Reducing Complexity

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Increasing globalization and demand for diverse product offerings puts supply chain complexity at an all-time high for many manufacturers and retailers. Some degree of complexity is inevitable, but too much causes a logistics double-whammy: increased costs and decreased efficiency. Companies are taking a hard look at product mix and processes to find ways to keep it simple.

"When you operate in a complex business environment, you have two choices: reduce complexity wherever possible, or do a better job managing it," says Larry Lapide, research director at the MIT Center for Transportation and Logistics.

Improving complexity management has become imperative for global companies because supply chain complexity increases almost geometrically as companies expand their operational footprint.

The electronics supply chain epitomizes this growing complexity.

"Electronics is a multi-tier industry where companies play roles in multiple supply chains, each of which works by its own rules determined by companies at the top of the chain," explains Peter West, vice president, marketing for Irvine, Calif.-based software developer RiverOne.

"Companies must accommodate customer-imposed short-term variability and at the same time orchestrate numerous moving parts and parties across the chain."

A large electronics manufacturing services (EMS) firm, for example, may have 250 customers; 5,000 suppliers, with a 5 percent to 7 percent monthly churn rate; and 20 manufacturing locations around the world, says West.

"The company spends billions of dollars on procurement, doesn't control what it makes, and doesn't control which suppliers it uses. Every month, it makes new products with new designs, retires existing products, and only makes a small margin on the business," he explains.

"If the company can gain better control of its supply base, automate workflow so production moves smoothly and it only has to deal with exceptions, it can really improve performance."

But streamlining operations is difficult. Companies have focused largely on optimizing within the enterprise, outsourcing many production-related activities.

"This solves the problem of inefficiency inside the factory walls, but can create inefficiencies on the outside," says West. "While inventory no longer mounts up inside the factory, it builds up elsewhere in the supply chain."

The lack of visibility into supply and demand throughout the channel aggravates the situation. And by breaking up the supply chain among outside providers, companies create a blizzard of transactions with no means to automate and manage them.

Until recently, information systems did not efficiently address this distributed business model.

"When markets receive a demand signal, it is communicated to the brand owner, who communicates it to its EMS partners, who in turn communicates it to the component suppliers," explains West.

"Because the events occur in an isolated silo, lag time exists between each communication—anywhere from a few days to a few weeks. "The information exchanged across these silos is asynchronous," he adds. "That creates potential inaccuracies, including overages and shortages.

"Companies often address this by building buffer inventories along the supply chain, a practice that directly impacts profitability and efficiency."

Today's outsourced and extended business model requires a fundamentally different approach to supply chain management. "The best way to tackle complexity is to divide it into two categories: product and process," says Robert Martichenko, president, LeanCor LLC, Florence, Ky.

The Product Perspective

From a product point of view, companies look to practices such as SKU and supplier rationalization as a way to chip at complexity. Businesses in many sectors suffer from SKU proliferation—they build additional products and styles, and create different packages and assortments.

"For every SKU, companies have to forecast demand, procure raw material and components, produce the item, manage its distribution, and, increasingly, its return or recycling. Supply chain complexity increases with each added SKU," Martichenko notes.

According to Art van Bodegraven, The Progress Group LLC, SKU proliferation:

  • Clogs the supply chain.
  • Cannibalizes movement and positioning of "good" SKUs. This turns "A" items into "Bs," turns "B" items into "Cs," and creates more "D" items.
  • Forces smaller orders for a greater variety of products.
  • Complicates product life cycle management.
  • Increases total inventory, eating up capital and space.
  • Complicates manufacturing set-up, adding cost and using production capacity.
  • Defies forecasting—new products bring unknown results.
  • Changes the storage and shipment mix, adding new and different cube/weight profiles.
  • Degrades material handling system performance.
  • Stresses the warehouse by reducing productivity and increasing inventory.
  • Adds cost.

But SKU proliferation itself is not the problem, van Bodegraven contends.

"The real issue is how to deal with SKU proliferation proactively and efficiently," he says. "Supply chain execution issues occur when companies fail to thoroughly assess and communicate the implications of planned proliferation on supply chain operations.

"Problems arise from not including everyone involved in fulfilling orders for the total product mix. Too often, the warehouse discovers new SKUs when they begin to arrive."

Thoroughly understanding the cost components of new SKUs is critical to evaluating their prospects and performance. Companies must identify and evaluate costs associated with added inventories, higher obsolescence risks, added processes and labor, order fulfillment efficiency, manufacturing set-up/changeover capacity losses, and transportation impacts.

Rationalizing Suppliers

Supply base rationalization offers another opportunity to reduce complexity. The first step is to accumulate current spend data, says Roberta Duffy of the Center for Strategic Supply Research, affiliated with Arizona State University and the Institute for Supply Management.

This data includes:

  • Volume spent for various categories or commodities.
  • Total number of suppliers for each category or commodity.
  • Volume spent with various suppliers.
  • Price detail for given items and services.

Organizations can use this data initially to determine where to focus supply base rationalization efforts.

"Start with categories that comprise the largest percentage of spend, or have the largest number of suppliers," Duffy recommends. "Use this information to decide which suppliers to leverage, and which categories benefit from consolidated contracts."

Next, examine the collected data in terms of various spend categories. "Depending on the spend category, companies will have different strategies for how many and which suppliers to work with, and what type of relationship to build with them," Duffy says.

The two-by-two matrix is the most common way companies segment spend categories. This method separates commodities and materials into four spend quadrants, based on how critical an item is to the organization:

  • Low-value/low-volume
  • Low-value/high-volume
  • High-value/high-volume
  • High-value/low-volume

To determine an item's criticality, businesses should ask: Is the commodity related to core competency? How does it align with the mission? Is the good or service standard or customized? What is its potential impact on revenue?

"Because the customer requirements and supply market are unique in each quadrant, it is appropriate to adopt various supply strategies," Duffy says.

"In the low-value/high-volume quadrant, for example, a firm might determine that fewer suppliers will enable volume leverage to result in lower prices. In the high-value/high volume category, continuity of supply might be a significant driver, resulting in a strategy that disperses business among several suppliers."

Tackling Processes

Complexity has a significant impact on companies' processes as well as products. It can waste valuable corporate resources and increase opportunities for errors that may cause defects. Process complexity is a direct result of the number of steps and inputs required to complete a process.

"Global supply chains are especially susceptible to process complexity because completing all the required transactions involves many steps and volumes of paperwork," says Martichenko.

Each step and paperwork requirement creates an opportunity for defects, leaving overall supply chain performance at the mercy of individual actions. Companies should map processes to isolate activities and paperwork requirements for each portion of a supply chain process, Martichenko advises.

"Businesses can then highlight and correct process errors before they become customer defects," he says. "Businesses can address customer defects in two ways: First, eliminate 'after-the-fact' errors through inspection and proofing. This approach is labor and resource intensive. Second, reduce the number of steps in a process—reduce its complexity.

"This requires drilling down to process details, and focusing on one microcosm of business at a time to understand how it works," Martichenko notes. Then businesses can apply lean principles to identify and eliminate waste."

Consumer products giant Gillette, for example, developed a software tool that enables it to capture activities and cost associated with supply chain and manufacturing processes. This allows the company to identify the true profitability of product programs and SKUs.

"With this tool, we can understand true customer profitability," says Michael Duffy, vice president, global value chain, Gillette. "We can identify cost per SKU, and use that information to improve how we manage that item.

"The first thing we do when we assess a process is map it to identify complexity levels," Duffy explains. "We use different tools to break down that complexity in terms of cost and human resources. Then we go to the process or business owners and say, 'We will support you, but it will cost this much.' The process owners can then decide whether or not they want to pay for the complexity."

In addition to assessing process complexity costs, Gillette is piloting a "lean" supply chain approach.

"Lean is popular within factories," Duffy notes. "But the principles of eliminating waste extend well beyond the factory floor. We look at the entire supply chain. We don't want to remove waste from one part of the chain simply to add it somewhere else."

Getting a grip on complexity starts with visibility. "If you can't see what's coming, there's nothing you can do about it," says Regaining Control & Managing Risk: The Electronics Outsourced Model Evolves, a study sponsored by the Electronics Supply Chain Association (ESCA). The study examines electronics companies' progress toward realizing supply chain visibility.

Visibility into the supply chains of close trading partners is excellent, but drops significantly with second-tier trading partners, study respondents report. Indeed, nearly 55 percent of outsourcers and 45 percent of providers in the ESCA study report limited visibility into their second-tier trading partners.

"This lack of visibility does not bode well for synchronizing a multi-tiered business ecosystem," the study says.

Outsourcing has resulted in significant loss of control over key processes throughout the electronics industry ecosystem. Nearly 70 percent of survey participants say they have less control over at least five of their key supply chain processes (of 25 examined) since embracing an outsourced business model.

And at least 25 percent of outsourcers indicate a loss of control over 11 inbound processes, ranging from delivery yield issues, warranty, and returns, to track and trace.

The findings point to some interesting paradoxes. While companies turn to outsourcing to reduce inventory liability, for example, 36 percent of ESCA respondents cite inbound inventory liability as the area where they lost the most control.

"If outsourcers lose control over inbound inventory liability, one might presume providers gain control of inventory liability," the study notes. "Yet roughly one-third of providers indicate they have lost control of inbound inventory liability, as have 19 percent on the customer side."

A Sizable Challenge

The ESCA study clearly illuminates the size of the challenge electronics companies and their service providers face in grappling with complexity. The electronics sector is not unique—these difficulties test other industries in much the same manner.

While no easy solution exists for supply chain complexity, companies are making progress by doing the hard work of rationalizing products and suppliers, mapping processes, and identifying and measuring costs, as well as rooting out waste and savings opportunities and managing these areas more effectively.

Says van Bodegraven, "Our professional responsibility is not to rail against the storm but to be creative about living in a world that's becoming more complex all the time."

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