are ordered. For non-core products and low-volume customers, the company looks at available stock and determines whether it can promise availability or not. It differentiates availability by customer site and location, and makes strategic items available everywhere, but others available only locally. It uses its ERP system to hold the right level of inventory of each part type in different locations to support the programme.

  Design for configurability

  Product design can allow customers to shape their own personal version of the product, and can even embed auto-personalisation into the working of the product.

  At a simple level, a toy manufacturer can allow a child to personalise a toy by including sheets of stickers to apply wherever he or she wants. Even painting the toy is a form of personalisation.

  At an intermediate level, telephony products are particularly well-suited to personalised configuration. France-based Popular Telephony manufactures and distributes electronic PBX systems that allow customers to configure their personal version of the system with hundreds of customisable features and options. Sometimes customers need assistance to learn the intricacies of the systems. Customer support like this can be viewed as an added cost, but it also represents an opportunity to interact with customers and build customer loyalty.