aligning misaligned supply chain
TRANSCRIPT
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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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A.T. Karn | ALIGNING A MISALIGNed SuppLy ChAIN 3
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
Source: A.T. Kearney
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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ALIGNING A MISALIGNed SuppLy ChAIN | A.T. Karn4
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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A.T. Karn | ALIGNING A MISALIGNed SuppLy ChAIN 5
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
Source: A.T. Kearney
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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ALIGNING A MISALIGNed SuppLy ChAIN | A.T. Karn6
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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A.T. Karn | ALIGNING A MISALIGNed SuppLy ChAIN 7
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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