Aligning Misaligned Supply Chain

8/6/2019 Aligning Misaligned Supply Chain

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Aligning a MisalignSl CainImproving supply-chain management to gain a competitive edge


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A.T. Karn | ALIGNING A MISALIGNed SuppLy ChAIN 1

Manuacturers know that a uid supply chain keeps their prod-

ucts moving rom the beginning stages o production all the

way to their customers hands. A misaligned supply chain can

lead to higher costs, lower quality and poor customer service. Companies

that gain a deeper understanding o their suppliers capabilities and theirown needs, and then diligently use that knowledge to improve their overall

supply-chain efciency, can dramatically strengthen their business and

gain a competitive advantage.

A u.S. manactrr aling wit man vola-

tilit was strggling to gt critical comonnts

trog its sl cainbming against

livr las, qalit isss an lot inbon

logistics costs. Nw roct lancs, incras

comtition, romotions, markting camaigns

an sits in consmrs xctations wr all

laing avoc wit t sl cain. An altog

t coman a sccssll aat to t vola-

tilit, its slirs a notk slirs wr

wrstling wit nxct an acclrat man

or tir comonnts. Bcas o last-mint

or cancll orrs, t manactrr a ina-

vrtntl act bot t qalit an costs in its

slirs orations (see fgure 1 on page 2).

Onc t manactrr nrstoo wat

was casing t roblms, t rst st was

to stabiliz roction scls. proction

acct igr invntor lvls in orr to k

scls x or longr rios o tim.

In rtrn, slirs agr to sar-savings

arrangmnts wrb t manactrr got

ric isconts wnvr crtain roction-

stabilit goals wr mt.

T scon st was to l k slirs

bcom mor fxibl, wic in som cass mant

agring to volm commitmnts to allow

slirs to lan an mak t ncssar invst-

mnts in caacit. T manactrr also

link its sl-cain managrs incntivs


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ALIGNING A MISALIGNed SuppLy ChAIN | A.T. Karn2

to racing roction-stabilit goals sci

in t sar-savings agrmnts wit slirs.

Tis wnt a long wa towar assring comli-

anc wit t nw olic.

T rslts wr ramatic: a 20 rcnt

nt savings in inbon sl-cain costs

an a signicant imrovmnt in qalit an

srvic lvls.

Tis is jst on xaml o ow strains

on t sl cain can cas big roblms

tat, in trn, la to wast an xcssiv costs,

an ow imrovmnts in roction lanning

an invstmnts in nw caacit can l start

an imrssiv trnaron.

Tr ar man was to bttr align an

imrov sl-cain rormanc. In tis

ar, w tak an in-t look at t bnts

o aving an align sl cain, an stratgis

comanis can mlo to aciv tm.

Aligned Supply Chains: The Upside

prorl align sl cains invitabl la

to lowr costs, lss rqir caital, igr qalit

an imrov srvic. T ollowing ors sci-

ics in ac ara.

Lower costs. All costs go own wn

roction lanning an scling gt mor

cint, bt t biggst rctions occr in

ovrtim an lin-cangovr costs. Imrov

alignmnt also cts logistics costs, as ll trck-

loa simnts rlac 11t-or xit

simnts. I w n sl-cain costs as

tos rlat to all transortation, warosing,

invntor-carring an manactring iscr-

ancis, w can ralisticall xct a 20 rcnt

rction in costs (see fgure 2).

Less required capital. Wn cisions ar

ma bas on tr man, an incntivs

ar s to ncorag mor accrat orcasts,

Figure 1

A misaligned supply chain due to unstable demand

Source: A.T. Kearney

Day 1 Day 2 Day 3 Day 4 Day 5

Dailydemand

Unstable schedule

Stable schedule

Waste 1: Buffer capacity builtin the system

Waste 2: Changes in schedule causeovertime and suboptimal changeovers

Waste 3: Safety stock

Waste 4: Excess inventory to keep thelines running (maybe of the wrong productor variant)

Waste 5: Changes in schedule causesuboptimal changeovers

Waste 6: Lines shut down


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caacit invstmnts will b mor rcis. Bttr

tiliz qimnt minimizs caital ti to t

sl cain, an mor accrat caacit ls

avoi sstm ovrloas an t n or costl

otsorcing. A sarr ocs on man will

rc invntor lvls sstmwi.

Higher quality. A wll-align sl cain

can l avoi sstm ovrloas an last-mint

roction cangs, an will rc variabilit

in t sstm. A sstm working at its otimm

lvl an at a mor constant ac sall

rocs wr rrorsan wn

rrors o occr t ar asir

to inti an manag.

Improved service. An align

sl cain las to a mor sta-

bl sstm, an in stabl sstms

it is asir to inti an ract to

cang. T coman jst or-

ats mor cintl an is bttr

abl to rson to cstomr ns.

Wit all t bnts tat accr

wn alignmnt roblms ar min-

imiz, w is misalignmnt still so common?

Bcas misalignmnt costs ont sm to aar

in most bgts (or at last its ar to inti

tm as sc). Aitionall, tr ar vr w

cass in wic k cision-makrs av t

Figure 2

Five areas of supply chain improvement


Improvedasset utilization

at supplier

6%

5%

5%

3%3% 20%

Note: Supply chain costs include all transportation, warehousing, inventory carrying costs and manufacturing cost variance

Reducedovertime (labor)

at supplier

Increasedutilization of cubes

(transportation)

Fewerexpeditedshipments

Reducedinventory

levels

Total

Te best supply chains oferincentives or managers to

estimate demand accurately.


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rqir inormation, incntivs an owr to

arss misalignmnt roblms.

A Perect Supply Chain?

In a rct worl, a trl align sl cain

wol involv onl on cision-makr wo as

accss to all availabl inormation. Tat rson

wol also av t incntivs an owr

to mak cisions tat minimiz sl-cain

costs. Bt, w o not liv in a rct worl.

Insta, sl-cain managrs otn tr to

maximiz tir bgts ratr tan minimiz

sl-cain costs, an as a rslt, mak ci-

sions tat rais ovrall otlas. T rtr w

T u.S. manactrr in or xam-

l sr rom nstabl man,

on o t tr common major mis-

alignmnt roblms tail blow:

Unstable demand. Manac-

trrs ticall rson to man

variabilit b continall ajsting

roction scls, wic las

to ajstmnts in sl rqir-

mnts. Slirs xrinc as mc

i not mor man volatilit tan

t manactrra scnario

known as t bllwi ct. Wn

slirs ar orc to ajst tir

roction scls constantl to

k wit manactrrs ns,

t n rnning ovrtim an

carring xcss invntor.

The cause: proction scl-

rs incntivs ar to rc man-

actring costs witin tir com-

an; slir costs ar not art

o tir bgt or incntiv sstm.

Tis is a roblm i slirs ont

av t fxibilit to aat to

cangs in man qickl an cost-

ctivl. Slirs tat s xn-

siv qimnt icat to roc-

ing a singl comonnt ar t most

at-risk, bcas i man or tat

comonnt isaars, t qi-

mnt sits il. dman instabilit

is also a roblm or slirs

ngag in roction tat rqirs

long cangovr or start- tims.

Slirs tat roc commoit-

t rocts ar lss likl to b

act b nstabl man bcas

t can comnsat or t loss o

on cstomrs orrs wit man

rom otr cstomrs.

Underinvesting in capacity.

Wn slirs ar ncrtain abot

man rom manactrrs, bt

av invst in icat caacit,

t ac signicant risk. I tir

roct osnt sll, t xnsiv

caacit will sit il. So slirs

otn invst blow xct man.

Ts nrinvstmnts sow in

t orm o ovrloa roction

lins, wic can la to la

roct lancs, lat livris,

qalit roblms an oor srvic.

Slirs ticall o not assm

rsonsibilit or nrinvstmnts

(an t ar vr iclt to rov),

so it is otn t manactrrs job

to inti smtoms o nrinvst-

mnt an ract to tm qickl.

The cause: unrinvstmnt

sall ans wn t slir

as to b xnsiv qimnt or

a icat s, in a sitation wr

tr is signicant man ncr-

taint (or xaml, nw-roct

lancs).

Supplier overcapacity.

Manactrrs otn ovrstat tir

orcasts to trick slirs into

invsting in aqat caacit.

Ovrstat man ma la to

xcss caacit or t slir,

wic in trn las to igr costs

or vron in t sl cain.

Tis sms to b a common rob-

lm, an a costl on or instris

wit ig-val comonnts, sc

as atomotiv an arosac, an

wr xnsiv qimnt is bing

s. It is also a roblm in cass

wr roction is labor-intnsiv

an lacks t labor fxibilit to

rc stang lvls i man is

lowr tan xct.

The cause: Sl-cain man-

agrs ar not sall naliz i

tir slirs n wit xcss

invntor.

Alignment Problems and Their Causes


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gt rom t rct worl scnario, t mor

likl t sl cain will b misalign.

Tr ar svral ks to a rorl align

sl cain. Figr 3 igligts t ollowing:

Understand true demand. Sl-cain

managrs arm wit torog knowlg abot

man can lan bttr an avoi wast. Frqnt

an accrat commnication wit cain artnrs

rgaring man can l, an collaborativ

lanning an orcasting tools can imrov inor-

mation saring. In t ast w ars, nw tc-

nologis av contribt signicantl to sl-

cain collaboration, bt tr collaboration

rqirs gtting ast t tnnc to ovrstimat

man in orr to avoi sortags.

Improve visibility o total supply-chain costs.

To mak cisions tat k sl-cain costs

low rqirs rst nrstaning t costs o all

artnrs an own t cain. Tis inormation

is not as to obtain, as most slirs tr to

i tir tr costs in orr to rotct tir cor

knowlg, comtitiv avantag an ngotiat-

ing owr. Tr ar a w was, owvr, to gt

a goo ia o sl-cain artnrs cost strc-

trs. For xaml, som OeMs st a small in-

os oration, similar to a slirs, to gt

a rasonabl stimat o t slirs costs.

Align incentives. T bst sl cains

or incntivs or managrs to stimat man

accratl. evn i t av all t ncssar

inormation, managrs will not l sl-

cain artnrs rc tir costs nlss tr

ar incntivs to o so. An coman xctivs

will not rqir tir managrs to l sl-

cain artnrs nlss t coman can sar

in t bnts. T soltion to tis ag-ol

Figure 3

Keys to a properly aligned supply chain


1. Understand true demand

2. Improve visibility of totalsupply-chain costs

3. Align incentives

4. Coordinate decisionsand back compliance

Basic Advanced

Monthly or weekly updates are based onmanufacturers demand and inventory

Capacity assumptions are based on communi-cation from each player (monthly or weekly),and sometimes audits

Cost estimates provided by supply-chainplayers or based on market

Supply-chain managers are offered someincentives to estimate demand properly andavoid misalignment costsContracts are used to align incentives amongcompanies

Some decisions are discussed,some others are taken independently

Constant updates help to adapt to changes insupply, including events at suppliers

Exact capacity known on a daily basis, exceptionsthat might affect real capacity are visible

Real costs are accessible and updated on aregular basis, ascertained by visits to facilitiesand benchmarks, among other things

Incentives and penalties are established by asingle decision-maker, based on total costs.Actions and decisions are rewarded or penalizedbased on their impact on total supply-chainperformance.

Key decisions are made, or at least approved,by a single decision-maker across the entiresupply chain

Different players establish clear rules for alldecision making. Decisions outside the rulesrequire approval from a supply-chain leader.


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ilmma is two-ol: incntivs or sl-cain

managrs an stratgis tat allow comanis

to sar in t bnts accr trog

an imrov sl cain. W otn rcommn

sar-savings agrmnts, an bonss (or

isconts) or mting orational goals. T

bst incntivs ar tos link to rcing total

sl-cain costs.

Coordinate decisions and track compliance.

Tr is littl canc to rc sl-cain wast

witot coorinat actions an strong comli-

anc b all comanis along t sl cain.

Ticall, a strong lar in t sl cain taks

t la in nsring coorination an comli-

anc. I tr is no strong lar, stablising

a cross-coman organization can ll tis rol

b bing accontabl or an aving t owr

to aciv cost savings.

B ocsing on ts or aras, sl-cain

managrs will av t rqir inormation,

incntivs an owr to align a misalign s-

l cain.

The Case o Toyota:

Aligning a Misaligned Supply Chain

Lik all atomotiv manactrrs, wn Too-

tas sl cain is misalign it as arl.

Bt Toota, nlik man o its u.S. an ero-

an contrarts, as bn abl to minimiz

sc misalignmnts an tror rc its

sl-cain costs an t costs o its slirs.

how os t Jaans atomakr manag wat

otr OeMs cannot? Tootas sccss lis in its

abilit to rac avanc lvls o rormanc

in t or aras iscss arlir.

1. Toyota knows the operations and costs

o its suppliers. Toota torogl nrstans

its slirs orations. T manactrr otn

rocs a small nmbr o comonnts in-os

in orr to bttr nrstan roction actors

an costs, an maks sr

tat vrting it rqirs o

its slirs is asibl an

will not crat qalit or s-

l roblms. Ts, Toota

is abl to stimat slir

margins, mak cisions to

rc its own costs an

tos o its slirs, an

ltimatl sar in t sav-

ings wit its slirs.

2. Toyota is trans-

parent with its demand

plans and has a strong ocus on maintaining

demand stability. Tr is no room or rror

in Tootas man lan; t coman strictl

ars to it, an an rqir cang is comm-

nicat to slirs in a timl mannr. Tis

allows slirs to lan tir orations in t

most cint wa ossibl, ts minimizing

cangovrs, ovrtim costs an roction-lin

stowns.

3. Goals are based on a total cost per-

spective. Toota lannrs trmin tir goals

onl atr consiring all costs along t ntir

sl cain, incling comonnts. Sl-

cain managrs ar naliz or actions tat

Misalignments occur because the

costs dont seem to appear in

most budgets (or at least its hard

to identiy them as such).


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act a slirs abilit to livr t roct

at t xct cost an qalit.

4. Toyota sets very strict manuacturing

and delivering requirements, controls compli-

ance at suppliers, and quickly reacts i there

is an exception. Bcas o its knowlg

o all sl-cain orations, Toota can st

orating targts tat l maximiz total

sl-cain rormanc. B carll monitor-

ing comlianc an qickl racting to xc-

tions, Toota is abl to avoi viation rom

its imos rqirmnts. having st orating

aramtrs tat maximiz total sl-cain

rormanc an nsr roct qalit, Toota

maks itsl t sol cision-makr in t

sl cain.

Tootas xaml sows tat incras knowl-

g an t ocs s o tat knowlg ar

k to managing sl cains. Comanis tat

gain a torog nrstaning o ow tir

slirs orat, an tn accratl assss

tir own ns, will b abl to crat rocrs

tat incras cinc along t ntir sl

cain. Tis in trn will la to cost savings, igr

qalit, bttr cstomr srvican an ovrall

comtitiv avantag.

Authors

Joachim Ebertis a partner based in the Chicago ofce. He can be reached at [email protected]

Joan Gelpiis a consultant based in the New York ofce. He can be reached at [email protected].


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Aligning Misaligned Supply Chain

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