It’s that time of year when supply chains that support the retail sector are tested. Planning, Procurement, Inventory Management and Logistics teams all have to work together to be successful. It all starts with placing bets on what, where and when consumers are going to buy during the holiday season months in advance. Some of the questions that have to be answered are: What will be the hot items for the holiday season? Will consumers purchase in-store or on-line? When during the period between November 1st and December 31st will consumers make their purchases?
As an example companies that have manufacturing capacity constraints in the fall, the Demand Planners have to lock in their forecasts in May or June. Once the demand plan is locked in, then the downstream supply chain teams can make their plans and weigh options to fulfill the forecast. Supply Planners weigh In-House versus Contract Manufacturing. Securing contract manufacturing early is less expensive and can be the difference between being in-stock and out of stock. In addition, if there are any long lead time raw materials needed to produce the final products they have to be bought by the Procurement team as early as summer time. You can increase the lead times needed if any raw materials or finished products have to be imported from overseas.
Once the products are produced, they have to be stored in warehouses until they need to be delivered to your local store shelf or your doorstep. Sometimes the standard warehouse that a producer uses runs out of capacity during peak season, so overflow warehouses have to be contracted. Determining where to stage inventory is one challenge that Logistics professionals have to handle in an evolving environment with on-line shopping continuing to increase in comparison to in-store shopping. Cyber Monday sales this year hit a record of $3.45B and is almost on par with in-store purchases made on Black Friday. The analysis can get murky because some consumers purchase on-line and pick-up in-store.
When you shop this holiday season either in-store or on-line, think of the Supply Chain “elves” behind the scenes making your products available at your local store or delivering them to your doorstep. The products don’t get to you by accident, it takes months of work to make every purchase possible. Happy Holiday Shopping!!
For years we’ve been hearing about Big Data. Now the call is to make the data visible and actionable. Easier said than done. Remember when we wanted our music, phone and camera on one device instead of having to carry multiple devices? Data Visualization is that desirable right now and it is challenging to do well. Here’s why:
Challenge #1: Properly defining the question that you want the data to answer
In the world of supply chain the leaders typically want all of the data summed up into Good News or Bad News. For example, at the end of a monthly S&OP meeting one of the key questions that gets asked is Can Sales continue to promote product A? For Operations to give a Yes or No answer, a timeframe has to be defined. Once the timeframe is agreed, then Operations can answer the question by building a heat map for every product or family of product (if that makes the data more manageable). The heat map then can be given to Sales at the end of the monthly S&OP.
Challenge #2: Cleaning up dirty data
This is where most organizations get stuck. Cleaning up the data is tedious work but it has to be done or the metric is useless. Take heart, sometimes identifying and fixing the issues with the data is meaningful on its own. Also, think about what decisions that dirty data is influencing on a daily basis or the time that it takes to explain variances every month.
Challenge #3: Developing graphics that tell the story at a glance with the push of a button
You have to work with your audience to determine what graphics work for them. I find that it’s best to create something and then get feedback. This step can be a bit of trial and error but once you have the design locked in, then you need a skilled developer to automate the report out. The end users really appreciate if they can easily run the reports and generate the charts and graphs on-demand with the push of button. If it is complicated or requires many manual key strokes to generate the charts and graphs then that report out will not be sustainable.
Challenge #4: Making the data actionable
Congratulations on making it to this step. You have put so much effort into getting here and now all you have to do is summarize thousands or even millions of data points across multiple parameters in a way that helps the receivers of the results to take action. If you can monetize the results by showing costs or savings that will give direction to the receivers of the output to either keep doing what they’ve been doing or give them incentive to make a change. Or, if you can summarize the data into categories that is meaningful to the audience then they will know where to focus their time and energy to make improvements.
Here is an example of a chart that answers the question: How good is my schedule? This chart in addition to five other supporting charts can be generated on-demand in 30 seconds.
At Profit Point, we work with our clients to overcome the challenges with Data Visualization and develop Meaningful Supply Chain Metrics. Contact us at www.profitpt.com or at 610-645-5557 and we will be happy to assist you.
Several years ago I started collecting coins. I love the beauty of a nicely preserved coin; just looking at the year on the coin takes me back to that time and place in history.
In addition to the usual proof sets most numismatists collect, I also like to collect coins that reflect unique times in history such as US steel war pennies and Japanese occupation dollars.
A few years ago I started collecting hyperinflation currency – currency issued by a country during a time of hyperinflation. Hyperinflation is extremely rapid or out of control inflation – a situation where the price increases are so out of control that the concept of inflation is essentially meaningless. Hyperinflation often occurs when there is a large increase in the money supply not supported by gross domestic product growth, resulting in an imbalance in the supply and demand for the money. This causes prices to increase, as the currency loses its value. Soon even the largest denominations of the country’s currency has so little buying power that consumers need to bring a wheelbarrow of currency just to buy a loaf a bread. To respond to this, the government begins to issue larger and larger denomination bills. Finally the denominations reach such ludicrous levels and have so little value that the currency totally collapses. One of the most famous examples of hyperinflation occurred in Germany between January 1922 and November 1923. By some estimates, the average price level increased by a factor of 20 billion, doubling every 28 hours.
One of my favorite pieces of hyperinflation currency in my collection is my 100 Trillion Dollar bill from Zimbabwe when by 2008 their inflation rate had reached 231,150,888.87%. Use of the Zimbabwean dollar as an official currency was effectively abandoned on April 12, 2009.
Venezuela is currently experiencing hyperinflation. According to estimates released by the International Monetary Fund, inflation in Venezuela is projected to increase 481% this year and by 1,642% next year. To put that in perspective, in February of 2016 a McDonald’s Happy Meal in Caracas cost $146 dollars at the official exchange rate of 6.3 bolivars per dollar
So how does a country with more oil reserves than Saudi Arabia end up with armed guards on food delivery trucks, 3 mile long lines to buy basic food, people dying due to lack of basic medical supplies and more poverty than Brazil?
1) Price Controls
As part of his Bolivarian Socialist Revolution, Chavez implemented price controls on goods. The government set prices at which retailers can sell goods. If you violate a price control and sell your goods for a higher price, the government will jail the business owner and nationalize (seize) their business. As a result of these price controls, it cost farmers more to grow the product than they could sell it and it cost factories more to produce an item then they were allowed to sell it. The logical conclusion to this scenario occurred – the farmers stopped growing crops and the manufacturing facilities stopped producing goods. The government’s response – jail the business owners and seize their factories and farms. The Venezuelan government was totally unqualified to run these factories and farms; as a result, they have all been shuttered. This lead to a huge imbalance in trade and Venezuela started to import almost everything from basic foods to medical supplies. This works great as long as the government has the huge revenue income required to support those types of subsidies.
2) Oil Prices have Fallen
For years, the country has been deeply dependent on its vast oil reserves, which account for 96 percent of export earnings and nearly half its federal budget. That was manageable when oil was selling at more than $100 dollars a barrel. Venezuela now needs oil prices to reach $121 per barrel to balance its budget however oil is hovering around $50 per barrel. Add to that the fact that oil from Venezuela is very thick and difficult to refine making it not as desirable as light sweet such as Brent Crude. This has forced Venezuela to import oil to blend with their oil to make it saleable in the current market.
3) Crippling Foreign Debt
Since 2005, Venezuela has borrowed $50 billion from China as part of an oil-for-loans agreement. Venezuela exports more than 600,000 barrels a day to China, however nearly 50 percent of that goes to paying off its existing debt to China. The situation has gotten so bad that Venezuela is selling its gold reserves to pay foreign debt obligations.
4) Currency is in Freefall
Venezuela’s bolivar recently fell past 1,000 per U.S. dollar in the black market. That means that the country’s largest denomination note of 100 bolivars is now worth less than 10 U.S. cents. The currency has lost 81 percent of its value in the last 12 months. This makes a bad situation much worse for a country that imports almost every basic need. For comparison purposes to truly understand how bad hyperinflation is getting in Venezuela, a doctor working in the country’s national health care system makes $15 per month. As of this writing, a 1kg bag of apples in Caracas costs $18. A liter of whole milk was $5.14. A 40” flat screen TV was $5,889. (U.S. dollars, assuming an exchange rate of 0.15748 USD per Venezuelan Bolívar. Source is a crowd-sourced cost-of-living comparison site).
Sadly for the good people of Venezuela, it is almost inevitable that their currency, the Bolivar, is destined for my hyperinflation currency collection. But what is the lesson that we as Supply Chain professionals can take from this tragic situation? Perhaps that supply chains and markets must be free to find their own price and value; and that governments cannot run a government properly, much less a factory.
The Future of Supply Chain Network Design
Most leading companies perform supply chain network design (SCND) analysis to define the structure of their supply chain as well as the key operations that will be performed at each location in the resulting network. The analysis includes suppliers, manufacturing, warehousing, and distribution. In fact, a number of Fortune 100 companies require such analysis before approving capital to add manufacturing or warehousing infrastructure. Those on the cutting edge are also using SCND analysis on a continual basis to understand the true delivered cost to supply each customer as well as the price required from the customer to achieve profitability goals. Advances in network design modelling and optimization have also opened the door to a broader analysis that focuses on the collective supply chains of all competitors in a marketplace and how best to supply the market at the lowest cost and maximum profit.
Twenty-five years ago, the optimization tools to analyze and strategically set one’s supply chain infrastructure were new and untested. Those companies on the cutting edge had the vision to employ this technology to gain competitive advantage. They analyzed the trade-offs among raw material, production, transportation, distribution and inventory costs to understand the most cost effective way to meet their customer demand at higher customer service levels. In today’s world, what was once the domain of a few has become a “best practice” in supply chain management. Most supply chain managers are on the band wagon and perform some sort of optimization based supply chain analysis when considering major capital investment, key strategic initiatives or when their network has grown too large and unwieldy through acquisition and growth. That does not mean that the world has caught up to the thought leaders….rather the thought leaders continue to push the envelope and are using SCND to do more for their organization than they did in the past.
In particular, there are two areas where the best supply chain managers are focusing their attention with regard to SCND: First, they are making SCND an evergreen business process that is fully integrated into all strategic and tactical decisions related to network infrastructure and product sourcing. Second, they are expanding the scope of their supply chain analysis to not only include their own supply chain network, but also to analyze the supply chain dynamics of their major competitors and how the entire market is being served.
Sustained Supply Chain Network Design
In too many cases, SCND analysis is a one-and-done process. The reality is that it’s often difficult to assemble the data required to perform the analysis, but this prevents companies from assessing ongoing risks and opportunities. Through a carefully designed data management process integrated to the right set of tools, leading businesses are putting into place sustainable business processes to continually revisit their supply chain network structure and operations.
Good data is the driver of good supply chain analysis. Many companies struggle with understanding the true activity costs associated with one or more of the following: raw material supply, production, packaging, warehousing, distribution and inventory. When running a significant supply chain analysis and design project it is often the case that the bulk of time and effort is spent on gathering, organizing and validating the input data that drives the analysis. Unfortunately, too often that effort is wasted, as that data is used once and then forgotten. However this need not be the case.
Those implementing best practices have extended data warehouses to include key activity based operations and cost data that is used in their strategic and tactical network optimization. The data is kept evergreen through continual data management processes and is always available for the next what-if scenario. These what-if scenarios might include:
• Short term: How best to tactically respond to unexpected events like strikes, weather disruptions, major capacity losses, etc…?
• Mid-term: How do I evaluate new sales opportunities for large additional volumes and how will these impact my ability to deliver across the supply chain?
• Long Term: How do I evaluate new merger and acquisition opportunities? How do I plan for capacity expansions?
Companies who maintain the proper data and do not have to start from scratch on each new what-if analysiscan use a tried and true process to respond more quickly and more accurately to the opportunities that constantly and continually present themselves.
Extending Supply Chain Network Design to Competitive Markets
If you have used optimization SCND to analyze a portion of your business in the past couple of years, then you are running with the herd. If you have implemented sustainable business process to refresh and maintain the critical data and are able to run supply chain network what-if analysis at a moment’s notice, then you are running at the front of the herd. Those running way out in front are also using SCND analysis to understand the true delivered cost of supplying product to each customer and managing their business profitability accordingly.
Advances in network design modelling, optimization, and game theory have recently opened the door to a broader analysis that focuses on the collective supply chains of all competitors in a marketplace. These tools can be used to which customer/product combinations should be targeted and at what price to maximize profit. There are three key steps to being able to accomplish this.
1. Understand your own Total Delivered Cost to each customer.
Understanding your true total deliver cost to each of your customers enables you to analyze and determine the profit you are earning from each customer. It also partially informs your pricing decisions, especially in competitive situations or when the demand is greater than your ability to supply. Not only does this analysis determine the profitability by customer, it also determines the impact of adding or dropping a customer, thus answering the question, “Even though it’s low margin business, can we afford to lose the volume?”
2. Estimate competitor costs for supplying to a shared set of customers
While pricing information is largely influenced by your own internal costs for producing, delivering and selling to your customers, it is also heavily influenced by the market conditions and at what price your competitors are able and willing to sell their competitive products to the same customers. In order to understand the market dynamics, you need to be able to reasonably estimate your competitor’s costs. For example, if you are in an industry where transportation delivery costs are significant, then regionally located manufacturing will have an impact on price and profitability. Understanding which customers are more profitable for you and which are more costly for your competitors to serve enables you to develop a winning strategy.
3. Use cutting edge optimization technology to model the competitive market
While most businesses are good at determining pricing and identifying profitable customers intuitively and on and ad hoc basis, few have put into place the rigorous business processes and analytics to be able to do it accurately on a routine basis. This requires a deep understanding of your total delivered cost, your supply chain sourcing options, and the flexibility you have on both the cost and revenue side of the equation. It also requires a better understanding of your competitors supply chain, and what they may or may not be able to do, based on their own costs.
Supply chain network design optimization tools have become well integrated into modern business decision making processes at leading edge companies. They are used to rigorously analyze and make the best decision in response to both short-term events such as weather disruptions, spot sales opportunities, capacity outages) and long-term strategy, such as capacity expansion or mergers and acquisitions. These analytical approaches and technologies have recently been extended to enable businesses to analyze not just their own operations, but the sum of multiple supply chains in the competitive market place. It is exciting work and adding additional millions of dollars to bottom line profit each year.
December 1st, 2015 5:11 pm Category: Distribution, Global Supply Chain, Green Network, Inventory Management, Network Design, Optimization, Optimization Software, Scheduling, Solver Optimization, Supply Chain Improvement, Supply Chain Optimization, Supply Chain Planning, Transportation, Vehicle Routing, Warehouse Optimization, by: Gene Ramsay
Profit Point has been helping companies apply mathematical techniques to improve their business decisions for 20 years now, and it is interesting to review some of the advances in technology that have occurred over this time that have most enabled us to help our clients, including:
• The ability for companies to capture, store and access increasingly larger amounts of transaction and anecdotal data that quantify the behavior and motivation of customers, manufacturers, suppliers and other entities
• The improvement in analytical capabilities that help make optimized choices, in such areas as the solving mixed integer optimization problems, and
• The improvement of computing technology, allowing us to perform calculations in a fraction of the time required just a few years ago
A recent post on the Data Science Central website highlights the use of advanced techniques based on these advances by on-line marketplace Amazon, which is generally acknowledged as one of the most tech-savvy companies on the planet. 21 techniques are listed that Amazon uses to improve both their day-to-day operations and planning processes, including supply chain network design, delivery scheduling, sales and inventory forecasting, advertising optimization, revenue / price optimization, fraud detection and many others. For a complete list see the link below:
Like our customer Amazon, Profit Point is committed to using these techniques for the benefit of our clients – we have been concentrating on implementing business improvement for our clients, including optimization in various forms, since our very beginning. Are you, like Amazon, using the best methods to seize the opportunities that are available today?
By now, we’ve all probably heard about the fact that there is a worldwide glut of crude oil.
This is due to many factors of course, including the increased production of oil and natural gas in North America (especially as a result of fracking), as well as the rising proportion that renewable energy sources have come to represent in the overall energy marketplace. And members of the OPEC cartel have made no secret that they are increasing or at least maintaining relatively high production levels so as to drive competitors out of the market and thus maintain their market share. Therefore the supply of petroleum on world markets is high, thus driving down the price.
This oversupply of crude oil in relationship to demand has had a big impact on the supply chain for moving oil from supplier to customer. Over the past decade, there has been a huge increase in the oil supply chain infrastructure. Trading companies have built vast storage facilities in order to insulate themselves from the high prices they experienced in the past. But now with the current glut of petroleum most of this on-shore storage capacity is full, and this has led to an interesting phenomenon. Now, some trading companies are being forced to use their marine transportation assets, i.e. oil tankers and supertankers, as simply floating tank farms. As the spot price of oil has collapsed, it now makes economic sense to simply load the vessels without a definite destination or customer in mind and store the oil at sea.
Such a strategy, of using transportation assets as de facto storage locations is very typical of any commodity type market where the market power of the customer is much stronger relative to the producer. For example, this situation has long been typical in certain commodities that are delivered by rail, where customers simply leave product parked in cars out on a rail siding somewhere until it’s needed.
Of course, over time as normal market forces do their work, the relative bargaining positions of the buyer and seller can shift. In the case of oil, various economic and political forces can quickly move the markets such that leaving tons of oil floating out on the seas in very expensive storage tanks no longer makes economic sense. And when this happens, those vessels will soon be put back to the purpose for which they were truly built.
I was touring with friends and a Food Science intern around the Bay Area last weekend. On Saturday they visited my home town of Napa and we did some wine tasting. We also stopped by the Culinary Institute of America in St. Helena just in time to be asked to judge the end of year Dessert Intensive of CIA’s latest cohort of students. It was a tall order but someone had to give the students feedback.
On Sunday, we took in Fisherman’s Wharf and the wrap up for the weekend was a stop at Ghirardelli Square for dessert. I knew what I wanted on this visit — Ghirardelli’s “Warm Brownie Sundae”. All day I was telling my friends about it and offering to share some with them. We finally get to Ghirardelli Square, waited in line for 20 minutes and when it was our turn to order the cashier says they are out of the Ghirardelli brownies. WHATTT!!??!! And then he adds sheepishly they’ve been out for TWO WEEKS. I was disappointed on so many levels but as a Supply Chain professional I was horrified. How can you allow yourself to be stocked out of one of your Signature Items for TWO WEEKS in Ghirardelli Square???? I have reached out to a former co-worker who used to work in their supply chain but no response as of the writing of this blog. So here is my public plea…
Please Ghirardelli, if you need some Supply Chain assistance call us at Profit Point. We can do a 2 or 3 day Business Process Assessment and make recommendations to improve your Supply Chain Operations.
July 21st, 2015 2:58 pm Category: Global Supply Chain, Network Design, Operations Research, Optimization, Optimization Software, Profit Network, Publications, Supply Chain Agility, Supply Chain Optimization, Supply Chain Planning, Warehouse Optimization, by: Ted Schaefer
Profit Point’s recent article in Industry Today, “The Future of Supply Chain Network Design,” describes how to fully leverage the new advances in a traditional supply chain optimization process to include not only your internal supply chain, but the supply chains of your competitors, as well.
Supply chain network design optimization tools have become well integrated into modern business decision-making processes at leading edge companies. The tools are used to rigorously analyze and make the best decisions in response to both short-term events such as weather disruptions, spot sales opportunities, utility outages and to longer-term strategy issues, such as capacity expansion or mergers and acquisitions. These analytical approaches and technologies can be game changers. The newest versions of SCND tools have been expanded: businesses can now analyze not just their own operations, but also the sum of multiple supply chains in the competitive marketplace, creating a new way to integrate competitive risk into the design of your supply chain.
Please contact us if you’d like to learn more about new ways to leverage traditional ideas.
A few weeks ago, Steve Westphal with Edge Network posted a piece on our blog about the benefits of SKU Optimization. This past week, Packaging Digest posted the results of a survey of the beverage industry that suggests new packaging may be one of the key drivers for profitability this year. The survey also illustrates how new packaging can cause the proliferation of SKU’s. One more reason why industry leaders maintain an ongoing SKU Optimization process within their supply chain.
If you’d like to to know more about SKU Optimization and how it can impact your bottom line, please contact us.
April 22nd, 2015 12:30 pm Category: Global Supply Chain, Network Design, Operations Research, Optimization, Profit Network, Supply Chain Improvement, Supply Chain Optimization, Supply Chain Planning, Supply Chain Software, by: Gene Ramsay
At Profit Point network design analysis, answering such questions as
• how many facilities a business needs,
• how large they should be and where they should be located, and
• how they should change over time, etc.
is one of our specialties. We have performed this type of analysis for a range of companies across multiple industry types and geographical regions, and we have developed our own network design-focused software package to help us do this type of study. (And we teach folks how to use the software as well, so they can answer their own network design questions, if they want to pursue that.)
Our modeling “toolbox”, our Profit Network software, is designed to be flexible and data-driven, so that the user can focus more attention on a key part of the supply chain where the questions must be answered, without having to define more detail than is really desired in other areas to the supply chain.
One of the key elements in many of the models we or our clients construct is the bill of materials. This data specifies the materials that are required to produce goods along the supply chain, be they intermediate materials or finished goods. For instance, if you are making a finished good such as a loaf of bread, the bill of materials would specify the quantities of flour, yeast, salt and other ingredients that would go into a batch.
To get trustworthy results from a model, it must require that the bill of materials (BOM) data be defined, and be used, in deriving the solution. (In some models we have encountered the BOM is just a suggestion, or products can be created from thin air if the BOM data in not defined.)
The BOM logic must also be able to capture the reality of a situation. The BOM may need to vary from one machine to another within the same facility. Or it might need to vary over time – as an example, when agricultural or dairy products are ingredients to a manufacturing process, the ingredients might have different characteristics over the seasons of the year, thus requiring different input quantities over time to produce a consistent, standardized output.
We work closely with our clients to ensure that our software is matched to their needs, and that it gives them the flexibility they need as their businesses change.
We just finished the fall soccer season in my home. I was thinking about watching my children play soccer when they were younger after a conversation with one of our consultants. He had just come back from visiting a prospective client where he was doing an assessment of their supply chain work processes and systems. Speaking frankly, this prospective client really did not have well defined work processes and certainly didn’t have systems implemented to enable good work processes. Mostly they seemed to run from one fire to the next and tried to do their best in tamping out the flames enough to be able to move onto the next crisis. Our consultant came back feeling dizzy from observing how they operated.
When my kids were younger and playing soccer, their style of play could be characterized as “kick and run”. They really either didn’t understand the concept of trying to possess the ball or couldn’t execute this strategy. If you have the ball, you have the opportunity to score. If your opponent does not have the ball, they can’t score. It’s a simple as that. After watching my kids play on Saturday mornings with this “kick and run” style, I would really enjoy going to see a local college team play. They have won numerous national championships and play at a very high level. They understand and are able to execute this “possess the ball” style of play. It was always helpful to see how the game should be played and get my perspective straightened out.
Perhaps the “possessing the ball” analog in the operation of a supply chain is “possessing the key information.” In soccer, you have to get the ball to your attackers at the right time and in the right place in order to score. Likewise, in the supply chain, you have to get the right information to the right people at the right time to beat the competition. If you are feeling dizzy from fighting fire after fire (playing “kick and run”) in your supply chain operations and don’t seem to be making any progress on making things better and more stable, it would be our privilege to help assess where you are at and work together to move your organization toward operating in championship form.
November 14th, 2014 9:45 am Category: Global Supply Chain, Green Network, Green Optimization, Network Design, Operations Research, Optimization, Optimization Software, Profit Network, Risk Management, Supply Chain Improvement, Supply Chain Optimization, Supply Chain Planning, Sustainability, by: Gene Ramsay
In developing a supply chain network design there are many criteria to consider – including such factors as the impact of the facility choices on
• Cost of running the system,
• current and future customer service,
• ability to respond to changes in the market, and
• risk of costly intangible events in the future
to name a few.
Frequently we use models to estimate revenues / costs for a given facility footprint, looking at costs of production, transportation, raw materials and other relevant components. We also sometimes constrain the models to ensure that other criteria are addressed – a constraint requiring that DCs be placed so that 80% of demand be within a day’s drive of a facility, for instance, might be a proxy for “good customer service”.
Some intangibles, such as political risk associated with establishing / maintaining a facility in a particular location, are difficult to measure and include in a trade off with model cost estimates. Another intangible of great interest for many companies, and that has been difficult to make tangible, is water risk. Will water be available in the required quantities in the future, and if so, will the cost allow the company to remain competitive? For many industry groups water is the most basic of raw materials involved in production, and it is important to trade off water risk against other concerns.
As I wrote in a previous blog published in this forum,
There are several risks that all companies face, to varying degrees, as global water consumption increases, including
• Physical supply risk: will fresh water always be available in the required quantities for your operations?
• Corporate image risk: your corporate image will likely take a hit if you are called out as a “polluter” or “water waster”
• Governmental interference risk: governmental bodies are becoming increasingly interested in water consumption, and can impose regulations that can be difficult to deal with
• Profit risk: all of the above risks can translate to a deterioration of your bottom line.
The challenge has been: how to quantify such risks so that they can be used to compare network design options.
Recently a post entitled “How Much is Water Worth” on LinkedIn highlighted a website developed by Ecolab that offers users an approach to monetization of water risks. This website allows the user to enter information about their current or potential supply chain footprint – such as locations of facilities and current or planned water consumption – and the website combines this information with internal information about projected GDP growth for the country of interest, the political climate and other factors to calculate a projected risk-adjusted cost of water over the time horizon of interest.
This capability, in conjunction with traditional supply chain modeling methods, gives the planner a tool that can be used to develop a more robust set of information that can be used in decision-making.
For more details visit the website waterriskmonetizer.com
April 16th, 2014 10:21 am Category: Global Supply Chain, Network Design, Operations Research, Optimization, Optimization Software, Profit Network, Supply Chain Optimization, Supply Chain Planning, Supply Chain Software, by: Gene Ramsay
Recently I had the opportunity to speak to an operations management class for MBA students in the Goizueta Business School at Emory University. The class is intended to give the students an introduction to a variety of problems that they might encounter during their careers, and to management science techniques that might be applied to them, using Excel as a solution platform. The professor had asked me to address the course topic from the point of view of one who had used these methods in the real world, and I was glad to do so, recounting my work in supply chain network design, hydro power generation scheduling, routing of empty shipping containers, natural gas supply contract management and various other problems.
During Q&A one of the students asked how a company should determine the appropriate source of resources to use for solving these types of problems – should it be in-house expertise or an outside consultant?
As I told him, to me, this depends on a number of factors, and I gave an example, based on our experience: In our practice we perform supply chain network design studies, and we also license the network design software that we use to our clients, if they desire. A number of clients have engaged us to first do an analysis for them, and then they have licensed the software so that they can then perform future projects themselves, using our initial project as a base. Many of these clients have used the software very effectively.
Those that have been most successful at using the software in-house, and at performing management science projects in-house in general, have several common characteristics-
- They are committed to tactical and strategic planning as tools for meeting their business goals,
- They have enough work in this area, and related areas, to keep an analyst or group of analysts busy full time, due to such factors as
- The scale and scope of their operations
- The speed of innovation in their industry
- The level of complexity of their supply chain and variety of products made, and
- Their desire for a “continuous improvement” approach as opposed to a “one-time reorganization” approach
- They have a commitment to maintaining personnel who
- have the proper skills and training to address these problems, and
- are allowed the time to work on these problems, rather than being constantly pulled off for “firefighting” short term or operational problems.
Most companies can make good use of management science solution methods, but, as you think about how to do this, try to make a realistic determination of your internal priorities, so you can decide between insourcing and outsourcing, or a mixture of the two.
This month, Supply Chain Management Review is featuring a 3-part series by Dr. Alan Kosansky and Michael Taus of Profit Point entitled Managing for Catastrophes: Building a Resilient Supply Chain. In this article we discuss the five key elements to building a resilient supply chain and the steps you can take today to improve your preparedness for the next catastrophic disruption.
Once a futuristic ideal, the post-industrial, globally-interconnected economy has arrived. With it have come countless benefits, including unprecedentedly high international trade, lean supply chains that deliver low cost consumer goods and an improved standard of living in many developing countries. Along with these advances, this interdependent global economy has amplified collective exposure to catastrophic events. At the epicenter of the global economy is a series of interconnected supply chains whose core function is to continue to supply the world’s population with essential goods, whether or not a catastrophe strikes.
In the last several years, a number of man-made and natural events have lead to significant disruption within supply chains. Hurricane Sandy closed shipping lanes in the northeastern U.S., triggering the worst fuel shortages since the 1970s and incurring associated costs exceeding $70 billion. The 2011 earthquake and tsunami that struck the coast of Japan, home to the world’s 3rd largest economy representing almost nine percent of global GDP caused nearly $300 billion in damages. The catastrophic impact included significant impairment of country-wide infrastructure and had a ripple effect on global supply chains that were dependent on Japanese manufacturing and transportation lanes. Due to interconnected supply chains across a global economy, persistent disruption has become the new norm.
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March 6th, 2014 9:32 am Category: Operations Research, Optimization, Optimization Software, Profit Network, Profit Vehicle Planner, Profit Vehicle Router, Supply Chain Improvement, Supply Chain Optimization, Supply Chain Planning, by: Jim Piermarini
In the recent weeks, I have been thinking about testing our applications, like our popular Profit Network, or Profit Vehicle Planner. When we test, we run data sets that are designed to stress the system in different ways, to ensure that all the important paths through the code are working properly. When we test, our applications get better and better. There are many good reasons to test, most importantly, is to know that an improvement in one part of the code does not break a feature in a different part of the code.
I have been thinking about how we could test our code a bit more, and the means by which we could do that. I have been reading about automated testing, and its benefits. They are many, but the upshot is that if the testing is automated, you will likely test more often, and that is a good thing. To automate application testing requires the ability to churn out runs with nobody watching. And to do that, the application needs to be able to be kicked off and run in a way that there are no buttons or dialog boxes that must be manually clicked to continue. There can be no settings that must be manually set, or information reviewed to decide what to do next. In addition, the application must then save the results somewhere, either in the instance of the application, or to a log file, or to a database of some sort. Then finally, to really be testing, the results must be compared to the expected results to determine the pass/fail state of the test. This requires having a set of expected results for every test data set.
In looking at this process above, I see numerous similarities to the process used to run a sensitivity analysis, in that many runs are typically run, (so automation is a natural help) and the results need to be recorded. Sensitivity Analysis is a typical process for user of our Profit Network tool, and out Profit Planner and Profit Scheduler tool. An additional step in sensitivity analysis however, is that you may desire to change the input data in a systematic way (say Demand + 5%, and Demand -5%), and to the extent that it is indeed systematic, this too could be folded into the automation. The results analysis is different too, in that here you would like to look across the final sets of results at the differences, while in testing you just compare one set of test results to its expected results. I can foresee difficulty in automating the data changes, since each type of data may need to be changed in a very specific way. Never-the-less, even if the data changes are manual, they could be prepared ahead of the run, and the runs themselves could be grouped in a batch run to generate the results needed for a sensitivity analysis.
Constructing a harness that lashes up to an application where you can define the number of runs to be made, the setting for that run, the different data sets to be used, and the output location for results to be analyzed, would be useful not only for testing, but for the type of sensitivity analysis we do a lot of here at Profit Point.
I am going to encourage our developers to investigate this type of a system harness to be able to talk to and control our applications to be able to run them automatically, and have their results automatically stored in a data store for either test or sensitivity analysis.
Jim Piermarini | CEO Profit Point Inc.
Additive manufacturing or 3D printing is a process of making three-dimensional solid objects from a digital model. It is achieved by laying down successive layers of material, as opposed to the traditional machining techniques of removing material by drilling and cutting. 3D printing is usually performed by a materials printer using digital technology.
Taking a digital image of a toy and printing out a near-perfect replica of it seems sci-fi and surreal, but rapid technological advances in 3D printing being developed make this and even more possible. Printing metal parts with increased strength makes machines even more viable and cost-effective in manufacturing. Additionally, an entire part can be 3D printed in a single machine, eliminating multiple touch points in traditional manufacturing and reducing failures. The newest futuristic trend in 3D printing is to go huge: using robotics to deposit building materials in an orchestrated and precise way to build large structures made up tons of interconnecting parts.
3D printing is a reality. A recent Forbes magazine article, “What Can 3D Printing Do? Here are 6 Creative Examples” lists several ways in which 3D printing have been used:
- In 2012, doctors from University of Michigan developed a tracheal splint made from a polymer and created directly from a CT scan of a baby’s trachea/bronchus using image-based computer model with laser-based 2D printing to product the splint.
- Both General Motors and Ford Motor Company have used 3D printing to make prototypes of vehicle parts used in testing and design.
- Nasa has used 3D printing recently to make a rocket engine injector and use it for major hot fire testing.
- Defense Distributed, a high tech gunsmith group, created the world’s first 3D printed gun called the “Liberator”.
- Prosthetics including a 3D printed bionic ear created by Princeton University scientists have been developed.
Although 3D printing has been around since the 1980’s, a differentiating trend has emerged this year that could make 2014 pivotal: 3D printing machines are now being used to manufacture a large variety of consumer products not just heavy machinery and structural components such as aircraft parts. The printers are expensive and the 3D pictures required to print are difficult for most – a mainstream breakthrough in 3D printing could be seen in the near future as printers become cheaper and easier to use.
What could the Supply Chain of tomorrow look like if and when 3D printing takes off? It has the potential to transform certain parts of manufacturing and supply chains over the long term. Traditional supply chains are often characterized by mass production of products driven by forecasts and pushed to customers through a warehouse distribution network, with long lead times, high transportation costs and large carbon footprints. A 3D supply chain would be distinguished by having customized production, be “pulled” by customer demand, locally printed and distributed, have short lead times, low transportation costs as well as low carbon footprint. It will create a demand for smaller factories that would take offshore manufacturing and bring it close to the consumer. Goods will be cheaper to reproduce domestically versus manufactured offshore and shipped from low-wage countries. Because new technologies currently being developed result in a significant proportion of manufacturing becoming automated large and costly work forces would be reduced. In addition to distribution cost reduction, storage would also be a reduced as products could be made quickly in response to demand as opposed to meeting service levels via inventory and safety stocks.
Although it is a huge leap to go from printing a single object on a 3D printer to replacing an entire manufacturing enterprise and thus allowing any business or individual to become its own homegrown factory, Gartner Group calls it the “beginning of the Digital Industrial Revolution which threatens to reshape how we create physical goods”. If that “threat” becomes reality, then it promises to reshape how we consider and optimize our current Supply Chain.
A company I recently visited relies entirely on only one supplier for a major component for their product. This is an obvious supply chain risk, and the company requires huge stocks of this component (which comes in several sizes and colors) to mitigate their risk. However, what about the less obvious risks that lurk in a supply chain? A basic business tenet that equates the greatest supply-chain risk with suppliers of highest annual expenditure was debunked in a new MIT study on supply chain risk.
That study was conducted by Professor David Simchi-Levi of MIT at Ford Motor Company. The study points out that traditional methods of identifying the highest risk to the supply chain rely on assessing a probability that a risk will occur and knowing the magnitude of the problems that would result. Since frequency and impact of risk are difficult to predict and quantify, conventional wisdom has been to assume the greatest supply-chain risk is tied to biggest suppliers.
Rather than looking at probabilities of disruptions, the study examined the impact to the company’s operations given the occurrence of any disruption. The reasoning behind this is that no matter what type of disruption companies’ mitigation choices are the same: maintain high amounts of inventory; find an alternative supply source, etc. The model uses Ford’s multi-tier supply network incorporating part mappings to product lines, supplier relationships, operational and financial impact measures and supplier recovery time to a problem. By successively removing nodes in the network and evaluating how to best reallocate inventory and analyze alternatives, the financial impact of each “disruption” was evaluated.
The model results showed that a short disruption at 61% of the tier 1 firms would not cause profit loss, but if only 2% of suppliers with the cheaper components experienced a disruption to production, Ford’s profits would be significantly impacted.
What if you could not only have visibility to your tier 1 suppliers, but your supplier’s suppliers, and so on and so on on…. Technology is emerging that enable companies to visualize their supply chains and the history behind them beyond the first tier. By employing crowd-sourcing technology companies can go beyond exposing their tier 1 suppliers. When used in conjunction with a network optimization study, supply chain risk is elevated to a whole new level of exposure. Profit Point experts are uniquely positioned to leverage both experience and technology to conduct Supply Chain network design and entire life-cycle analysis.
Supply chain experts agree that one of the greatest challenges to Global Supply Chain in 2014 is disruption either in technology or physical outages. Those companies who have prepared for these challenges will be best positioned in the coming year to be successful.
Great strides have been made in transportation infrastructure in the last 150 years; such feats as the construction of the Suez and Panama Canals, and the development of long-distance railroad and highway networks, have reduced cost and fostered trade for the world as a whole. And more changes are coming on line today, or are in the pipeline, including significant additional throughput capacity in Panama in 2015, and the gradual development of added rail capacity connecting Asia and Europe. (For more information on the latter, see the article The New Silk Road by my colleague John Hughes.
Another area where additional transport capacity would greatly benefit trade, and potentially bring a significant improvement in living standards, is central Africa. This area has immense natural resources, such as the copper and cobalt found in the Democratic Republic of the Congo and Zambia, and the coffee grown in Uganda, that require both land and sea transport to reach major manufacturing and consumer areas. A number of projects are under construction or consideration to bring change to the supply chains in that part of the world.
An article in The Economist earlier this year looked at barge and rail transport projects underway in Egypt, Guinea, Ghana and Angola, and profiled plans for future infrastructure improvements by firms such as Citadel Capital of Cairo.
The strategic thinkers at consultancy Stratfor have focused a number of their recent research articles on the different options available to better connect the rich ore in the landlocked central area of Africa to world markets. The South African port of Durban has the best developed cargo handling facilities among the ports in the southern part of the continent, and currently attracts large volumes of minerals, but this requires a long road trip from Katanga in the Congo through Zambia and Botswana to South Africa. Durban is substantially further from the sources than ports such as Dar es Salaam in Tanzania, or Walvis Bay in Namibia, but the road route to Durban is relatively safe and stable, whereas paths to other ports suffer from unreliable or otherwise inadequate infrastructure, or the requirement to switch between rail and truck en route from mine to coast. But that is perhaps just a short term issue – given the potential rewards, several plans to improve these routes are in various stages of planning or development.
As these changes become visible on the horizon, and gradually take place, companies would be well-advised to evaluate their options, and plan for these changes – strategic supply chain planning allows management to keep their firms at the forefront of the business world.
When we help our clients improve their supply chains the first step in the process is usually to identify what problem they need to solve, or what questions they are trying to answer. Examples of such questions might be
- What will be the impact of several possible capital investments in our distribution system?
- A major customer is considering changes in their manufacturing – how should we respond?
- How can we improve the assignment of available production / inventory to customer orders?
After pinning down the objectives, the focus will then shift to the design of a planning model, or a software system, that will help them to address the identified needs. We find that a key design tenet for the model, or the scope of the supply chain to be covered, is to include enough detail to be able to answer the questions at hand, but no more.
A typical supply chain will stretch from procurement of raw materials to manufacturing to distribution to customers (and possibly beyond, on either or both ends.) Part of capturing the supply chain behavior will be to define the transformation of materials along the chain. This can be done by defining a bill of materials, or BOM, which defines the quantities of input ingredients that are required at a point in the supply chain to make an output material of interest. For instance, if you are a baker then your BOM is your recipe – e.g. the amounts of flour, buttermilk, leavening and various other ingredients required to make the batch of biscuits.
Deciding on the detail of the materials going into the BOM, and getting the right quantities for the BOM, is a key step in properly modeling the supply chain. If you are working at an operational supply chain level, the BOM will need to be detailed enough to actually make the product, but many times in a planning situation, it is reasonable to omit some of the detail, and only capture the main flows of product through the system. You will need to make these decisions based on your project objective.
For instance, if you are modeling a beverage company’s supply chain, water may be a key ingredient in the production process. If the question you are trying to answer for the beverage company is whether traditional warehouses vs. crossdocks is a better distribution solution for a part of the territory, then you may decide that the sources and cost of water for the production facilities will not have a big impact on the answer, so you can omit the water consumption from the analysis. On the other hand, if the objective of the analysis is to evaluate the impact of alternative future production locations on the company’s overall environmental impact and commitment to sustainable practices, then water for production (and waste water, and other intermediate or byproduct materials) would likely need to be included in the production BOMs.
Making good choices in defining your BOM is one of the important steps in getting a supply chain model to help you answer your questions effectively. Our extensive supply chain experience allows us to bring a large knowledge base to the assignment when we are helping our clients design in enough detail, but no more.
June 22nd, 2012 3:46 pm Category: Distribution, Enterprise Resource Planning, Global Supply Chain, Green Network, Green Optimization, Network Design, Optimization, Supply Chain Agility, Supply Chain Improvement, Supply Chain Planning, Transportation, Vehicle Routing, by: Editor
Supply Chain optimization is a topic of increasing interest today, whether the main intention is to maximize the efficiency of one’s global supply chain system or to pro-actively make it greener. There are many changes that can be made to improve the performance of a supply chain, ranging from where materials are purchased, the types of materials purchased, how those materials get to you, how your products are distributed, and many more. An additional question on the mind of some decision makers is: Can I minimize my environmental footprint and improve my profits at the same time?
Many changes you make to your supply chain could either intentionally – or unintentionally – make it greener, so effectively reducing the carbon footprint of the product or material at the point that it arrives at your receiving bay. Under the right circumstances, if the reduced carbon footprint results from a conscious decision you make and involves a change from ‘the way things were’, then there might be an opportunity to capture some financial value from that decision in the form of Greenhouse Gas (GHG) emission credits, even when these emission reductions occur at a facility other than yours (Scope 3 emissions under the Greenhouse Gas Protocol).
As an example, let’s consider the possible implications of changes in the transportation component of the footprint and decisions that might allow for the creation of additional value in the form of GHG emission credits. In simple terms, credits might be earned if overall fuel usage is reduced by making changes to the trucks or their operation, such as the type of lubricant, wheel width, idling elimination (where it is not mandated), minimizing empty trips, switching from trucks to rail or water transport, using only trucks with pre-defined retrofit packages, using only hybrid trucks for local transportation and insisting on ocean going vessels having certain fuel economy improvement strategies installed. These are just some of the ways fuel can be saved. If, as a result of your decisions or choices made, the total amount of fuel and emissions is reduced, then valuable emission credits could be earned. It is worth noting that capturing those credits is dependent on following mandated requirements and gaining approval for the project.)
If your corporate environmental strategy requires that you retain ownership of these reductions, then you keep the credits created and the value of those credits should be placed on the balance sheet as a Capital Asset. Alternatively, if you are able, the credits can be sold on the open market and the cash realized and placed on the balance sheet. Either way, shareholders will not only get the ‘feel good’ benefit of the environmental improvement, but also the financial benefit from improvement to the balance sheet. If preferred, the credits can be sold to directly offset the purchase price of the material involved, effectively reducing that price and so increasing the margin on the sales price of the end-product and again improving the bottom line. If capital investment is required as part of the supply chain optimization, the credit value can also be a way to shorten the payback period and improve the ROI, or to allow an optimization to occur
So, when you consider improving your environmental impact or optimizing your supply chain, consider the possibility that there might be additional value to unlock if you include both environmental and traditional business variables in your supply chain improvement efforts.
Written by: Peter Chant, President, The FReMCo Corporation Inc.