Adapt or Die –A Case for Change · failing to adapt to the growing complexity of their environment. Many misread the environment, select the wrong approach to strategy, or fail
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Our World Today?• Global supply relative to global demand? Global oversupply• The practical life of Asset/Infrastructure? Shorter recovery life• The massive effort invested in Forecast improvement? Forecast error is still on the rise ‐ building the wrong things (FMCG = 55% accuracy)
• The effect of off‐shoring and outsourcing to lower cost? Service levels declined, inventory up and expedite costs have increased
• The effect of billions invested in ERP? Companies are doing the wrong things sooner and faster and paying a premium to attempt to recover
• The effect of billions invested in Improvement Methodologies? Gains in resource productivity have not translated to sustainable system ROI
Clearly Organizations Do Not Understand What Drives ROIDemand Driven Institute logo is a trademark of the Demand Driven Institute. All
content copyright Demand Driven Institute 2016. All rights reserved
“We investigated the longevity of more than 30,000 public firms in the United States over a 50‐year span. The results are stark: Businesses are disappearing faster than ever before. Public companies have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes. That’s six times the delisting rate of companies 40 years ago. And the rise in mortality applies regardless of size, age, or sector. Neither scale nor experience guards against an early demise.
We believe that companies are dying younger because they are failing to adapt to the growing complexity of their environment. Many misread the environment, select the wrong approach to strategy, or fail to support a viable approach with the right behaviors and capabilities.”
(Martin Reeves, Simon Levin, and Daichi Ueda, Harvard Business Review, January‐February 2016)
“We believe that companies are dying younger because they are failing to adapt to the growing complexity of their environment.”
Development and proliferation of planning systems has not enabled better ROA performance despite labor productivity doubling in the same period!
MRP MRP II ERP APS
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What will it take to change this?
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Today’s Deep Truth
↓ Unit Cost = ↑ Return on Investment (ROI)
What if Today’s Deep Truth is Totally, Completely, Unequivocally False?
To prove this we will need to understand two key principles of supply chains
Demand Driven Institute logo is a trademark of the Demand Driven Institute. All content copyright Demand Driven Institute 2016. All rights reserved.
The Consequences of Focusing on Unit Cost
Plant feel pressure to maximize monthly profit
plan (CoGS dollar credit) KPI
People behave according to
metrics
Plants try to maximize making “high CoGs dollar”
products Setting up more increases product unit
cost and lowers resource efficiencies.
Some items have more CoGs dollars
than others.
Departments tend to produce the high
CoGs dollar items at the expense of the
low items.
Plants receive CoGS dollar credit when they ship to
DCs
Plants tend to produce to stock even when there is no demand signal (e.g. “extend the forecast”).
Plants pull ahead orders to increase the batch size for make to stock
orders.
+
Make to order and make to stock share
common capacity and material
Make to order backlogs grow – we
ship late
Some make to stock products are overstocked
Some make to stock products incur stock
outs
Demand Driven Institute logo is a trademark of the Demand Driven Institute. All content copyright Demand Driven Institute 2016. All rights reserved
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Plants feel pressure to expedite late work
Plants feel pressure to meet their on time
performance KPI.
We feel pressure to use overtime
Materials are consumed
unnecessarily
There are common raw materials and subcomponents
There is common labor and machine resources
Capacity is consumed unnecessarily
Materials are not available
Capacity is not always available
We feel pressure to add capital
We feel pressure to expedite materials
We feel pressure to add inventory
We create artificial
bottlenecks Under pressure we emphasize speed
Quality issues increase
Inventory? Lead Time? Costs?On‐Time Delivery? Revenue?
Make to order backlogs grow – we ship late
Some make to stock products incur stock outs
Some make to stock products are overstocked
The Consequences of Focusing on Unit Cost
Demand Driven Institute logo is a trademark of the Demand Driven Institute. All content copyright Demand Driven Institute 2016. All rights reserved
Material Requirements Planning
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“As this book goes into print, there are some 700 manufacturing companies or plants that have implemented, or are committed to implementing, MRP systems. Material requirements planning has become a new way of life in production and inventory management, displacing older methods in general and statistical inventory control in particular. I, for one, have no doubt whatever that it will be the way of life in the future.” Orlicky 1975
Joe Orlicky
Features:• Time Phased Planning• Level by level BOM explosion• Dependent demand planning
Benefits:• Component synchronization• Reduction in inventory• Improved priorities
Many flow‐based models have been proposed (e.g. Lean and TOC) but most have remained compartmentalized with only pockets of success.
Flow‐Based Metrics
Any conventional flow‐based metrics (e.g. due date performance) come into conflict with and are countered by the proliferation of cost‐based metrics.
Tactical Reconciliation
Reconciliation is not bi‐directional – it is a one‐way street. Reconciliation is also painful by introducing nervousness with every new MRP run and monthly S&OP updates.
Using Fully Absorbed Cost Metrics Using Forecast for Supply Order Generation
Fully absorbed unit cost = direct material cost + labor cost + overhead costs.
Direct material costs are VARIABLE costs.Labor and overhead costs are FIXED costs in the short range.
Combining VARIABLE and FIXED costs creates the false impression that fixed costs vary within the short range. They do not and that is why they are called fixed costs.
There are three rules about forecasts:1. They start out wrong.2. The more remote in time the extend
the more wrong they are3. The more detailed they are the
more wrong they are.
Forecasts drive planned orders in the MPS. These planned orders generate supply orders in MRP.
Capacity, capital, materials and space are committed to signals that have significant rates of error associated with them!
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No Flow‐Based Operating Model
• Many flow‐based models have been articulated but…
• Conventional S&OP, MPS and MRP are configured to be a push based model.
• This means that flow‐based operating models like Lean and TOC typically remain compartmentalized and limited and most often conflict with the conventional system
• Is there a flow‐based model that can be implemented at the system level?
• Their effectiveness is limited by conflicting cost‐based metrics.
• These conflicting metrics obscure what is relevant and introduce self‐imposed variability within organizations as personnel oscillate between protecting flow and protecting cost performance.
• When flow is promoted and protected, costs are under control. The inverse, however, is not true.
Monthly S&OP updates create massive shifts at the beginning of every month.
New MRP RunsMRP run results in massive cascading schedule changes as date and quantity changes at higher levels effect all connected lower level components.
Tactical reconciliation is not bi‐directional – it is a one way street.
Tactical Demolition and Reconstruction
Thoughtware
These four prerequisites allow an organization to think, communicate and behave systemically for flow.
When these prerequisites are in place an organization has the proper “thoughtware” installed for flow.
Now we need a framework to utilize this thoughtware.