inside netflix's binge-worthy business model€¦ · 55 case study 56 lessons learned...

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I N S I DE NETFL I X ' S B I N GE-WORTHY BUS I NES S MODEL

Airplane food redefined

Disaster-proof your supply chain

Exploit slow-moving parts

Simple ways to save

Inventory classification strategies

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Volunteer for the 2019APICS Board of DirectorsAPICS is accepting nominations for the 2019 APICS Board of Directors. Take this opportunity to lead APICS in its mission to enable individuals and organizations to compete successfully and build a stronger global economy.

Nominations are due May 25, 2018. View position descriptions, policies, and the application at apics.org/nominate.

Advance your logistics careerEarn the Certified in Logistics, Transportation and Distribution (CLTD)

The CLTD credential is designed to help you and your organization meet today’s global supply chain challenges.

nMaster the essential knowledge needed for logistics, transportation and distributionnRemain current with global logistics trends and developmentsnReduce costs and impact your organization’s bottom line

Learn more about this must-have credential by visiting apics.org/cltd.

2 April-June 2018

APICS magazine (ISSN 1056-0017) is published by APICS, 8430 West Bryn Mawr Ave., Suite 1000, Chicago, IL 60631-3439. Phone: 773-867-1777. Periodicals postage paid at Chicago, IL, and additional mailing offices. Copyright © 2018 by APICS. All rights reserved. Printed in the United States of America. POSTMASTER: Send address changes to: APICS, 8430 West Bryn Mawr Ave., Suite 1000, Chicago, IL 60631-3439.

April-June, Volume 28, Number 2FEATURES

The Entrepreneur: Inside Netflix’s Binge-Worthy Business ModelThe Netflix founding CEO shares his creative process.42

First-Class Airline Catering at the World’s Busiest HubBy Chris Fay, Melissa R. Bowers and Mandyam M. Srinivasan

Discover how one airline is maximizing the customer experience.

26 XX April-June 2018

Photo: iStock/adventtr

XX April-June 2018

apics.org/magazine XX

INVENTORY STRATIFICATION

46 Indirect Spent Gives Your Supply Chain a Competitive EdgeBy Joong “Joon” Hyun

Adopt simple strategies to improve your company’s bottom line.

3036

Is Your Supply Chain Ready for the Next Disaster?By Lowell Grabel

Gain strategies to safeguard your supply chain.

Keeping Slow-Moving Spare Parts in CheckBy Vivek Chopra

Learn how to enhance service and better support your customers.

Inventory Stratification Optimizes ResultsBy Jaime Quilez Calleja; Gurram Gopal, Ph.D.; and Katherine W. Olsen, CSCP

Save employee time and effort with smarter item classification.

50

COVER STORY

apics.org/magazine 3

If you want to maximize return on your networking

investment, strive to find out how you can help others.

Page 18

Page 24

Page 12

4 About APICS

6 From the CEO

7 From the Editor

8 Supply Chain Matters

10 Corporate Spotlight

12 Career Launch

14 Customer Experience

15 Management Perspective

16 Enterprise Insights

17 Working Green

18 Professional Development

20 Lean Culture

22 Sales and Operations Planning

24 Relevant Research

55 Case Study

56 Lessons Learned

DEPARTMENTS

4 April-June 2018

ABOUT APICS MAGAZINE

EDITORIALEditor-in-ChiefJennifer Proctor

Senior Managing EditorElizabeth Rennie

EditorKia Wood

DESIGNBates Creative

ADVERTISINGTom [email protected]

EDITORIAL ADVISORY BOARDBrain Atwater, CPIMSteve BrownMarta Dijkman, CPIM, CSCPAntonio Galvao Costa, CSCP, CLTDRex MagadiaLeila Merabet, CPIMGracien Mobinzo

Publication in APICS magazine does not constitute an endorsement of any product, service or material referred to, nor does publication of an advertisement represent an endorsement by APICS or the magazine. All articles represent the viewpoints of the authors and are not necessarily those of the magazine or the publisher. Letters to the editor will be published at the discretion of the editor.

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Subscriptions: APICS members have access to the magazine online at apics.org/magazine. U.S. members can purchase a one-year print subscription for $20, and international members can purchase a one-year print subscription for $40. For all others, the subscription rate is $93 annually. To join or subscribe, call APICS customer service at 800-444-2742 or +1-773-867-1777.

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APICS BOARD OF DIRECTORSChair of the BoardWilliam Householder

Chair-ElectKeith Connolly

Treasurer-SecretaryGinny Youngblood, Ph.D., CSCP, CPIM, SCOR-P

DirectorsScott Ehrsam, CSCP Antonio Galvao Costa, CSCP, CLTD, CTLMark Holmes, CTLRadha Krishna, Ph.D., CFPIMPamelyn Lindsey, CSCPPaul Pittman, PhD, CSCP, CFPIMShari Ruelas, CPIM, CSCPMichael Wasson, CSCPGeorge Yarusavage, CPIM, CTL, C.P.M., DLP

APICS CORPORATEChief Executive OfficerAbe Eshkenazi, CSCP, CPA, CAE

Magazine [email protected]/magazine

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Institute of BusinessForecasting & Planning

6 April-June 2018

FROM THE CEO

Honoring Supply Chain Superstars

Abe Eshkenazi, CSCP, CPA, CAEChief Executive Officer

W e are in the middle of some eventful weeks here at APICS. The Call for Entries for this year’s APICS Awards of Excellence launched on March 15, and

more submissions are flowing in every day. Entrants represent corporations and professionals from around the world, eager to earn their place among the distinguished winners of this pres-tigious supply chain award.

I am proud of what we do here at APICS, particularly when I think about the insightful ways that the APICS body of knowl-edge is being put to work in the real world. Past APICS Awards of Excellence winners — such as BASF, Caterpillar, DuPont, Johnson & Johnson and Hewlett-Packard — demonstrated in their own entries the many ways that they use APICS educational concepts, competencies and best practices to transform their supply chains and businesses, improve processes and performance, deliver value, and heighten employee satisfaction and engagement.

In addition, last year we included individual categories for the first time. The 2017 inaugural winners are talented and dedicated people, advancing the profession in inspiring ways. For example, the Supply Chain Leader honoree was Sabine Simeon, vice president, supply chain Europe, at Schindler. The judges recognized her efforts to move Schindler from a company in which supply chain man-agement was not well recognized to one that proactively highlights how supply chain management improves the entire value chain. As Simeon recently told Editor Kia Wood, “The transformation has completely reshaped the organization’s mindset.”

I encourage you to read more about Simeon in the “Supply Chain Matters” department, which is on page 8. Then, flip over to the “Corporate Spotlight” on Johnson Controls, winner of the 2017 APICS Award of Excellence — Education. Discover how Johnson Controls partnered with APICS to create an innovative supply chain

academy that features on-demand learning solutions to help employees enhance business performance and advance in their careers.

I encourage you to enter the 2018 APICS Awards of Excellence. It’s a great opportunity to gain visibility, be acknowledged by your peers and instill pride at your organization. Share your own company’s success stories in one of the corporate categories, enter an individual category yourself, or nominate a deserving supply chain colleague. The categories are as follows:• The APICS Corporate Award of

Excellence — Education recognizes an organization’s commitment to productivity and advancement based on the effective and ongoing application of the APICS body of knowledge.

• The APICS Corporate Award of Excellence — Transformation recognizes an organizational transformation that elevates the business and its overall supply chain performance.

• The APICS Award of Excellence — Supply Chain Leader honors an executive who exhibits extraordinary team and organizational leadership.

• The APICS Award of Excellence — Diversity and Inclusion Champion honors a professional who fosters work environments that value equality and individual differences.

• The APICS Award of Excellence — Corporate Social Responsibility Catalyst honors a professional who consistently integrates the triple bottom line of people, planet and profit into business practices.

• The APICS Award of Excellence — Emerging Supply Chain Leader honors a visionary young professional who demonstrates strong potential to become an outstanding leader in the field.From today through May 31, APICS will

accept entries at apics.org/awardsofexcellence. I look forward to honoring this year’s win-ners at APICS 2018 in Chicago. Good luck!


FROM THE EDITORFROM THE EDITOR

Feeling Nostalgic

I was having dinner with a good friend recently, and I mentioned to her that Netflix Co-Founder Marc Randolph was speaking at our annual conference and I had interviewed him for APICS

magazine earlier that day. After chatting with her about Randolph, she asked me what other interesting people I had interviewed during my time at APICS. I was compelled to sit down and assemble the following list, along with a key takeaway from each of the interviews. I was truly inspired along the way, and I hope you will be too.

Tom Rath, author of StrengthsFinder 2.0: This was one of my favorite interviews, as I am a true StrengthsFinder believer. (I’m a proud maximizer, if you’re wondering.) Rath and I discussed strengths, weaknesses, organizational leadership, professional well-being and much more. He noted that no one can be perfectly well-rounded — nor should you try. There just isn’t enough time to become truly great at everything. Likewise, if you’re investing hours in areas where you lack natural talent, there’s a very good chance your time could be better spent. If you haven’t taken the assessment, I highly encourage you to check it out!

Maureen Evans, senior vice president at Ipsos Marketing US: Evans taught me many interesting things about millennials. To engage and delight this powerful segment, businesses must leverage proven technological tools and innovative platforms. “The authentic insights you will gain in this way are really impossible to uncover via traditional methods,” she explained to me, adding that millennials expect to be included in all aspects of the product development process because they want their voices heard. Acknowledging this truth at the earliest stages is critical.

John Van Vliet, Ph.D., associate professor in the School of Business Management at Shorter College: By my calculation, this was my first “APICS Interview” ever. Van Vliet and I spoke in 2008 about what remains a burning issue for supply chain management professionals 10 years later: inventory carrying costs versus risking a stockout. He offered this advice: “Identify

the show-stoppers. These are the A-plus items — the ones where the stockout would really be horrible. Then, try to figure out if you have to take Herculean efforts to make sure you won’t stock out. Look at how responsive the rest of the supply chain is to that item.”

William Walker, CFPIM, CIRM, CSCP, director of supply chain management at StarTrak Systems: Walker and I discussed the importance of building strong relation-ships with international partners as supply chains become increasingly global. He made this great point: “Something that drives me a little bit crazy is when I travel with people internationally, and their mentality is, ‘Set up the business trip, go there, meet for an hour, come back.’ You’ve spent three days traveling there and traveling home, and it’s just senseless to not spend an extra day entrenching yourself a little bit in that culture, learning a little bit about that country and developing that relationship.”

Jack Welch, former chairman and CEO of General Electric: The only time Welch had available to speak with me happened to be smack-dab in the middle of my summer vacation. I remember gloomily leaving my kids on Folly Beach and crossing those Charleston, South Carolina, bridges to get back to the hotel in time for our call. Of course, interviewing a business legend turned out to be worth it. Welch’s most interesting tidbit: “You get truth when you build trust. Every meeting must strive for the right answers through truth and have everybody speaking their mind. Every meeting that has truth in it speeds up the process, makes the company more competitive and makes it ready to act.”

Last, but not least, Netflix’s Marc Randolph: For this one, simply turn to page 42. And to continue our stroll down memory lane, read my post on the Thinking Supply Chain Blog at apics.org/blog, where you will gain insights from seven more past interviewees. Enjoy!

Elizabeth RennieSenior Managing Editor of Publications

8 April-June 2018

SUPPLY CHAIN MATTERS Kia Wood

Prizewinning Leadership

Editor’s note: Sabine Simeon was the recipient of the 2017 APICS Award of Excellence — Supply Chain Leader, which recognized her extraordinary contributions to advancing the field of supply chain. To see the categories, get more information or enter, visit apics.org/awardsofexcellence.

Q: What led you to a career in supply chain?I started my career in purchasing in one of Schindler’s manufac-turing plants in Europe. At that time, the Schindler Group was undergoing several important changes in their sourcing strategies, moving from a long era of insourcing to a completely new outsourc-ing model of the plants, which created opportunities and a path for me to the corporate purchasing department. This new position, at a corporate level, equipped me with a broader view of the strategic implications of my role and ultimately led, several years later, to a supply chain role.

Q: What are your primary responsibilities, and how do they enable you to make a difference?Since its founding in 1874, Schindler has transformed from an engineering company that manufactures elevators and escalators to a company focused on transforming mobility solutions for the cities of today and tomorrow. I am in charge of the supply chain in Europe, encompassing all operations ... As Schindler moves 1 billion people per day, I contribute to the comfort and safety of one-seventh of the world population daily.

Q: How have you elevated the status of supply chain management at your company?Supply chain management was not well recognized within the organization, so I took the decision to lead by example and showcase how supply chain can positively impact the value chain. Knowing that the elevator business unit was facing several important operational challenges, we needed to build a business case on the supply chain transformation to be presented to the top management in order to explain and justify why building a reliable, cost-efficient supply chain model with a strong focus on discipline and operational performance would benefit the company’s bottom line and competitive advantage.

Q: How did these efforts improve performance?The results have been outstanding, with a [return on investment] of 3.2, a lead time reduction of 20 percent, and an inventory reduction of 28 percent … The transformation has completely reshaped the organization’s mindset: to think more tactically with a continuous improvement culture and to work systematically in a project-based mode.

Sabine SimeonVice President Supply Chain EuropeSchindler

Kia Wood is editor for APICS magazine. She may be contacted [email protected].

To comment on this article, send a message to [email protected].

A Day with Sabine Simeon

5:45 a.m.I usually start my day meditating while walking my dog outside in the park.

6:30 a.m.I take care of my house’s morning supply chain: having the kids ready, supplying breakfast, checking everything is in order, and giving away kisses and goodbyes.

7:30 a.m.I make as many phone calls as possible from my car (I don’t know who invented Bluetooth, but he or she is a genius) before I reach the office to get a feel for the day’s temperature and start to sort things out.

8 a.m.I say hi to Eva, my assistant, and chitchat about the important meetings of the day. I usually get scolded and reminded that lunch can’t be skipped, so she makes sure I do not have any meetings during lunchtime — thanks, Eva!

8:30 a.m.I have a one-on-one meeting with my boss to present some of my new ideas on the spare parts supply chain and on how blockchain could support us. Mental note to myself: Never talk about new ideas so early in the morning.

10 a.m.I have a call with four manufacturing plant managers to review monthly performance.

10:30 a.m.My team does a great job during our sales and operations planning meeting: straight to the point, focusing on deviations and escalating important decisions with a set of propositions.

12:30 p.m.I fit in an additional meeting with someone who can do the talking while I gobble down my healthy salad. (Thanks again, Eva!)

3 p.m.I have a meeting with the sourcing director to review the savings pipeline for next year.

5 p.m.Finally, I have an hour-or-so to reply to my emails that I have been ignoring.

7 p.m.I am heading back home on autopilot, but feeling pleased by the day.

7:30 p.m.I am back home with the kids and hubby, and I re-become a mom! Thinking of my late-night glass of (French) wine that I will have once everybody is asleep.


Find an APICS seminar near you: ̥ Principles and Practices of Inventory Accuracy ̥ Principles of Distribution and Logistics ̥ Principles of Sales and Operations Planning ̥ Sales and Operations Planning Workshop ̥ Principles and Practices of Demand Management ̥ Supply Chain Risk Management ̥ Principles and Practices of Material

Requirements Planning

See the schedule and register: www.apics.org/events

10 April-June 2018

CORPORATE SPOTLIGHT

• a maturity model framework consisting of strategy, planning, execution, compliance and empowered people

• the enabling capabilities of performance, technology and systems, and integration and collaboration

• supporting documents such as policies, standards and guidelines that describe the expectations for how to achieve excellence.

Measuring performanceJohnson Controls decision-makers sought to create a solid supply chain maturity model that would be linked to operational per-formance based on standard processes and metrics. They chose to achieve this goal by building a strategic partnership with APICS. This enables them to tap into all the business benefits of APICS education and the Supply Chain Operations Reference (SCOR) model.

A Supply Chain Academy was started in order to offer APICS training and learning solutions to employees in one of 31 roles involved with Johnson Controls supply chain operations. “The Supply Chain Academy philosophy was cre-ated with employee capability-building in mind,” Ross says. “By first establishing the structure for learning, we recognized the APICS content could be implemented efficiently and effectively. Without this meth-odology in place, the academy would not have been able to design, develop and launch learning programs within just six months.”

The Supply Chain Academy features on-demand learning solutions that help employees improve performance and progress in their careers. The educational tool lives on a subpage of Johnson Controls’ supply chain SharePoint site, so team members can easily tap into the APICS resources. Learning solu-tions are housed in a management system and structured as a pre-exam test-out option, the content and a final exam. This format enables Johnson Controls to measure the effective-ness of each training module.

Individual, self-directed learning modules make it possible for employees to complete required training or certification programs based on their personal skills assessments. Evaluations are linked to the domain levels of each skill and provide a roadmap to filling the gaps.

J ohnson Controls is a global technology and industrial company with 130,000 employees serving customers in more than 150 countries. The organization designs, manufactures

and delivers energy-efficient building solutions; automotive and advanced batteries for stop-start, hybrid and electric vehicles; and automobile seating components and systems. Johnson Controls supports all major automakers, supplying 50 million cars every year.

The Johnson Controls Operating System (JCOS) connects and integrates Johnson Controls’ manufacturing operations, supplier distribution channels and customers. A key feature of the JCOS platform is supply chain excellence, which describes the company’s journey to achieving a world-class supply chain. By advancing its people, processes, technology and metrics with APICS education, Johnson Controls leaders are enabling this excellence while driving positive customer experiences and superior business results. In fact, the initiative has been so successful that Johnson Controls earned the 2017 APICS Corporate Award of Excellence — Education.

“The supply chain excellence vision is about having a single Johnson Controls way of designing, integrating and optimizing end-to-end, demand-driven value chains to attain a sustainable competitive advantage for our customers and shareholders,” says Lynn Ross, supply chain academy leader, manufacturing excel-lence for Johnson Controls.

The strategy is based on a set of structured, unified, and integrated activities and resources that create a culture of learning and excel-lence. Specific focus areas include• the transformation of operations, management infrastructure,

and mindsets and behaviors

Johnson Controls Builds an Award-Winning Learning System


Elizabeth Rennie

Elizabeth Rennie is senior managing editor

for APICS magazine. She may be contacted at [email protected].


The APICS Awards of Excellence are for corporations and individuals demonstrating superior performance and dedication to advancing the field of supply chain management.

The APICS Corporate Award of Excellence — Education recognizes an organization’s commitment to productivity and advancement based on the effective and ongoing application of educational concepts, competencies and best practices from the APICS body of knowledge.

The APICS Corporate Award of Excellence — Transformation recognizes an organizational transformation that elevates the business and its overall supply chain performance as a result of a supply chain assessment leveraging the APICS body of knowledge and/or the APICS Supply Chain Operations Reference (SCOR) model.

The APICS Award of Excellence — Supply Chain Leader honors an executive who exhibits extraordinary team and organizational leadership; provides dedicated coaching, mentoring and support of fellow professionals; and makes lasting contributions to advancing the field of supply chain.

The APICS Award of Excellence — Diversity and Inclusion Champion honors a professional who displays exceptional commitment to diversity and inclusion, fosters professional environments that value equality and individual differences, and inspires people of all profiles and backgrounds to succeed in supply chain careers.

The APICS Award of Excellence — Corporate Social Responsibility Catalyst honors a professional who consistently integrates the triple bottom line of people, planet and profit into business practices in order to promote corporate social responsibility and reduce environmental impact throughout the supply chain.

The APICS Award of Excellence — Emerging Supply Chain Leader honors a visionary young professional who already has made significant contributions to the supply chain management profession and demonstrates strong potential to become an outstanding leader in the field. Learn more, view the winners from previous years and enter at apics.org/awards.

“Establishment of the Supply Chain Academy is the latest milestone in the supply chain team’s efforts to transform Johnson Controls’ networks into an efficient ecosystem that helps drive our company’s growth,” says Jeff Williams, vice president of enter-prise operations and engineering. “Through the APICS certifi-cation programs, our organization will learn to analyze current

performance, plan for the improvements, and continue to develop our talent and build capabilities.”

Understanding supply chainTo address limitations surrounding aware-ness of what supply chain is, an overview e-learning course was produced to be used as a baseline. The course provides connections among supply chain networks, maturity models and the basic knowledge of how a supply chain network influences all func-tions within the company.

Ross says the academy also enables employees to better understand their job functions, the skills required to perform their roles successfully and the relevant principles. “APICS is an integral part of mapping train-ing to roles,” she adds.

Ricardo Estok, global manufacturing operations council, principle leader, Johnson Controls, says employee confidence also has increased as more people achieve APICS certification. “All the requirements on both knowledge and applied skills are effectively in place to perform in the subject matter for which employees are certified,” he says. “Certification programs enable our organization to leverage one standard way of applied subject matter expertise to improve performance.”

As Johnson Controls employees journey through APICS programs, the academy measures the outcomes. Ross explains that this is comprised of the completion ratios of assigned learning, measuring how employ-ees are applying the education to their roles and coaching and mentoring others. “This life cycle assures the content is relevant to our employees, is measurable and remains aligned to gap closures,” Ross says.

She adds that the initiative’s ultimate success relies on Johnson Controls lead-ership’s commitment to being a learning organization. “We look forward to strength-ening our partnership with APICS because APICS educational programs and the SCOR model are essential to our supply chain excellence strategy, employee talent and sustainability,” she says. “It is why we chose APICS as our partner and will continue building this relationship on our journey to supply chain excellence.”

12 April-June 2018

CAREER LAUNCH

Illustration: iStock/nadia_bormotova

I love the classroom dynamic. I look forward to one day being a mentor, confidante, and source of inspiration and guidance for my future students — just as many of my professors were to me. I plan

to teach supply chain management with a focus on sustainability and ethics. As networks continue to grow enormously in complexity and scope, a business education centered on these three principles is the perfect contextual training tool to make students more global, fair-minded and creative business leaders.

Supply chain management is an integral part of organizations and is essential to company success and customer satisfaction, but there is a massive supply chain talent shortage. The U.S. Bureau of Labor Statistics reports that jobs in logistics are estimated to grow by 26 percent between 2010 and 2020. Additionally, the DHL report “The Supply Chain Talent Shortage: From Gap to Crisis” esti-mates that demand for supply chain professionals exceeds supply by a ratio of six to one. To make matters worse, more and more Baby Boomers are leaving the workforce.

DHL found that the largest driver behind this shortage is changing skill requirements. According to the report: “The ideal employee has both tactical/operational expertise and professional competencies such as analytical skills, but 58 percent of companies say this combi-nation is hard to find. Additionally, tomorrow’s talent must excel at leadership, strategic thinking, innovation and high-level analytic and technological capabilities.”

The perceived lack of opportunity for career growth and the belief that supply chain jobs lack excitement also have a significant impact on supply chain talent sourcing and retention. “The industry is still contending with the impression that other fields are more prestigious and offer more opportunities, fueling lack of interest in the industry within the world’s future workforce,” the report states.

Because education is uniquely capable of addressing these varia-bles, I wanted to learn more about how educators (and businesses)

could help. I met with Douglas Carlberg, who has worked in some of the top global supply chains for nearly 30 years. He also teaches graduate-level supply chain courses at Golden Gate University. The following are key takeaways from our conversation.

Supply chain needs a “rah-rah” person. Carlberg made the distinction that, it’s not that supply chain is viewed in a negative light; it’s that there’s a lack of awareness and a substantive misunderstanding of the discipline — particularly the benefits of pursuing the supply chain career track. He referenced the countless TV shows that glorify and popularize professions such as law, medicine, advertising and hedge fund management. By the same token, the supply chain field needs someone in the limelight to permeate the cultural bubble and shatter the stereotypes — a luminary who can go and spread the word of exactly how a supply chain career can be the ideal job. “We need someone of influence who can relate to others and say, ‘Hey, I work in supply chain, and I love it,’” he advocated.

The education system must step up even further. Until our supply chain idol comes along, Carlberg and I both agreed that the onus falls on the educational system — primarily through school counselors and teachers. “And the seeds must be planted early,” he urged. Students even in elemen-tary school should be exposed to supply

Supply Chain Trends and Trend-Setters

Priming the Supply Chain Managers of the Future

By 2020, any new supply chain management professional must have:1. Leadership and strategic

management aptitude2. Strategic and critical thinking skills3. Operational expertise4. Problem-solving competency,

creativity and imagination5. People-development, mentoring and

coaching proficiency6. Technical and analytical expertise

—Top six survey responses from the DHL report “The Supply Chain Talent Shortage: From Gap to Crisis”


Rex Magadia

Rex Magadia works in transportation and

logistics at the Academy of Art University in San Francisco. His

background is in envi-ronmental engineering.

Magadia has a Master of Business Administration

in global supply chain management. He may

be contacted at [email protected].


Thank you for being part of the APICS community!We're celebrating 60 years of supply chain evolution and looking ahead to a bright future!

chain, how it offers a unique view of how a business works, and the many ways that it enables organizations to satisfy customer demand and improve economies all over the world. Once this critical big-picture understanding is internalized, young people can drill down and discover their personal passions and how they fit into the overall model.

Students also must be reassured by their counselors and teach-ers that supply chain salaries are competitive, if not greater than many of those more admired jobs. John Fowler, a professor at the W.P. Carey School of Business at Arizona State University (ASU), told U.S. News & World Report that the average starting salary for ASU’s full time MBA students who specialize in supply chain man-agement was between $95,000 and $120,000 annually. In addition, these students received a five-digit signing bonus on average.

Business must take another look at comprehensive training programs. Carlberg and I both agreed that the findings in the DHL survey with regard to new graduates having both tactical and operational expertise, as well as professional competencies, were unrealistic. Rather, the expectation should be that new hires have the business acumen and work ethic to develop these aptitudes and, consequently, learn the nuances of the supply

chain industry as they advance in their careers. Companies must train and invest in undeveloped employees. That’s the only way for young professionals to become supply chain professionals.

For decades, large companies had big training budgets and well-defined pro-grams, through which an investment in employees would pay off as these people became dedicated, trustworthy professionals for years. However, these programs became scarce during the dot-com era, largely because people were not staying in their jobs very long, and executives didn’t want to devote time and resources to someone who was just going to take their newfound knowledge and skills elsewhere. But if we really want to close the supply chain management talent gap, it’s time to get over our fears and give these training philosophies strong consideration.

14 April-June 2018

Photo: iStock/Yok46233042

CUSTOMER EXPERIENCE Annette Franz

Annette Franz is founder and CEO of CX Journey. She may be contacted at [email protected].


• find your brand message inconsistent with their own brand experiences. So, what does all of this mean for you

and your business? Well, just as the maxim states, confused customers don’t buy. Furthermore, they won’t return to try again — at least not without a lot of effort from you — and they certainly won’t recommend you to friends or colleagues. Unfortunately, confused customers develop the kind of dissatisfaction that leaves a bad taste in their mouths — one that often lingers for a long, long time. Why would they ever want to experience that?

Following are some straightforward strategies and practices you can put in place to help eliminate the confusion at your company.

First, use customer journey maps to remove operational and process inefficiencies. It’s vital for you to thoroughly understand the steps customers must take in order to achieve var-ious tasks, whether it’s researching a product, purchasing it, getting it serviced, or any num-ber of other activities and key touchpoints. Once you identify where the journey breaks down, work to fix the issues that are leading to misunderstanding.

Consider how you can help make things more effortless for your customers. Then, look to your employees and your internal messaging to take this effort even further. Always keep in mind that, before your workers can understand what is expected of them, they must not be suffering from any kind of confusion either. Employees should fully understand both their roles within your company and how what they do contributes and relates to the customer experience. This requires a distinct focus on your business’s purpose, vision, values, brand promise and objectives.

Once your employees have this clar-ity, they will bring it with them into everything they do — including organiz-ing websites and stores, detailing product information, writing marketing messaging, developing pricing and discounts, build-ing collaborative relationships with other employees, establishing communication and brand strategies, and much more. All of this soon will translate to clarity for your customers, as well.

T here’s a marketing maxim that states, “A confused cus-tomer buys nothing.” American photographer and envi-ronmentalist Ansel Adams had a similar notion, which

he expressed as, “There’s nothing worse than a sharp picture of a fuzzy concept.”

Think about that for a minute. Are there some fuzzy concepts in need of focus at your organization? Are your customers walking around puzzled and perplexed? Do you know the signs to look for? Perhaps most importantly, do you know the implications of customer confusion?

Let’s begin exploring these questions by first defining what a con-fused customer looks like. Confused customers• can’t find what they need because your website layout or store

displays are too complex and convoluted • can find what they’re looking for, but don’t understand product

details • don’t recognize the differences among your various product offerings • think your products do something they can’t• are overwhelmed by too many choices • don’t have the MBA in finance required to understand your

pricing and discount strategies• are stuck working with staff members who are not trained ade-

quately to answer questions• have an issue with your product or service and can’t understand

why your employees don’t resolve it• are getting lost in your jargon instead of being communicated

with in a customer-focused manner• aren’t getting enough information to make a decision• are getting too much information, little of which is relevant to

the problem they want to solve• view your brand, products or services no differently from those

of your competitors• see inconsistencies in your brand, its purpose, and your prod-

ucts and services

A Confused Customer Buys Nothing


MANAGEMENT PERSPECTIVEMichael Morand, CFPIM, CSCP, CLTD

Illustration: iStock/Andrew_Rybalko

Michael Morand, CFPIM, CSCP, CLTD, is senior

manager, supply chain at Johnson & Johnson

and a DBA candidate at Temple University’s

Fox School of Business. He may be contacted at

[email protected].


A s managers, we must maintain awareness of our personal motivation schemes and take care to not assume we understand the motivations of others. We often refer to

change-management models to guide actions for our teams, but these can provide an incomplete understanding of the work required, as we often neglect the importance of individual motivation management.

Motivations are the internal drivers that each of us possess: the forces that move us forward toward a goal. These drives include autonomy, achievement, relationships, balance and comfort, secu-rity, and power and influence. Few of us will identify only one of these in our personal motivation profiles, though we likely prioritize some over others.

Our views of the world are shaped in part by the lens of these motivations. Personally, I am primarily motivated by achievement and the drive to accomplish significant goals. When I hear my leadership talk about a challenging, clearly defined objective with measurable results, I am brimming with excitement and eager to rally my teammates to the cause. It’s the thrill of the climb and the fulfillment of reaching the summit!

Therefore, as a leader, I tend to highlight the significance of the objective, focusing on the complexity of the challenge. While that approach may appeal to some people on my teams, for others, it’s not always effective. This is because it doesn’t take into consideration their particular motivations. Conversely, when I take the time to identify and empathize with the motivations of my teammates, we get some pretty great results. By valuing their unique experiences and perspec-tives, everyone is a part of the solution and actively engaged. This, in turn, maximizes their contributions to the task at hand, enables me to develop more meaningful relationships and builds trust for all.

For instance, if I were to collaborate with someone who was more motivated by security, I might want to provide concrete goals and structured action steps, use a steady approach, frequently discuss progress, and provide regular feedback and encouragement. These

actions would help that individual handle the pace of change, circumvent the urge to default to the previous ways of doing things and feel more prepared for the future.

TensionsMotivation profiles also cause tension. While my primary motivation is achievement, I also enjoy strong relationships, working autonomously and creatively, maintaining a good work-life balance, and being a formal leader in various efforts. In other words, motivations can oppose and conflict with one another. Those of us who are inspired by achievement may struggle to maintain work-life balance. For others, the drive for power and influence may get in the way of building relationships. And being motivated by auton-omy and creativity may cause a struggle with regards to security and stability.

If the role of a manager is to bring out the best in the team, minimizing tensions may be every bit as important as the appeal to primary motivations. So, if a team mem-ber is experiencing tension created by a strong achievement motivation and a need for balance, his or her manager may help simplify and prioritize work efforts to avoid overextending or ensure that this person is taking adequate time off work for recovery and recharging.

CaveatsKeep in mind also that motivation profiles often evolve. As with other facets in our lives, time and experience influence our pri-orities and drive. Individual circumstances also may shift, thereby altering motivations and potentially creating new tensions. For example, people with a strong motivation for achievement may struggle to reconcile that drive to excel when they get married, have their first child or undergo another life-changing event.

None of us can be neatly categorized to have all our actions explained by a series of conditions or attributes. Therefore, we managers must constantly think about motivation management for our teams. It is one of the many facets of our profes-sional lives that make our work rewarding — and achieving this versatility makes us better.

Motivation Management

16 April-June 2018

Competitive Change with the Three K’s

Dave Turbide, CFPIM, CIRM, CSCP, CMfgE, is a New Hampshire-based independent consultant and freelance writer and president of the APICS Granite State Chapter. He also is a Certified in Production and Inventory Management and Certified Supply Chain Professional master instructor and The Fresh Connection trainer. Turbide may be contacted at [email protected].


ENTERPRISE INSIGHTS Dave Turbide, CFPIM, CIRM, CSCP, CMfgE

Photo: iStock/Pogonici

T wenty years ago, I had an opportunity to tour a number of factories in Japan. I still remember being impressed by seeing kaizen in action. According to the APICS Dictionary,

kaizen is the Japanese word for improvement. More specifically, the term refers to continuing improvement involving employees in all areas and levels of the business. At the plants I visited, it seemed that everyone was involved in finding ways to improve productivity, safety and performance. In fact, the cultures of these companies were clearly built around this concept, with workers encouraged and empowered to make small improvements each day.

Kaizen has been adopted by manufacturers around the globe, usually as part of a lean manufacturing initiative. Typical kaizen activities include • rearrangement of tooling and equipment for better access,

greater convenience or less physical strain • implementing the five Ss improvement methodology to clean

and organize a work area• suggesting changes in a process step to improve workflow.

However, today’s companies cannot solely rely on small, incremen-tal improvements. Sometimes, big changes are needed to keep pace with emerging technologies, new competitors and radical market swings. To complete their journeys to competitive success, manufac-turers need to embrace two more K’s: kaikaku and kakushin.

KaikakuLet’s say a company develops a new process, installs robotic equip-ment to automate an activity or makes a change to a product that affects its manufacturing. These are sizable shifts that likely will require substantial adjustments to equipment, processes and company

culture in a relatively short period of time. This is where kaikaku — which means radi-cal or revolutionary change — comes in.

Although minor modifications can be driven by support staff, more sweeping changes require the input and oversight of top management, with other personnel actively helping to define and implement the modifications. These changes don’t need to be totally innovative; rather, they can be applications of existing and proven techniques and technology. Kaikaku requires funding and project management to complete a specific, defined improve-ment project. In addition, kaikaku projects have a defined schedule, including a definite start and end, whereas kaizen is a continuing part of the culture and tasking.

Typical kaikaku activities involve • installing a new machine• redesigning an entire production line• introducing a new process or material• reconfiguring a part of the plant to pro-

duce a new product or manufacture an existing product in a new way.

KakushinTo complete the picture, let’s take a look at kakushin — the Japanese term for inno-vation. Technology is evolving so rapidly these days that innovation in the forms of new processes, approaches to manufac-turing, materials and equipment is a must for many manufacturers. Kakushin drives such changes through new ideas and tools.

Typical kakushin activities involve • a fundamental change in approach or

underlying assumptions• breakthrough ideas, products or services• renewed ways of thinking that lead to

transformation, reform or renewal.

The trinityAlthough incremental change is vital, it is insufficient to ensure competitiveness in today’s fast-changing world. Grander changes and ongoing innovation are esse-ntial to staying up-to-date with technology, markets, and ever-shifting customer needs and preferences. All three of these concepts combine in a coordinated effort to improve products and processes and, in turn, help a company grow, stay competitive and succeed.

Today’s companies cannot solely rely on small, incremental improvements.


Antonio Galvao, CSCP, CLTD, is vice president

of supply chain at DuBois Chemicals. He

may be contacted at [email protected].

Mike Dries is a retired business journalist

and corporate commu-nications executive

now working as a free-lance writer. He may



Driving growth without creating negative social and environ-mental impacts is a challenge faced by businesses, govern-ments and organizations of all types. Those that are succeed-

ing have developed new ways of thinking and operating — strategies and tactics that enable sustainability to guide day-to-day decisions and inform strategy.

In this context, publishing a corporate social responsibility (CSR) report is an important undertaking. The data within this document must be an accurate, reliable reflection of performance against clearly articulated goals and objectives. This provides an opportu-nity to report effectively to financial markets and the general public about past accomplishments and ongoing commitments.

Furthermore, a CSR report also can be a powerful way to com-municate accountability and transparency to stakeholders. Again, solid data is critical, as any incomplete or inaccurate information will undermine the public’s perception and damage the organiza-tion’s brand. When done well, however, CSR reporting becomes a valuable tool that enables dialogue and monitors progress in pursuit of sustainable growth.

There are other benefits of publishing a CSR report, as well: • A growing number of companies see sustainability reporting

as a means to drive enhanced product and process innovation, creating added competitive advantage.

• Transparency of nonfinancial performance can bolster an organization’s reputation and demonstrate its leadership.

• A CSR report provides a solid basis for examining and improving decision-making processes, leading to improved efficiency in areas such as energy consumption, material usage and waste reduction. These are all areas in which supply chain management professionals

can and should play a major role. To be sure, measuring performance and resource consumption are essential steps toward improved results and increased efficiencies. For instance, procurement departments focus on resourceful use of raw materials and packaging, recycling, and using materials that require less energy to produce. Logistics

professionals likewise work to reduce miles traveled to reduce fuel consumption. And packaging engineers seek ways to optimize space usage, improve stacking and reduce the amount of empty air. All of these are examples of sustainability initiatives that improve profits and protect our planet.

Importantly, leading companies today also are requiring their suppliers to green their own operations. In 2017, Walmart reinforced its commitment to reduce greenhouse gas emissions in its supply chain through an ini-tiative called Project Gigaton. The retail giant is providing emissions-reduction toolkits to a broad network of suppliers as it strives to eliminate one gigaton of emissions by 2030. That’s equivalent to taking 211 million cars off the road for a year.

“We are proud of the improvements we’ve made in reducing our own emissions, but we aim to do more. That’s why we’re working with our suppliers and others on Project Gigaton,” said Kathleen McLaughlin, Walmart’s senior vice president and chief sustainability officer.

Added Laura Phillips, Walmart’s sustain-ability senior vice president: “Our suppliers recognize the opportunity to realize those same benefits in their businesses. By work-ing together on such an ambitious goal, we can accelerate progress within our respec-tive companies.”

Walmart is not alone. Global candy maker Mars Inc. has announced its commitment to invest about $1 billion to tackle climate change, poverty and resource scarcity. Explaining why Mars has decided to raise the visibility of its sustainability initiatives, Andy Pharoah, vice president of corporate affairs and strategic initiatives, said, “We have taken a different approach because we see the scale of the challenge we collectively must overcome and the opportunity for business to find its voice on these issues.”

Walmart and Mars are just two examples of organizations embracing transparency in the reporting of their CSR initiatives, as well as effectively using CSR reports to convey objectives, account for their progress against those objectives and influence the values they stand for as an enterprise. Supply chain management professionals must continue working every day to define and support such undertakings.

Corporate Social Responsibility Reporting

Photo: iStock/jxfzsy

WORKING GREENAntonio Galvao, CSCP, CLTD, and Mike Dries

18 April-June 2018

PROFESSIONAL DEVELOPMENT

N etworking is a top predictor of career success, yet it is neglected by many businesspeople. Misunderstood and underappreciated, the value of networking isn’t always

immediate with tangible results and therefore can be frustrating to busy professionals. Interestingly, there are several peer-reviewed studies on network science, which have shown that simply being in an open network is the best predictor of career success. In other words, the old saying, “It’s not what you know, but who you know” still rings true today.

Most people believe that you only need to network if you are actively looking for a job or if you have a career in sales, market-ing or recruiting. Nothing could be further from the truth. Of the thousands of supply chain candidates who I have recruited over the last 20-plus years, the most successful have embraced network-ing as a critical career-development strategy. They use their robust professional networks to actively seek out mutually beneficial relationships that enable them to achieve a high degree of success. Following are some of the strategies these people employ:

Strategize your approach. Begin by developing well-defined goals and action plans using the five steps below: 1. Define your networking objectives and the benefits you want

to receive.2. Make a list of the types of people you want to connect with, then

rank them in order of importance. 3. Determine appropriate networking opportunities, and schedule

them in your calendar. This includes events, meetings and time spent on online networking sites.

4. Create clear action steps and deadlines. 5. Write everything down. Having your networking activities front

and center keeps you on track and committed to your objectives. Create mutually beneficial relationships. If you want to max-

imize return on your networking investment, strive to find out

how you can help others. Anyone can grow digital connections on a computer screen, but it takes effort to develop real and mean-ingful relationships. Similarly, don’t sell yourself too hard. Instead, highlight how you can be of assistance, and emphasize the core benefits of establishing a connec-tion, with the goal of creating a dialogue. Once you have a degree of comfort with the individual and it seems time to move beyond an online conversation, then you can ask to schedule a call or meeting.

Tap existing resources. One of the eas-iest ways to start building your network is by generating referrals from people you already know. Explain to them what you hope to gain through networking so that you receive the best referrals. Embrace diversity for maximum benefit; don’t limit yourself to people who only work in your profession.

Become a volunteer. Volunteerism is a great way to meet new people in a stress-free scenario while serving your local community. There are countless nonprofit organizations out there that would love to make use of your time and talents — one of which is definitely your local APICS chapter.

Continue your education. Local uni-versities and community colleges offer classes to expand your knowledge and enable you to meet new people. Consider classes related to your career as well as your hobbies and passions.

Join professional associations. These groups, particularly supply chain associa-tions, offer a wealth of networking advan-tages. Be sure to maximize your involve-ment by exploring the following avenues:• Supply chain conferences take place over

multiple days, offering educational value and the best and easiest way to make a lot of contacts in a short period of time.

• Local chapters provide an excellent way to socialize with other supply chain profes-sionals in your region.

• Tap into your association’s online mem-bership directory using search criteria such as industry, company, location or job title to find other members.

• Facility tours enable you to acquire real-world knowledge while meeting profession-als who are hosting or attending the event.

Photo: iStock/Rawpixel

Expand Your Supply Chain Career Potential with Networking


Rodney Apple

Rodney Apple is founder and president of SCM Talent Group, a supply

chain recruiting and executive search firm. He has served as the APICS career coach since 2014

and routinely contributes supply chain career

development content for members. Apple may



Tap into alumni connections. Find your local chapter and get involved. People are usually willing, if not excited, to help someone from their alma mater.

Personalize your social network connection requests. Making each invitation request unique is more likely to catch the eye of your

networking target, demonstrating that you have done your research and have a genuine interest in creating a mutually beneficial rela-tionship. Answer these questions in your introductory message: • Who are you?• What do you hope to gain from connecting with this individual?• What problems do you strive to solve in your profession?• What are some potential ways that you could help the person

you want to connect with?Focus on quality over quantity. Networking is not a numbers

game. I’d rather have 500 quality connections than 10,000 connec-tions with random strangers with whom I have nothing in common.

Some people act as if networking is a contest. You’ll see some of them even listing the num-ber of connections they have in their profile headline. This is not only empty boasting, but also counter-productive, as amassing random connections actually can do harm to your social network.

Stay engaged, but don’t stalk. Strive for proper balance between staying active with your network and blowing up their inboxes. Be sure to leverage social media as well by liking, sharing and commenting on posts from members of your network. You can and should write and share your own content as well, but always focus on high-value content as opposed to self-promotion.

Networking requires a willingness to step outside of your comfort zone and engage with complete strangers. It takes patience, resiliency and commitment. Implement these tips to get going in the right direction.

HONORING SUPERIOR SUPPLY CHAIN PERFORMANCE AND ACHIEVEMENT

Call for Entries opens March 15Deadline is May 31

Corporate CategoriesAPICS Corporate Award of Excellence Education APICS Corporate Award of Excellence Transformation

apics.org/awardsofexcellence

Individual Categories APICS Award of Excellence Supply Chain LeaderAPICS Award of Excellence Diversity and Inclusion ChampionAPICS Award of Excellence Corporate Social Responsibility CatalystAPICS Award of Excellence Emerging Supply Chain Leader

Amassing random connections actually can do harm to your social network.

20 April-June 2018

A lthough the internet of things (IOT) is new to the lexicon of many business professionals, using the internet to provide real-time information about a “thing” actually

has been happening for a long time. For years, IOT capabilities have led to heightened efficiency, accuracy and economic benefits; enabled users to be more agile and responsive; and produced related competitive advantages. The barrier to entry continues to decrease every year, and businesses are taking notice. In fact, experts estimate that the IOT will incorporate about 30 billion objects by 2020.

According to the APICS Dictionary, IOT is “an environment in which objects, animals or people are provided with unique identifi-ers and the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction. This allows objects to be sensed and controlled remotely across existing network infrastructure, creating opportunities for more direct integration between the physical world and computer-based systems.”

Tapping inThe first step to maximizing the opportunities associated with the IOT is to decide what kinds of data you want to capture and use. IOT’s reach is essentially endless. If you offer any kind of goods or services to customers, then information on demand signals, supply disruptions, quality concerns, customer complaints and countless other key indicators are out there and can provide better decision support.

The next task is understanding your particular data pipeline and determining how to collect the most valuable information. To do this, first identify the point at which the data is needed in order to effectively index and analyze it. Also, consider how will it be stored throughout the entire ecosystem of your supply chain, as well as how the devices collecting data now and in the future will connect and enable platforms to receive and manage the data.

Then, the question becomes how you will manage your data warehouse so that it doesn’t turn into a data lake just sitting stag-nant. Determine if you have the right tools to access the data and extract those key business support decisions. Also, it’s impor-tant to provide a line of sight for business managers and enable them to access the data they need without too heavily relying on information technology resources.

The risk is enormous with the IOT, so this is another key issue to address. Again, the IOT’s reach is vast, and the potential threats are equally so. Most notably, there is added vulnerability because of enterprise risks associated with the interconnec-tivity of devices across the supply chain. Connected devices are a gateway for hack-ers to bypass firewalls and get into your networks. For example, say you purchase a piece of equipment from a supplier that is connected to your internal network in order to provide quality and performance

data to your enterprise resources plan-ning system. This could turn into a Trojan horse, giving the bad guys access.

Another big challenge is that most companies can’t quantify how much data they have inside or outside their networks — whether it’s data on energy usage, pro-duction, quality, GPS locations, vibration, temperature and much more. With data feeds from so many different technologies integrated with one another, the potential liability is astronomical.

Defining what mattersTo make the most of the IOT while miti-gating potential risk, it’s first essential to gain a clear picture of what IOT capa-bilities are important to your company strategy and why. To do so, consider using quality function deployment and Pareto analysis. Then, conduct a thorough risk analysis. Time is short, and change is constant. You’ll need to choose your IOT battles carefully.

So Many “Things” to Contemplate

LEAN CULTURE Ron Crabtree, CIRM, SCOR-P, MLSSBB

Ron Crabtree, CIRM, SCOR-P, MLSSBB, is chief executive officer of MetaOps, a master MetaExpert and an organizational transfor-mation architect. He is the author or coauthor of five books about oper-ational excellence and the online magazine at MetaOpsMagazine.com. Crabtree also teaches, presents and consults. He may be contacted at [email protected].


The IOT’s reach is vast, and the potential threats are equally so.

Illustration: iStock/akindo


Share your supply chain expertise with the global APICS community.The APICS editors encourage you to submit a feature or “Lessons Learned” article to APICS magazine. Communicating your supply chain knowledge as a published author advances the profession while enabling you to validate your industry expertise and gain certification maintenance points.

WRITE FOR US!

Learn more at apics.org/editorial.

22 April-June 2018

T he demand consensus meeting is one of the most important steps in sales and operations planning (S&OP), with the resultant demand plan serving as a critical input for all other

S&OP process meetings. Without a demand plan as a starting point, not much else can happen in the cycle. There would be no supply and demand balancing exercise, plan valuation, or scenario plan-ning. In fact, when I worked as an S&OP consultant, the demand consensus meeting was the only S&OP process element universally employed at every company I encountered. Some of them also conducted supply review meetings, and a few held formal portfolio review meetings. But every single one had a consensus meeting.

Why is the demand consensus meeting so ubiquitous? First, the demand plan reigns supreme in supply chain planning and is a required input for most planning systems. Therefore, a fore-casting process of some sort is essential. The demand plan also is important for financial planning tools and processes, something on which today’s organizations are placing growing value. This need to provide system input— and the understanding that a good demand plan improves downstream planning — creates an implied need to talk about demand, even if the conversation is immature by conven-tional S&OP standards.

Luckily, talking about demand is a very natural thing for most business leaders. We like to ruminate on, interpret and posit about demand. The concept of consumer behaviors that trigger demand is a lot more intriguing than yawning over the nameplate capacity of some production line during a supply review meeting. Plus, the reality of demand is packed with a ton of data worth leveraging.

In fact, the demand data available to most organizations is pervasive and becoming more so. Planners have long relied on point-of-sale or consumption data, as well as depletions, orders,

shipments and econometric data, as inputs into their demand plans. However, recent innovations have spawned a flood of new inputs, such as search engine data, social insights, big data and other buzzworthy trends that are bringing a sea change to the world of planning and demand consensus.

As you might imagine, the challenge is determining which inputs add the most value to the forecasting process. While I would argue that not all — or even many — of these new elements offer meaningful insight into the demand curve, they do serve as evidence of the ongoing quest for better or purer signals, from which planners can weave the demand story. And therein lies the rub: How does one have a quality conversation about demand amidst a jungle of so many inputs and points of reference? What exactly defines a good S&OP demand dialogue?

TruthsBefore parsing the definition of a good demand dialogue, there are some underly-ing givens one must consider. First, most demand consensus meetings are driven by history, and more recent historical demand events generally take precedence. Second, nearly all historical demand data is believed to have two underlying parts: a predictable demand element (meaning, we know and can reasonably project at least one com-ponent); and an uncertain and often very volatile demand element. This uncertainty usually is the result of large, one-time orders; a market disruption; batch or mini-mum-order dynamics; or some rare extrin-sic factor that alters an otherwise stable pattern. A good demand consensus meeting seeks to understand both input types so that baseline demand is well-defined. Then, and only then, can a consensus team try to determine the best way to proceed.

After many years of planning to antici-pate demand, I can assure you that the best and quickest improvements can be obtained by spending time refining the inputs related to the predictable portion of demand. This leaves the uncertain components as either the risk, a potential upside or an area han-dled by supply planning professionals in the form of buffer inventories or rapid-response

Photo: iStock/Peopleimages

Are You Having Chewy Conversations?

SALES AND OPERATIONS PLANNING


Patrick Bower

Patrick Bower is senior director of global supply chain planning and cus-

tomer service for Combe. He is responsible for the

company’s sales and operations planning pro-

cess, order management, and third-party logistics

management. Bower may be contacted at

[email protected].


methods. Either way, uncertain demand should be a point of inter-est in the S&OP supply review process.

Successfully managing predictable demand requires the uni-fied effort and energy of many participants. No stone can be left unturned in the aggressive examination of every reasonable input. The outcome of this work is a demand plan forged via a fact-based morphing of statistics, analytics and a feel for the business — all integrated with a well-grounded understanding of consumer behav-iors. While others may have a more elegant word for this process, I refer to it as “chewing the demand data.” It is the process of applying critical thought and actively challenging the demand inputs for quality and relevance while constructing a demand plan.

The demand review phase within S&OP is structured to enable such critical thinking because it calls for the right people and right data to be on hand to analyze demand, calculate trends, identify anomalous events, and measure the demand plan and exception process. Most of this effort takes place well before the

demand review meeting occurs and is managed via prerequisite assignments allocated across sales, marketing, demand planning and market research. Each group strives to understand all the dynamics that might influence demand, and then these inputs are brought to the meeting.

Listening in Recently, I had an extensive conversation with some colleagues here at Combe. I think a representative recap of our discussion might be instructive (of course, all numbers cited here are fictitious). The dialog went something like this:

Demand planner: “The shipment trend for regular-strength Vagisil has been averaging 20,000 units per week and is +3 percent over the last four weeks and +2 percent over the last 13 weeks, indicating some improvement in the near-term trends. At the same time, all point-of-sale trends are flat year-over-year, which suggests that the trade is building inventory. Walmart has added some inven-tory in the last few weeks, and, after talking with our account rep there, she thinks this may be for an upcoming rollback. This appears to be a one-time event and not a sustaining trend on the shipment side. I suggest we keep the forward forecast flat.”

Marketer: “I agree. Looking at historical point-of-sale data, we do not get much of a lift from rollbacks — just barely enough to pay for the programming — so this definitely is a one-time event and not reflective of trends. There is no seasonality to this item, so I would take the gain associated with the inventory build but leave the forecast trend flat. As an aside, our consumers do not pantry-load on promotion; it is a need-based product. We are hoping a tactical price reduction will steal a little share and keep the private label at bay. It bears noting, however, that we won’t have new creative until the

fourth quarter, so don’t expect to see any near-term impact to volume.”

Salesperson: “My team agrees, as well. There have been no major listing changes for the regular-strength item, and there are no unusual promotional events planned for later this year versus last year, so we are fine with holding the forecast flat. As you know, Walmart is by far our biggest customer for regular-strength, so we don’t expect any channel-shifting as a result of the rollback.”

This demand consensus conversation was “chewy,” in my parlance. It reflects depth, thoroughness and a feeling that all inputs have been considered. It addresses the forecast mathematically by asking about the moving average, the trend, any seasonality and whether anything of importance has changed. And it includes insight about con-sumer and account behaviors. Of course, we could have included other facts — about social media or search engine results — but none of these has been proven to have a sig-nificant correlation to either point-of-sale movements or actual shipments.

This example is specific to consumer packaged goods, but the lessons apply to any industry. Conversations must be realistic, honest and transparent. The discussions should entail future plans based on an examination of all inputs, considered in declining order of relative value. In the Vagisil example, shipment trends drove our conversation, but they were quickly followed (in terms of priority) by a discussion about point-of-sales results. One-time events and multiple-time-period trending also were very important. In addition, the focus on demand drivers was detailed, and all work was com-pleted prior to the actual demand consensus meeting. Everyone came to the discussion with opinions based on facts, not gut feel-ings. The right outcome was driven by the right conversation, with critical thinking as a key element in both demand consensus and the balance of the S&OP process. Now that’s what I call “chewy!”

No stone can be left unturned in the aggressive examination of every reasonable input.

Learn more from "Sales and Operations Planning" author Patrick Bower in his post on the APICS Thinking Supply Chain Blog at apics.org/blog.

24 April-June 2018

Power Up

I f you look around, you’re likely surrounded by multiple items — including your laptop, tablet and mobile phone — that are powered by a rechargeable battery. Although these batteries

may seem small and low-tech, they contain big potential to power vehicles, homes and even communities.

Evolving technology, eco-friendly benefits and decreasing prices are driving many industries to consider lithium-ion and other rechargeable batteries as a main power source. Bloomberg reports that lithium-ion batteries for electric vehicles are selling for 24 percent less than they did in 2016 and about 80 percent less than in 2010 (Chediak 2017). In the past two years, 98 percent of the new battery projects initiated by electric companies involved lithium-ion batteries (McMahon and Infante 2017). Going forward, experts project that these batteries will make up approximately 63 percent of global grid-scale storage (Stenclik, Denholm and Chalamala 2017).

This trend toward rechargeable batteries is most obvious in the automotive industry. Rechargeable lead-acid car batteries start vehicles and maintain the energy needed for the lights, radio, dashboard notices, onboard GPS and other gadgets. As these batteries evolve to become larger and more versatile — and as prices continue to decline — the increasing use of these vehicles

could propel their annual power consump-tion to 551 terawatt hours by 2040, roughly the same amount of electricity consumed by nearly 60 million average residential utility customers in 2015, the U.S. Energy Administration estimates (Copley 2017a).

Furthermore, as rechargeable batteries extend into the home utilities market, they will give homeowners the ability to collect and store energy for later use, as opposed to having to sell excess energy back to the local power grid and then buy it again when needed. This also can help home-owners stockpile energy in case of power outages and better manage their power requirements by reducing consumption from the grid at peak demand periods (International Energy Commission 2017).

On an even larger scale, some groups are investing in lithium-ion battery systems to support community power grids. Duke Energy recently announced that it will spend $30 million on a pair of lithium-ion battery systems designed to strengthen the electric grid in western North Carolina. This is the first phase of a broader plan to improve efficiency and provide support-ive services such as frequency regulation (Copley 2017b).

The Imperial Irrigation District in California installed a 20-megawatt-hour lithium-ion-battery energy storage system that increases reliability and puts the utility at the forefront of the energy industry’s technological evolution. The system is designed to improve the ability to integrate wind, solar and geothermal energy into the local grid. It also enables the district to supplement backup energy resources while acting at extra generating capacity.

Tesla recently installed the world’s largest lithium-ion battery in South Australia. The 100-megawatt, 129-megawatt-hour Powerpack system is connected to the 99-turbine Hornsdale Wind Farm. The system can supply 30,000 homes with about an hour’s worth of power (Hitch 2017).

Pluses and minusesThe adoption of these technologies is spurred by their multiple benefits to both consumers and providers. Energy storage enables the expanded use of renewable

Illustration: iStock/WaffO

zzy

RELEVANT RESEARCH


energy; helps control costs by reducing downtime and production losses; manages supply and demand variability; and improves operations in generation, transmission and distribution. Across the board, new energy storage solutions integrate renewable resources such as solar and wind, boost reliability, and more quickly restore power in an emergency (McMahon and Infante 2017).

Despite these advantages, energy storage systems still are an emerging technology. One estimate is that stored capacity, including pumped hydropower plants, is 24 gigawatts, but peak demand in the United States alone is nearly 840 gigawatts. This leaves a considerable gap that would need to be filled before a changeover to this power source. In addition, obstacles including high costs, lower-than-desired rates of charge and discharge, life cycle limitations, and concerns about the safety of battery energy storage systems are slowing growth (Stanclik, Denholm and

Chalamala 2017). In order to better meet demand and overcome these obstacles, the energy storage industry will need to create a variety of technologies ranging from high-power, short-duration batteries for balancing applications to long-duration storage for energy applications.

Even once the technology is perfected, communities still will need to update their infrastructures to better use lithium-ion and other rechargeable batteries. Electric grid infrastructures typically are highly complex, interconnected networks that involve thou-sands of electric utilities and millions of businesses and homes. Many, if not all, of the electrical connections that exist will have to be altered to accommodate the thousands of energy storage systems being introduced into the electric grid. This will result in implementation costs and years of time spent coordinating the work of contractors, subcontractors and individual homeowners.

However, the global market seems to be betting on the pros over the cons. The worldwide grid storage market is expected to increase more than tenfold by 2025, with nearly 80 percent of that growth coming from outside the United States (Stenclik, Denholm and Chalamala 2017).

Stenclick, Denholm and Chalamala go on to say, “Battery energy storage will be one of many valuable technologies and resources that will help facilitate additional renewable penetration and mod-ernize the grid.” For now, the authors suggest that the industry focus on providing “essential grid reliability services in regions where the value is highest, such as island and remote grids, munic-ipal and co-op electricity providers, and areas with high renewable penetration.” As the power system modernizes and the industry starts to focus more on renewable energies, battery energy storage will play a more significant role in the marketplace.

Richard E. Crandall, PhD, CFPIM, CIRM, CSCP

New energy storage solutions integrate renewable resources such as solar and wind, boost reliability, and more quickly restore power in an emergency.

References1. Chediak, Mark. 2017. “The Latest Bull Case for

Electric Cars: The Cheapest Batteries Ever.” Bloomberg, December 5, 2017. bloomberg.com/news/articles/2017-12-05/latest-bull-case-for-electric-cars-the-cheapest-batteries-ever.

2. Copley, M. 2017a. “Duke Energy Proposes 1st Large-Scale Battery Projects for Its Utilities.” SNL Energy Power Daily, September 22, 2017.

3. Copley, M. 2017b. “Utilities Told to Prepare for Growth from Fledgling Electric Auto Sector.” SNL Energy Power Daily, April 18, 2017.

4. Hitch, John. 2017. “Tesla Delivers on Down Under Bet with World's Largest Battery.” New Equipment Digest, December 1, 2017. newequipment.com/industry-trends/tesla-delivers-down-under-bet-worlds-largest-battery.

5. International Electrotechnical Commission. Market Strategy Board. Electrical Energy Storage. Switzerland: 2017. iec.ch/whitepaper/pdf/iecWP-energystorage-LR-en.pdf.

6. McMahon, R., and L. Infante. 2017. “Harnessing the Potential of Energy Storage.” Electric Perspectives 42 (3): 48-50, 52-53.

7. Stenclik, Derek, Paul Denholm and Babu Chalamala. 2017. “Maintaining Balance: The Increasing Role of Energy Storage for Renewable Integration.” IEEE Power & Energy Magazine, November/December 2017.

Richard E. Crandall, PhD, CFPIM, CIRM,

CSCP, is a profes-sor emeritus at

Appalachian State University in Boone,

North Carolina. He is the lead author of

“Principles of Supply Chain Management.”

Crandall may be contacted at crandllre@

appstate.edu.


The author would like to thank Mike Carpenter of the APICS Foothills Chapter for suggesting the topic for this issue’s “Relevant Research.” If you have suggestions for future topics, contact Richard E. Crandall, Ph.D., CFPIM, CIRM, CSCP, at [email protected].

26 April-June 2018

Photo: iStock/adventtr

AIRLINE CATERING AT THE WORLD’S BUSIEST HUB


he airline industry is fiercely competitive and challenged by rising costs and low margins.

Airlines operating in this high-risk marketplace must carefully align their business and operating models.

One company working to achieve this objective is Delta Air Lines. After facing significant challenges in the early 2000s, and filing for bankruptcy protection in 2005, Delta now serves more than 180 million customers each year and is ranked as the world’s largest airline by Forbes Global 2000.

These days, very little separates one airline from another. So, Delta executives decided to take aim at the customer experience through superior onboard catering. This service is regarded by Delta executives as a differentiator, particularly for their premium classes. In 2015, Delta partnered with its Atlanta caterer, Gate Gourmet, to establish a new approach to airline catering. Their solution is embedded in the theory of constraints (TOC), and, through the initiative, Delta moved away from the age-old model of catering through mass production and toward one of catering through mass customization.

Adapting to changeDelta’s original catering model involved standardized, full-meal services offered at each cabin. This later evolved into a minimized-product-offering plan, with tailored service offerings based on flight length and markets served. Catering was no longer a standard, single-build

process across all fleets; instead, it required highly variable, flight-specific plans. In addition, as Delta made necessary aircraft changes — as many as 150 times per day — to accommodate operational or maintenance issues, such events often resulted in flying an aircraft type different from that specified in the original flight plan. This had a negative effect on catering efforts, which faced significant difficulties related to adapting to capacity, complexity and customer requirement shifts.

In 2015, Gate Gourmet was servicing 650-720 flight departures every day (depending on seasonality), representing more than 1,100 flight legs. However, because the company could only effectively handle 600 flights per day, it offloaded the other flights to a local sister facility. Yet, Gate Gourmet still was underperforming against customer reliability, quality and demand goals. Delta wanted Gate Gourmet to increase facility capacity in order to better handle its existing demand, as well as projected future growth of up to 850 departures in future years.

Meeting client objectivesThe first step in Gate Gourmet’s improvement journey was to identify the constraint. This was critical to ensuring that everyone involved in the process was focused on the right matters. Because there were many different aircraft configurations with individual flight offerings associated with each flight, a careful analysis

By Chris Fay, Melissa R. Bowers and Mandyam M. Srinivasan

28 April-June 2018

of the problem was essential. Ultimately, the primary constraint was determined to be the lack of space when getting trucks on and off the dock.

A root-cause analysis then was performed to determine why dock capacity was a constraint. The results revealed that high work-in-process (WIP) levels and the inherent variability of the system caused a number of undesirable effects that degraded system performance.

The variability started with the catering equipment itself. There were 31 different aircraft galley configurations, six catering cart types, three box carriers and 183 unique drawer configurations designed to hold a mix of catered food items produced by Gate Gourmet. Plus, equipment from up to 135 inbound flights was received during peak hours, which meant that the equipment processing area had to handle more than what was required for outbound demand in order to clear the queue. In addition, to help alleviate dock backups, used carts would be pushed into the equipment processing area. Staff flooded production lines with incoming carts regardless of the demand, further increasing WIP and delays.

The inherent variability of aircraft swaps, gate changes and schedule fluctuations further complicated cart loading. Understandably, there was a natural impulse by Gate Gourmet staff to want to start preparing the carts early. But doing so actually resulted in even higher levels of WIP and longer queues and lead times. As lead times increased, so did the need to expedite, and employee priorities became confused. This cycle fed on itself, creating internal chaos with no end in sight.

In addition, due to a limited number of delivery trucks, Gate Gourmet had to send multiple flights’ carts on a single truck. The drive time between gates and concourses, as well as loading and unloading, meant that flights with back-to-back departure times could not be loaded on the same truck. Therefore, carts did not reach the final staging area in the sequence required for on-time dock departure, incurring further delays and dock backups.

To address these challenges, Gate Gourmet decision-makers chose to adjust their scheduling methods to a system that used the constraint in a more effective manner — in other words, exploiting the constraint.

In the second step, exploit the constraint, Gate Gourmet employees first had to maximize the utilization of dock space. They began by assessing the movement of trucks and considering how they could enable a clearer focus on picking up carts from the dock in a timely manner, minimizing time

spent in the field and efficiently returning to the dock when it was time to pick up another load.

First, truck batch sizes were reduced. Then, for inbound dock traffic, staging zones were created in the equipment processing area to queue inbound equipment by cart type instead of just processing and pushing them forward. The immediate emphasis was on pulling carts off the trucks and staging them in the zones as quickly as possible in order to keep the trucks moving. For outbound dock traffic, zones were created in the final staging area based on scheduled truck dock departure times. This ensured that flights on the same truck are staged in the same location and also put a cap on the maximum number of flights allowed in the final staging area.

The cap on the inventory staged in the final zone equaled 2.5 hours’ worth of dock departures. This inventory then was partitioned into 30-minute time banks to avoid overloading the area with carts. This was important because finalizing carts with last-minute items, such as ice, lemons, limes and dairy products, is particularly difficult if the zone is too cluttered.

Once the time banks were in place, the required security inspection process was carried out alongside the finalizing of flights, instead of further delaying truck departures by inspecting the carts while they are on the dock. This new inspection process allowed for easy prioritization and visual management.

In addition, Gate Gourmet implemented a dispatch solution to enhance visibility into Delta flight changes and truck fleet status in the field. The system features a direct feed from Delta’s operating system that loads changes in real time to the dispatch tool and delivers them directly to the responsible driver through a handheld device. A global positioning system also was installed, along with a map that shows truck movements. Furthermore, beacons were installed on every Delta loading bridge to automatically capture when a truck enters or exits the gate. The increased visibility gives Gate Gourmet tremendous insight into asset utilization, as well as arrival and turn-time performance.

Scheduling methodologyNext, a drum-buffer-rope (DBR) scheduling plan was created using existing Gate Gourmet information technology (IT) systems. According to the APICS Dictionary, DBR is a method from the TOC for scheduling and managing operations that have an internal constraint


or capacity-constrained resource. At Gate Gourmet, this technique uses dock departure times as a simplified drumbeat with a predetermined length of time as the rope that pulls flights — rather than individual cart types — into the procedure, facilitating a transition to a make-to-order system. Although the average turn time for a cart was 12 hours, the actual time necessary to build a cart for a flight is less than 20 minutes. So, in a perfect world, the Atlanta facility wouldn’t have needed more than two hours to cover for peaks in demand. To shield from uncertainty, it therefore was decided to set the buffer length at twice that: four hours.

In the new approach, all planned flight pairings going onto a truck were given the same required dock departure time regardless of flight departure. This ensured the correct sequence for flight release and production as well as proper final staging of the flights, as they had the same dock departure time. The scheduled departures were uploaded into the IT system and printed on all equipment flight tags. Chain-of-custody scanning was executed as well.

Another benefit of the initiative came from tracking and status updates, which now can be seen on monitors throughout Gate Gourmet’s facility. Managers can immediately see the effectiveness of the operation without having to walk through the facility inspecting carts and tags.

Airline food re-envisionedThis simple scheduling system subordinates everything to the demands of the constraint, and all milestones coincide with that schedule:• Milestone 1 — release. A flight is released into the

system four hours prior to dock departure time. • Milestone 2 — kitchen ready time. Excluding last-

minute items, the kitchen ready time for flight production is now one hour prior to deadline.

• Milestone 3 — flight finalization. Flight finalization involves items that are added to carts at the very last minute. This milestone, as well as all audits and security inspections, now are completed by dock departure time minus 30 minutes. This ensures that

the finalizing of flight carts will always be at least one staging zone ahead of the dock departure schedule.

• Milestone 4 — dock departure. Dock departures are fixed, and any deviation is deemed late. In the end, implementing a simple DBR scheduling

system enabled a WIP reduction of more than 50 percent and a 25 percent increase in throughput. Gate Gourmet brought back in-house all offloaded flights, reducing annual costs to Delta by $1 million, and produced a peak of 813 flights in 2016, with a clear capacity to produce the 850 flights that soon will be required.

Gate Gourmet realized a 75 percent reduction in overall flight delays from its lowest point in 2015, making Atlanta the 2016 leader in on-time performance. These results catapulted the Atlanta operations to flagship status for Delta’s catering operations, and the airline is now reevaluating all hub operations based on this success.

Chris Fay is general manager of international catering operations for Delta Airlines, where he is responsible for the day-to-day operational execution of catering outside the United States. Additionally, Fay works on global continuous improvement efforts for Delta’s on-board services. He may be contacted at [email protected].

Melissa R. Bowers is the Beaman Professor of Business in the Department of Business Analytics and Statistics at the University of Tennessee, Knoxville. She received the Richard Sanders Outstanding Leadership in Executive Education Award twice and the 2011 Outstanding MBA First Year Faculty Award, University of Tennessee College of Business. Bowers may be contacted at [email protected].

Mandyam M. Srinivasan is the Pilot Corporation Chair of Excellence in Business at The University of Tennessee. He has received the Franz Edelman Award for Achievement in Operations Research from the Institute for Operations Research and Management Sciences. Srinivasan may be contacted at [email protected].


This simple scheduling system subordinates everything to the demands of the constraint .

THE NEXT DISASTER?I S Y O U R S U P P L Y C H A I N R E A D Y F O R


30 April-June 2018

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By Lowell Grabel

32 April-June 2018


The effects of a disaster are felt throughout the supply chain long after an event takes place. No one is immune; these catastrophes can be just as crippling if they happen to a key partner rather than your own organization, and they can disrupt the involved business, its suppliers, customers and employees. As our economy becomes increasingly global, even an incident halfway around the world can have an enormous impact on our ability to conduct business as usual.

A disaster is any event that causes a major disruption to normal operations and delivery of services for a significant period. Factories, warehouses, shipping terminals and stores are vulnerable, and the loss of critical resources — such as information technology (IT), people, power and transportation — is a distinct possibility for any business in todays’ complex network. However, by addressing a company’s exposure to risk, the probability of an extended disruption can be reduced and the ability to recover in a timely fashion increased.

A YEAR OF DEVASTATIONAccording to the U.S. National Oceanic and Atmospheric Administration, 2017’s weather and climate-related disas-ters cost a record $306 billion in the United States alone. Global insured losses made 2017 the third-most expensive year for the insurance industry. Millions were affected by floods, wildfires and earthquakes, including the following:• Hurricane Harvey. Some analysts believe that Hurricane

Harvey could be one of the most expensive natural disasters in U.S. history. Besides the destruction it caused for residents of Texas, it posed a serious threat to American commerce. The Port of Houston and its connected network of roads and rails are vital to many businesses’ supply chains. Even a few days’ disruption at such a crucial hub is felt around the world for months.

• Mexican Earthquake. Moody’s Investors Service says the September 19, 7.1 magnitude earthquake, which killed at least 369 people in the capital and nearby states, “has the potential to be one of Mexico’s costliest natural catastro-phes.” Mexico City Mayor Miguel Angel Mancera adds that 360 buildings either have to be demolished or receive major structural reinforcement. An additional 1,136 structures are reparable. AIR Worldwide, a Boston-based catastrophe-modeling consultancy, notes that insured losses are only a small part of the total economic damages. It estimates the insured losses at 13 billion- 36.7 billion pesos ($695 million-$2 billion).

• Monsoon rains in South Asia. Flooding and landslides resulting from monsoon rains have affected at least 41 million people in Bangladesh, India and Nepal, according to the United Nations. The New York Times reports than 1,000 people died and thousands of homes were destroyed “as sheets of incessant rain pummeled the region.”

• Hurricane Maria. Multiple news services have calcu-lated that the Hurricane Maria death toll exceeds 1,000 people. Six months’ worth of rain fell in less than four days, major dams experienced cracked spillways and overflowing canals, and the wind tore hundreds of electrical transmission towers from the ground. Electrical grids and mobile phone networks went down, and backup generators stopped working as fuel became unavailable. So far, FEMA has identified approximately 18,029 affected businesses in Puerto Rico and The Virgin Islands, seriously upsetting businesses, jobs and sales. The destruction of medical device man-ufacturing capacity also created a shortage of medical IVs, requiring some health care providers to find new suppliers or rely on alternative products.

• California Wildfires. The Los Angeles Times reports that the wildfires that ravaged Northern California in October led to 44 deaths; burned through 50,000 acres; forced 27,000 people to evacuate; and destroyed more than 8,400 structures, including homes and businesses, making them the most destructive wildfires in state history. In addition, major rail and trucking routes were severely impaired.Of course, Mother Nature doesn’t account for all dis-

asters. They also can be manmade, such as incidents of civil and labor unrest, cyberattacks, piracy, utility failures, product defects and terrorism. Recent examples include the Samsung Galaxy Note 7 cellphone battery recall and the high-profile Equifax data breach, which caused major problems in the supply chains involved.

TAKING DISRUPTION IN HANDThe ever-growing reach of global supply chains exposes these networks to serious vulnerabilities. Potential impacts include financial harm, such as unrecoverable loss of revenue or accounts receivable, as well as contractual fines and penalties; operational impairment from diminished productivity or the inability to provide effective customer service and regulatory reporting; and damage to relation-ships, corporate image, reputation and confidence.

The good news is that there are proven steps to identify potential risks to the supply chain and plan for business


interruptions. The first is to develop an impact analysis. This investigation provides a comprehensive under-standing of the business and its supply chain, enabling organizations to identify exposures and potential miti-gation measures. It helps users pinpoint the most feasible and cost-effective strategies and solutions for business continuity and disaster recovery. In addition, reviewing insurance policies as they relate to business interrup-tion enables companies to detect any areas requiring additional coverage.

Disaster recovery preparation is the next step. Based on the results of the impact analysis, this exercise finds critical business functions, resources and methods; reveals business unit, supplier and customer interdependen-cies; further identifies potential threats and exposures; and helps users ascertain potential losses and impacts, should a disaster occur. The process involves document-ing recovery time objectives, IT interdependencies and manual procedures; evaluating existing recovery capabili-ties; and creating effective mitigation measures, including the recovery plan.

The recovery plan should clearly document who to call, where to go and who will do what in the event of a disaster. It also determines which tasks must be consid-ered mission-critical. The plan sets a schedule for periodic backups of all electronic and hard-copy documentation, which should be stored in an alternate location.

Focus on creating a stable, yet flexible, supply chain. Diversifying suppliers and methods of transport wherever possible is an effective strategy. Also consider alternate supplier teams, and define roles both internally and externally to enable this emergency supply chain. Think of substitute work spaces, such as remote access to data and applications, as well as the ability to work from home or another facility. In a local or regional disaster scenario, it is common to have to compete with other businesses for the same limited resources, such as fuel for backup generators, replacement computer equipment, emergency repair services, alternate transportation, and specialized per-sonnel. It is advisable to identify and secure an agreement for such priority services.

The body of the recovery plan should include• assumptions• incident-management team members, as well as criti-

cal personnel, resources and recovery assignments• a recovery strategy and solution overview• emergency-response procedures

In the past two years, more than 50% of businesses experienced an unforeseen interruption. 81% of these disruptions caused the business to be closed one or more days.

80% of companies that undergo a major disaster go out of business within three years.

40% of organizations that experience a critical information technology failure go out of business within one year.

44% of businesses that suffer a major fire never reopen.

40% of organizations without a business continuity plan fail immediately after a disaster because they are unprepared strategically and financially to cover the cost of extended downtime.

An additional 25% of companies affected fail within two years.

Sources: ARC Advisory Group, Gartner, Price Waterhouse Coopers, Dunn and Bradstreet

• incident-reporting procedures• recovery team notification, mobilization and assembly

procedures• detailed recovery procedures• situation-assessment guidelines• emergency contact information of key employees,

vendors and customers• a summary of mission-critical business functions to

be recovered• detailed procedures for transitioning back to business

as usual.

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Also keep in mind that, in the event of a disaster, it may be necessary for critical tasks to be performed by someone other than the usual resource. Write down all procedures in such a way that an individual with the appropriate skill set, but not necessarily the daily experience, will be able to understand and execute the critical tasks.

Finally, a plan is only as good as its execution. Once it is developed, make sure all internal and external team members are familiar with their roles and responsibil-ities. Recovery teams should be comfortable with plan details and procedures. A periodic review and mock test exercise should be conducted, which can be in the form of a table-top exercise or a full physical and technical exercise using a scripted scenario. This will help team members practice their roles, develop confidence and expertise, emphasize good judgement, and reveal any necessary updates.

Test as many components as possible and practical: Are alternate power fuel tanks full? Can backup data be easily accessed? Are partners prepared for their roles? Require development of test objectives and use this exercise to validate technical recovery procedures. Business continuity and disaster recovery planning rely on both common sense and due diligence.

Lowell Grabel began his career in professional services designing communication networks. Later, he provided consulting services in business continuity and disaster recovery planning. He has worked in a variety of industries, including manufacturing, finance, health care, government, pharmaceutical, energy, education and retail. Grabel may be contacted at [email protected].


BUSINESS CONTINUITY FOR COMPLEX GLOBAL SUPPLY CHAINSPresented by: Lowell GrabelBusiness Continuity and Disaster Recovery Planning Consultant

June 7, 2018 | 1:00 p.m. Central

Attend this APICS Extra Live Webinar to learn more from author Lowell Grabel about how to ensure that you stay in business after a natural disaster. Participants will discover

■ how to identify potential threats ■ proven strategies for contingency planning to protect life and critical business functions ■ lessons on how to prevent an incident from becoming a disaster ■ real-world tools to use when implementing disaster recovery plans.

Register at apics.org/extralive.

INSPIRE THE NEXT GENERATION OF SUPPLY CHAIN PROFESSIONALSWith the help of volunteers like you, we can beat the future supply chain talent shortage. This program engages K-12 students with science, tech, engineering, and math concepts plus supply chain management. It also demonstrates the promising career paths available.

HELP US REACH OUR GOAL: Over 100,000 students by 2020 through the Supply Chain STEM Educational Outreach Program.

Get involved: apics.org/stem

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KEEPING SLOW-MOVING

IN CHECK

SPARE PARTS

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Original equipment manufacturers (OEMs) know all too well that any failure to support their customers during crucial periods of equipment breakdown can seriously damage reputation and destroy any potential for future sales. OEMs that sell industrial equipment to corporate customers appreciate this troublesome fact better than most. These businesses often face what is known as the long-tail effect, which describes having a large proportion of spare parts that are sold infrequently. Keeping this long tail under control is key to effective management in the spares distribution environment.

Challenges of the long tailOEMs commit to ensuring uninterrupted service, which implies that these service firms are duty-bound to stock even items that fail infrequently. However, keeping large numbers of slow-moving stock keeping units (SKUs) increases cash tied up in inventory. Further, as new models are released, the number of spare-part SKUs also increases. Consequently, an increasingly large range of spares need to be stocked.

To resolve this issue, many businesses focus on lead-time reduction at all nodes in their service distri-bution networks. The assumption is that, if lead times are reduced, then the minimum inventory needed (also called the norm) will be reduced at various nodes. When this happens, many professionals hope they can stock an increased range of spares, leading to improved service.

At first glance, this assumption seems correct. Thus, many procurement and distribution experts work to reduce lead times or redesign their distri-bution networks in order to minimize transit times from one node to another. However, even if lead times are reduced, significant inventory reduction may be impossible.

Norm and lead timeThe norm for an item stocked in a make-to-availability environment is determined by the peak demand within the replenishment lead time. Comparing demand within multiple lead time buckets in the past and then iden-tifying the peak sales figure attained within any one of the buckets provides the norm. For example, if reliable lead time of an item is 15 days, then sales figures within successive lead time buckets of 15 days over the past year

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38 April-June 2018

would be compared. Thereafter, the maximum demand in a 15-day bucket is designated as the norm for the item.

Norm equals peak demand during a reliable replen-ishment period factored for variability and reliable replenishment time. Based on the formula, norm and replenishment lead time are directly related, as depicted by the straight-line graph in Figure 1.

But be warned: While this may be the case sometimes, it is not always so. For instance, Vector Consulting Group recently conducted a detailed study of both slow- and fast-moving parts at a large material handling equip-ment company in India. Figure 2 shows the annual trend of norm computation with increasing lead times for a slow-moving spare part. This part was sold only nine times in the last year, about one sale every 40 days on average.

Figure 2 is quite different from expected and indicates that the norm, when computed for such slow-moving parts, is a stepped function of lead times. In other words, the norm remains constant within a certain interval of lead time, changing in value only when moving from one interval of lead time to the next.

In the case of a fast mover that has sold daily for the past year, the graph of norm and lead time looks similar to Figure 1. For fast movers, any reduction in lead time results in a reduction in norm. Therefore, decreasing lead time can be the right action for firms selling fast-moving goods. However, an initiative to broadly reduce lead times of items irrespective of their demand profiles may not be as successful in reducing inventory levels.

So, what is the best approach for slow-moving parts? Consider an item with a simplified demand pattern, as depicted in Figure 3. Suppose the item has sold four times in the past month. Its minimum interval between two consec-utive sales, as seen from the demand table, is five days. Let’s assume for simplicity’s sake that the demand pattern of the item is of a repetitive nature each month: The first sale is on 10th, the second is on the 15th, the third is on the 25th, and the fourth is on the 30th.

Considering Figure 4, if this item were to be kept as made-to-availability and its norm computed based on the past month’s sales data, the minimum achievable norm remains at seven units if the lead time is five days or less.

Figure 2. A real-world, slow-moving spare part

Nor

m

Replenishment lead time

18

16

14

12

10

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01 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115 121 127 133 139 145 151 163 175 181

Figure 1. Comparing norm and lead timeLead time

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SPARE PARTSSPARE PARTSS

Day Sales Day Sales Day Sales

1 0 11 0 21 0

2 0 12 0 22 0

3 0 13 0 23 0

4 0 14 0 24 0

5 0 15 7 25 7

6 0 16 0 26 0

7 0 17 0 27 0

8 0 18 0 28 0

9 0 19 0 29 0

10 7 20 7 30 7

Figure 3. Item sales by day Figure 4. Comparing norm and lead time

Lead time Norm Lead

time Norm Lead time Norm

1 7 11 14 21 28

2 7 12 14 22 28

3 7 13 14 23 28

4 7 14 14 24 28

5 7 15 14 25 28

6 14 16 21 26 28

7 14 17 21 27 28

8 14 18 21 28 28

9 14 19 21 29 28

10 14 20 21 30 28


Thereafter, it increases as a stepped function as seen earlier in Figure 2.

This pattern develops because the norm for any make-to-availability item is decided by comparing sales within multiple lead-time buckets in the past and adopting the peak sale as the norm. For slow-moving items, a typical lead-time bucket comprises multiple days of zero sales and a few days of actual sales. As lead-time increases, the bucket size considered for determining the norm increases. However, for slow-moving items, a rise in bucket size does not always result in a rise in consumption within the bucket because additional days in a bucket may not mean additional sales.

Figure 5 shows a slow-moving item during a demand duration of 15 days. Here, an increase in lead-time bucket size from 10 days to 14 days only adds multiple days of zero sales and does not result in an increase in total sales within the bucket, which remains fixed at seven units. Only on the 15th day does another sale event get added inside the bucket, increasing the sale within the bucket. For a slow mover, the sale within a lead-time bucket depends on

the number of sale events that get covered within a bucket. The greater the interval between any two sales events, the larger the lead-time bucket size required.

According to the demand profile in Figure 4, five days is the minimum duration between any sale over a 30-day timeframe. Therefore, a lead-time bucket of five days or less can accommodate only one sale event or none (every sale event being a sale of seven units) throughout the month. For lead-time bucket sizes between one and five days, the peak consumption within the lead time remains equivalent to a single sale event, which is seven units. The minimum norm possible for this item therefore is seven units and is achieved when the replenishment lead time is equal to or less than the minimum duration between consecutive sales — five days in this case. This is defined as the minimum time between sales. Based on their minimum time between sales and the minimum norm values achievable, these parts can be designated as base norm items. The only way in which the norms for such items can be reduced further is through the reduction of their minimum time between sales below the current lead

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SPARE PARTS

times. This could happen through demand-generation activities, for example.

Because demand profiles and replenishment lead times vary by locations in the distribution network, an item that is base norm at one location might not be base norm some-where else. Therefore, service leaders must make sure the base norm item can be fulfilled, even if the stock is farther away at a different location, before the minimum time between sales is exceeded.

For instance, if a base norm item with minimum time between sales of 30 days is stocked at a dealer location, with transit lead times to the location equal to 10 days, then any further reduction in transit lead times to less than 10 days will not result in any norm reduction for the item at the dealer. Conversely, any increase in transit times from 10 days up to the limit of 30 days will not result in the item’s inventory increase at the dealer locations. Consequently, such an item can be supplied directly from the central warehouse, although it is farther away, provided the transit lead time for the item remains less than 30 days.

If the base norm items were replenished directly from aggregated points, then no stock for such items will be required in the intermediate nodes of the distribution net-work. This reduces the overall inventory in the supply chain with no impact on serviceability. The cash released through inventory reduction at the intermediate nodes can be used to add more spare part SKUs in order to improve overall customer service.

Fine-tuning base norm partsIn any distribution network, as items are stocked farther away from the central warehouse, they tend to become

progressively slower moving. This deterioration in move-ment is more pronounced in OEM service organizations — particularly those that are affected by long tails. Such items are likely to become base norm.

When customers want their parts quickly, decision- makers might stock more base norm items at the point of sale. In such cases, companies tend to replenish all SKUs from the immediately preceding nodes (regional ware-houses) in the distribution network. Such parts sit unsold for long periods of time before getting consumed and then get replenished quickly, resulting in poor inventory turns for those parts. Therefore, an item identified as base norm at any node in the distribution network should not be restocked immediately. Rather, it should be main-tained at a more aggregate location.

Experts like to build sophisticated distribution networks with many intermediate nodes, but this often adds unnecessary complexity. Instead, OEM leaders should evaluate their stock and base norm items regu-larly, enabling a better inventory profile for the company and its customers. This simplicity drives the rigorous examination and re-examination of past assumptions.

Vivek Chopra is a consultant with Vector Consulting Group and has more than 13 years of experience helping businesses achieve supply chain excellence. He has served clients in the pharmaceutical, industrial products, consumer products, high-tech, paper, infrastructure and facility management industries. Chopra may be contacted at [email protected]


Figure 5. Demand for a slow-moving item over 15 days First sale event Second sale event

Sales within a 15-day bucket = 14

Sales within a 14-day bucket =7



Sales within an 11-day bucket =7


Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Sales 0 0 0 0 0 0 0 0 0 7 0 0 0 0 7

KEEPING SLOW-MOVING

IN CHECK

SPARE PARTSSPARE PARTSS


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42 April-June 2018

I N S I D E NETFLI X ' S

B I N G E - W O R T H Y B U S I N E S S M O D E L

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Rennie: There seem to be many con-flicting accounts of how Netflix was founded. What really happened?Randolph: The reason genesis stories are so simple and compelling is because people really aren’t that interested in all the gory detail. Companies don’t spring from some eureka moment and then become fully formed entities around an original, simple idea by one person. Genesis stories are messy; they’re constantly changing direction. The idea that you start with never is what you end up with. And it’s usually based on the contributions of not just one, all-knowing founder, but dozens

of people along the way who contribute little bits of the DNA.

But, of course, when someone asks you, “Where did the idea come from?” you can’t launch into this detailed expla-nation because their eyes immediately glaze over. So, very quickly, you realize it’s just a lot simpler to have a one-line answer. And a good one basically cap-tures the spirit of the company. So, there’s the myth that Netflix came to be because of a late charge from returning a movie late, and you know that’s not true. But it’s okay; it’s a story. People like stories.

The reality was that [Netflix cofounder] Reed Hastings and I were looking for an

Editor’s note: Although Marc Randolph is best known for being the cofounder and founding CEO of Netflix, his career as an entrepreneur, advisor and investor spans more than four decades. Randolph launched more than a half-dozen other successful startups, mentored hundreds of early-stage entrepre-neurs and invested in numerous successful tech ventures. APICS magazine Senior Managing Editor Elizabeth Rennie recently had the opportunity to speak with Randolph, who will be a keynote speaker later this year at APICS 2018 in Chicago.I N S I D E NETFLI X ' S

B I N G E - W O R T H Y B U S I N E S S M O D E L

44 April-May 2018

idea. We went through hundreds of ideas, passing them through a complicated matrix of requirements that we believed would offer the highest possibility for success. One of the ideas was to do video rental by mail. But even that idea was a bad one, because, at the time, video rental was just cassettes, so that wouldn’t work. It was only a few months later that DVDs were suddenly in test markets, and we recognized this might actually change one of the big dynamics because DVDs are small and light.

Rennie: So you have your idea, what happens next?Randolph: In fact, we did an interesting proof of con-cept. We went and bought a music CD from a record store and then went a few doors down and bought a

little gift envelope. Then, we mailed this music CD to ourselves and demonstrated that we could ship a movie through the mail in a regular envelope for just the price of a first-class stamp. That enabled us to actually say, “Wow, this might work.”

Rennie: You mentioned a “matrix of requirements” that you consider when looking for a great business idea. As an adviser and an investor, what’s inside that matrix?Randolph: The reality is that ideas don’t count for much. I’m being very honest here. Again, I don’t think I can name a single company where the idea they became successful with is the same one they started with. … So, first of all, I’m looking for an interesting problem. I’m looking for one that’s challenging. I want a big problem because I want something that, if I solve it, there’s potential for it to be a meaningfully large busi-ness. I want, ideally, a problem that’s like, “If this went right, it actually gives me permission and expertise to solve even larger problems.”

I was a direct marketing person before I entered the technology world. So, with Netflix, I was looking for something that would use personalization to a high degree — and something that I could do in e-commerce because that was a category that was just starting to come up. I was looking for categories that had opera-tional dependencies so I could differentiate myself from other companies, which were commodities based. Note that none of these things is “I was looking for something in movies because I love movies.”

Even today, when I’m working with, mentoring or investing in early-stage companies, I’m almost never look-ing at the idea because I know the idea’s going to change. What I’m looking for is whether the entrepreneur has

the right skillset to be successful. I’m looking for whether they really understand the problem they’re trying to solve, and then I ask, “Is this person going to have the drive, the flexibility and the passion to keep pursuing this and eventually figure out how to solve this problem?”

Rennie: What are some other key attributes that you look for in a successful entrepreneur? Randolph: It’s a very lonely, difficult job, where 90 per-cent of the things you try fail. So, you have to have passion and conviction to keep going and the self-confidence that you’re going to eventually figure it out. Topping the list of important skillsets, I believe, is focus. … In a startup, just by definition, the world is lined up against you. Nature abhors a startup. So, as you’re launching this company and working your way through the problems, there are hundreds of things that are wrong. Success requires you to take all the resources you have and focus them on a very narrow set of things. The most skilled entre-preneurs can drown out the 100 things that are on fire

44 April-June 2018

the most skilled entrepreneurs can drown out the 100 things that are on fire and focus on the two or three that are really important.

The


and focus on the two or three that are really important. And they are intuitively able to sense what those two or three important things are.

The other skillset you’re looking for is leadership. After all, this person may have to gather together a bunch of people, get them to leave their otherwise well-paying and well-benefited jobs, and take a much more risky position for a much lower salary. You have to convince them that you can see where you’re going and have the conviction to lead.

Rennie: As a Netflix user myself, one of the things that I think adds the greatest value is that I am connected with what I personally enjoy watching. Do you agree that personalization is the heart of the service? And when did you know it would really differentiate the business?Randolph: It’s absolutely the heart of the service.We realized from day one that, even though we were launching a DVD-by-mail company, eventually movies will be delivered digitally. Everyone took great pains to point out just how imminent our demise was when that happened. And the thing is, they were right. Eventually people would stop watching movies on DVD and begin streaming them, or downloading them or doing it digitally in one manner or another. The question was when. So, we had to build a company that was relevant in the world of DVDs, but that would stay relevant when the world transitioned to digital.

When I look back, I think one of the smartest things we did was positioning the company in a way that allowed it to bridge that divide. So, [although] calling ourselves the “world’s fastest shipper of plastic” was flawed, equally flawed would have been “we are the streaming experts” because it would have meant nothing to people for 10 years. So, instead, we became “we’re the place to find movies you love.”

It will be an equally compelling positioning in the future when people are receiving their movies in some yet-to-be-known way. But, of course, when you’re positioning yourself as the best place to find movies you love, you have to put your money where your mouth is, and we really did drive toward making the service about that. All the personalization that you were just referring to earlier is what drives that proprietary content. It drives the dynamic website, which presents

things that we think you’re going to like. So, we’re gen-uinely about making this a place where you find better things to watch than anyplace else.

Rennie: What’s your creative process, and where do you look for ideas? Randolph: Once you’re an entrepreneur, you’re always an entrepreneur. So, in reality, you never need to look for an idea. They are constantly running right up to you and pulling on your pant leg. They’re whispering to you at night. All these ideas are popping out of everywhere, clamoring for attention. And what happens is you have to fight that down.

The way I got my creative fix in the last dozen years is by helping other people make their ideas a reality. So, I pick a handful of companies, and then I deeply embed myself within them. I really learn who they are, who their partners are, learn their market and learn their product so that I can genuinely participate as they’re solving really hard problems.

Rennie: What can APICS 2018 attendees look forward to from your keynote later this year?Randolph: I intend to dispel the myth that, in order to be an innovator or a disruptor, you have to be from Silicon Valley or have a computer science degree. I’m going to explicitly tell them things that they can try at home the day after they leave the conference — things that will allow them to be more innovative in their own work. All of these things that I’ve learned from making Silicon Valley startups successful, everybody can do in their own lives. It’s partly attitude; it’s partly some little tricks. People have the skills within themselves to inno-vate in their jobs, and I want to give them the confidence to try.


Join us in our hometown of Chicago for APICS 2018, September 30-October 2. Visit apics.org/conference to learn more and register today.


46 April-June 2018


BY JOONG “JOON” HYUN

48 April-June 2018

Would you like to significantly improve your company’s bottom line? A thorough evaluation of your organization’s indirect spend may yield surprising, significant and relatively quick results.

The first step in analyzing your organization’s indirect spend practices is to understand the difference between direct and indirect costs. According to the APICS Dictionary, direct costs “can be directly attributed to a particular job or operation.” Within a typical manufacturing environment, this includes the purchase of goods and services that are incorporated into a product to be sold, such as raw materials, subcontracted manufacturing services and components. In contrast, a cost that is allocated across various cost objects is indirect. Examples include utilities, security, cleaning, maintenance, recruitment and travel agencies, office supplies and furniture, and related overhead expenses.

Thorough evaluation and effective management of indirect spend can be challenging and highly complex, but with these costs accounting for as much as 25 percent of a company’s expenses, it is well worth the effort. A 10 percent overall indirect savings reduction often is possible within one year, resulting in a 2-3 percentage point improvement to the bottom line.

Focus areasThere are three key indirect spend opportunities on which to focus:1. Decrease purchase quantity and frequency by identifying and

avoiding any noncrucial spending.2. Reduce per-unit costs. This can be done via specification

review and adjustment to ensure what’s being purchased isn’t unnecessarily sophisticated. Additionally, stock keeping unit (SKU) and supplier rationalization will limit the number of SKUs and vendors for better leverage and volume discounts. By centralizing purchasing and seeking out competitive bidding by multiple vendors and face-to-face negotiations, you can ensure fair prices are reached and strengthen relationships.

3. Simplify and improve processes. Sophisticated tools, such as enterprise resources planning (ERP) systems, frequently are under-utilized; improperly applied; or hampered by tacked-on, lingering manual process. This results in complicated, inefficient and ineffective indirect spend practices.

Decrease purchase quantity and frequencyThe first task is to get an accurate snapshot of what is being purchased, who is doing the purchasing, the timing of each spend and whether the purchasing trend is going up or down. Answer these questions by conducting a Pareto analysis of each spend by category, department or function, and the individuals involved. This will help identify the biggest indirect spend categories and the top spenders.

Next, perform a sanity check for the spending timing of an assortment of items at various levels of the business. One thing to look out for is if your company’s spend in the last two months of its fiscal year is significantly higher than the average of the other 10 months. If this is the case, employees may be spending simply to use up their budgets. Conduct similar checks with at least a handful of specific items.

Another great opportunity for getting indirect costs under control is travel-related savings. Study a sampling of travel that occurred in the past year, and ask the following questions:• Was the travel crucial? If the trip had not been

made, what adverse impact would there have been on the organization?

• Could the same results have been achieved if the employees had used audio or video conferencing technologies?

• If multiple people made a trip, what crucial roles did each person play? If even just one less person had traveled, would there have been adverse impacts?Money spent on subscriptions, memberships and licenses should

be reviewed carefully. Consider switching to e-memberships to save money by accessing benefits digitally; cancel what’s unnecessary. Many information technology (IT) firms charge for their systems based on the number of licenses. Review these regularly to make sure money is not being spent on fees for people who have left the company or taken a position that no longer requires a license.

Check your supply cabinets. Actually walk in there and look for yourself. First, if there is a separate cabinet for departments with fewer than 50 people, eliminate those immediately. Then, consider if there is more inventory or variety than required. Centralize and standardize the options. There is no need to offer your employees a rainbow of paper clip options. Resist the temptation to mimic an office supply store.

Something as simple as a printer setting can make a small, yet immediate savings. Color printing is three-to-five times more expensive than black-and-white copies. Check your default settings. In the same spirit, make sure employees are turning off room lights and projectors after a meeting. Set the right tone by doing so whenever you leave your own office. These actions may not yield big financial savings, but, if everyone pitches in, they will foster a more frugal mindset for all, which eventually touches people and areas throughout the entire organization.


Train managers to not automatically rubber-stamp requests. Many managers feel uncomfortable rejecting a request or base their approval decision on what’s left in the budget. Remind them to think strategically about training, conference attendance, customer visits, team outings, supply purchases, subscriptions and the like.

Reduce per-unit costFor the second step in the indirect-spend assessment process, begin by reviewing the scope of work done by service providers. Assess the specifications and duration to ensure alignment with business requirements. Conduct a similar review of physical goods suppliers. Make sure your organization is making purchasing decisions based on business need, not supplier suggestions or employee personal preference.

Finally, analyze the number of suppliers you work with. Rationalize the choice based on price, quality and delivery performance. A great bonus to consolidating is that, by becoming a bigger customer, you will gain leverage during negotiations.

Simplify and improve processesThis step involves developing a concise set of weekly and monthly reports to make your indirect spend more transparent. The reports should clarify how money is spent, by whom and for what reasons. If possible, have this report generated automatically by your ERP system.

Have one person or a small group responsible for indirect spend. Create a new position, such as operational excellence or cost optimization director. This person will be responsible for analyzing current procedures and identifying and leading cost-savings initiatives.

Schedule regular meetings to review indirect costs as well as the status of spend-reduction initiatives. If your company is in urgent need of significant bottom-line improvement, hold a separate monthly discussion solely on savings initiatives. To be effective, the meeting must be attended by the highest levels of the organization, along with all functional heads.

Make sure spend-request processes aren’t too complicated or frustrating, as this can cause employees to bypass the established procedures. Clarify the approval chain, eliminating needless layers of sign-offs. Another Pareto analysis here can establish approval levels such that less than 5 percent of the request volume requires CEO or CFO approval, less than 10 percent of the request volume requires department head approval, and less than 20 percent of the request volume requires director approval. Likewise, maximize system capabilities so these tools are not considered cumbersome red tape, but methods for simplifying and improving spend control.

Instill discipline and accountability throughout your organization. Check the authority levels of each user to ensure no conflicts exist. There should be proper limitations and constraints associated with each identification. Then, hold the owners accountable. Some managers will delegate responsibilities over what many consider to be the mundane task of indirect spend, but this can have a detrimental impact to your organization.

Do not allow invoice-splitting. Some employees will try to split spend requests in order to shrink the totals and avoid review by higher management. Clearly communicate to your workforce that this practice is not allowed — period.

Lastly, pursue additional IT solutions only when discipline and accountability are solidified. There are several software packages that can be very helpful with indirect spend, but hold off on such investments until the fundamentals are in place.

Joong “Joon” Hyun is a director at ABeam, a global consultancy with more than 4,300 consultants. He has 25 years of strategy- and operations-related work experience in the United States, Europe and Asia. Currently, Hyun leads ABeam Thailand’s strategy and operations practice. He may be contacted at [email protected].


EMPLOYEES MAY BE

$PENDING SIMPLY TO USE UP THEIR

BUDGETS.

50 April-June 2018


BY JAIME QUILEZ CALLEJA; GURRAM GOPAL, PH.D.; AND KATHERINE W. OLSEN, CSCP

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52 April-June 2018

0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1

Inventory stratificationis the process of classifying items based on predetermined factors related to a company’s business environment and goals. The methodology organizes inventory items and stock keeping units (SKUs) into categories in order to optimize working capital. Being revenue-driven, inven-tory stratification ranks items on their profitability and how quickly they sell. Fast-moving items, even if they don’t earn much profit, are positioned ahead of items that are highly profitable, yet sell at a slower pace. Those SKUs that are less lucrative and do not sell in a reasonable amount of time are removed from the inventory mix. The key to inventory stratification, therefore, is attaining an optimal balance of carrying just enough slow- and low-selling inventory to meet customer demand without burdening cash flow.

Inventory stratification is grounded in Pareto’s law, which, according to the APICS Dictionary, states that a small percentage of a group of items represents the greatest impact or value. In the philosophy, ABC classification is used to create three distinct groups of SKUs, labeled A, B or C. The APICS Dictionary explains that A items usually comprise 10-20 percent of the total number of items, but as much as 50-70 percent of the dollar volume; B items account for 20 percent of the total and 20 percent of the dollar volume; and C items typically make up 60-70 percent of the total number of items and 10-30 percent of the dollar volume.

This type of categorization is important because, for most businesses, enormous amounts of employee time and energy are consumed by inventory management. A items may deserve these efforts because they are so critical. However, B items often are better handled with

an inventory-management technology, and C items can be controlled with a simple, rules-based system, such as periodic provisioning, which enables planners to source and supply these items with minimum adminis-trative expense.

MULTI-CRITERIA-BASED INVENTORY CLASSIFICATIONCastle Metals provides a broad range of metal products, metal processing capabilities and customized supply chain solutions to a variety of industrial sectors. The company has 20 locations throughout North America, Europe and Asia and works with its international original equipment manufacturers to serve their multi-location production requirements and delivery needs. Castle Metals leaders are committed to continuous improvement and empowering their employees to use their expertise and creativity to pro-vide integrated supply chain solutions to customers. This is done by offering timely delivery of high-quality metal products and processing services, and a competitive and sustainable rate of return to its shareholders.

Until recently, Castle Metals used a global inventory classification system based on a single criterion: pound usage. But this did not account for the specific needs of its individual sites, especially those outside of the United States. For instance, an A item in the United States may have little demand in Canada, which would mean that the Canadian location was wasting space storing low-demand SKUs. The supply chain team responded by implementing process improvement that enabled Castle Metals to shift from a global to a local approach to inventory classification and achieve an improved focus on high-demand items at each location.



0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1

This modification yielded good results, but there still were too many A items at each location, and they were taking up considerable employee time. So, Castle Metals leaders decided to conduct a pilot for a new, multi-criteria-based inventory classification system. They started in one of the smaller locations, which processes approximately 4 percent of customer orders. This test location mainly deals with four types of metal categories: carbon, alloy, stainless and aluminum. Each has subcategories with different grading specifications, although practically all of them are managed in cylindrical bar shapes.

Structured interviews were conducted with members of the supply chain team, which resulted in the selec-tion of the criteria that would be used for inventory classification at the pilot site. The chosen measures were 12-month sales history, total gross profit, order minimums and sales forecast for the next four months. Supplier lead time also was recognized by all interview-ees as an important measure, but it was not used in the pilot. Decision-makers said supplier lead time would be the first standard added when expanding the use of the new methodology.

AHP MODEL IMPLEMENTATIONThere are several different methodologies for multi-criteria inventory classification, including the analytic hierarchy process (AHP), genetic algorithms, fuzzy logic and neural networks. The AHP framework is

commonly used for scoring inventory items and has been proven effective in many situations. AHP is built upon pairwise comparisons of criteria, which Thomas L. Saaty and Luis G. Vargas say in “Models, Methods, Concepts and Applications of the Analytic Hierarchy Process” enable decision-makers to achieve “objectivity through subjectivity.”

Applying the AHP scoring algorithm to these com-parisons results in a relative weight for each criterion. After a SKU is rated on each measure, the scores are multiplied by the AHP-derived criteria weights and

Criterion Weight

Total gross profit 59%

12-month sales history 24%

Four-month forecast 13%

Order minimum 4%

Total 100%

Figure 2. Weighting scheme from AHP methodology

If … Then …

Criterion X is as important as criterion Y The pairwise rating of X to Y is 1

Criterion X is usually more important than criterion Y The pairwise rating of X to Y is 3

Criterion X is twice as important as criterion Y The pairwise rating of X to Y is 5

Criterion X is three times as important as criterion Y The pairwise rating of X to Y is 8

Criterion X is four times as important as criterion Y The pairwise rating of X to Y is 9

Figure 1. Assigning rating to X-Y comparisons

54 April-June 2018

summed to derive a score for the SKU. The comparisons are made on a scale of 1-9. Figure 1 demonstrates the scheme used to assign a rating to each of the compari-sons between X and Y.

Further, if the comparison rating of X compared to Y equals “a” (with “a” being between 1 and 9), then the comparison rating of Y compared to X per AHP rules is:

In the Castle Metals pilot, six comparisons needed to be made across the four specified measures. The supply chain managers did an independent comparison. Then, they were brought together for discussion and further evaluation. Eventually, they reached consensus on the rankings for the comparisons. This resulted in a 4-by-4 matrix of the classifications. Applying the standard AHP scoring method to this matrix resulted in the weights shown in Figure 2.

DETERMINING THE SCORESThe next step was to calculate a final score for each SKU. This was done by taking the SKU’s rating on each crite-rion and multiplying it by the assigned weight. However, each criterion has its own scale, so the SKU classifications needed to be normalized in order to be comparable across criteria. For each criterion, the maximum and the mini-mum across all SKUs was calculated. Then, a normalized rating was calculated for each SKU as:

(rating – minimum)(maximum – minimum)

For instance, if the total gross profit varied between $100,000 and $500,000 across SKUs, and a particular SKU had a total gross profit of $160,000, its normalized rating would be:

($160,000 -$100,000)($500,000 - $100,000) , or 0.15

In this manner, each SKU has a rating between 0 and 1 for each criterion. A higher rating indicated a higher pref-erence for that SKU. Once the ratings were determined, they were multiplied by the criteria weights and summed to give the final score for all of the SKUs at the Castle Metals pilot site.

Next, a Pareto chart was generated based on the scores, which was used to stratify the SKUs. Even when the cutoff for A items was 80 percent of accumulated

value, the multi-criteria method resulted in fewer A items compared to the original system. If the cutoff for A was 70 percent of accumulated value, then A would have even fewer items. In the end, the new system refined the classification of 32 percent of the SKUs.

BENEFITS OF STRATIFICATIONThe primary advantages of Castle Metals’ new classification policy include:• more objective and narrower identifications of

A items• improved allocation of investment dollars • decreased operational costs• enhanced customer service levels, especially for

A items.Perhaps most importantly, the process of arriving at the

new classification involved the expertise of all members of the supply chain team, as well as marketing managers, which improved buy-in for the inventory management changes. Team members are confident that this initia-tive will be successfully rolled out at other locations in the future. Furthermore, the Castle Metals leaders look forward to repeating the exercise once or twice each year, enabling fine-tuning and increasing the effectiveness of the company’s inventory classification practices.

Jaime Quilez Calleja is operations area manager for Amazon Spain, where he leads a team of more than 100 associates. He also is a recent master’s graduate in indus-trial engineering and supply chain management. Calleja may be contacted at [email protected].

Gurram Gopal, Ph.D., is a professor in the Department of Industrial Technology and Management at the Illinois Institute of Technology. He received a Fulbright Scholar Award to teach and conduct research at the Galway Mayo Institute of Technology. Gopal may be contacted at [email protected].

Katherine W. Olsen, CSCP, is director of supply chain at Castle Metals. She also is an adjunct professor at the Illinois Institute of Technology. Olsen may be contacted at [email protected].


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1a


APICS magazine welcomes case study

submissions. Send a message to

[email protected] for more information.


CASE STUDY

Elevating Potential Inside and OutChallenge: Improve customer service during times of increased order volumeSolution: Conexiom’s Sales Order AutomationCompany: Werner Electric VenturesHeadquarters: Cottage Grove, MinnesotaOperation: Electrical distributor

The challengeWerner Electric is a distributor of electrical, automation, and light-ing services and solutions serving the industrial, contractor, com-mercial, original equipment manufacturer and systems integrator markets. As the company has grown and order volume increased, Werner Electric struggled to keep up with the demand. The inside sales team had to manually input orders, and, with some being several pages long, the process could take hours.

“Although orders were fulfilled quickly, there could be up to a 24-hour delay to send an acknowledgement to our custom-ers,” explains Gerry Thomas, director of finance. “We needed to improve the customer experience as the volume of orders was impacting our inside sales team’s ability to fulfill orders quickly.”

Werner Electric leaders decided to implement a scalable solution to process more sales orders without unnecessarily adding staff. The tool needed to be effective enough to get key stakeholders on board and garner internal buy-in. “Some people are resistant to change, so we needed to help them experience the service and see for themselves how it would benefit them personally,” says Angela Schmollinger, automation services specialist.

The solution Werner Electric implemented Conexiom’s Sales Order Automation, a cloud-based software that automatically extracts and transforms data from purchase orders into electronic orders. With the help of the Werner Electric inside sales team to identify and onboard high-volume customers suitable for automated sales order processing, the solution has proved highly valuable. As a result, the company has increased Conexiom usage by 500 percent since September 2016.

The results With this key workflow optimized, order cycle time has improved while errors and returns have been significantly reduced. In fact, order accuracy is at 100 percent with Conexiom.

“Frustration from a customer standpoint was alleviated,” Thomas says, adding that acknowledgement turnover — which, with the old system could have taken up to a day for some customers — has been reduced to an hour. In addition, the number of returns was immediately reduced.

Employee frustration also has been relieved. The automation of manual data entry created more time for inside sales staff to add value, as they are no longer spending a big chunk of their time keying in customer orders.

“We were asking our inside sales team to be data entry staff,” explains Patty Mullin, director of information technology. “With their time freed up, they are able to add new and more exciting tasks to their roles.”

Moreover, team members are providing high-quality customer service via their deep product knowledge and expertise. They are helping customers with product selection and technical questions, and testing new enhancements for their sales tools.

With Conexiom, Werner Electric is able to handle continued growth and add scal-ability to its operations without increasing workloads for their inside sales team. Staff members are more productive, and the pro-cessing of customer orders and cycle times remains unaffected. Best of all, the company is building stronger customer relationships, elevating the customer experience, and enhancing the competency and capabilities of its people.

Werner employees allocate time to value-added tasks.

56 April-June 2018

LESSONS LEARNED Mark S. Miller, CIRM, CPM

Lessons in Effective Negotiating from the Pawn Shop Stars

T he best supply chain managers are also effective negotia-tors. Sure, negotiation skills are essential to purchasing — but they also play an important role in inventory manage-

ment and transportation and logistics. Interestingly, some of the most essential negotiation skills also happen to be displayed each week on those reality TV shows about world-famous pawn shops. If you’re unfamiliar, basically, the programs depict a pawn shop staff ’s interactions with customers, who bring in a variety of arti-facts. Viewers watch as the players haggle over price and debate each piece’s historical background.

Following are some of those key lessons:Knowledge is power. If the pawn stars need help, they call in

local experts — rare book specialists, history buffs, longtime toy store owners and people who authenticate famous signatures. Experts negotiate more effectively than novices. Follow this example, and make sure you have the expertise to make a good deal, even if that expertise comes from an outside source.

Let the other party make the first offer. If you make the first offer, the deal is never going to get better than that number. If you quote too much, you lose money; if you quote too little, you might insult the other party and stop the negoti-ation in its tracks.

Likewise, never accept the first offer. It is expected that you will negotiate. I was a purchasing manager for years. If I quoted a price to a new buyer, and he or she didn’t negotiate, I would immediately withdraw my offer. Watch the pawn shows, and observe how the players always try get a better deal.

Be creative. To be a successful negotiator, you must find a deal that meets the needs of both parties. One of the pawn shop stars is known as the “King of the Bundle.” He often buys several products together to get a reduced price. In purchasing, we know this as price-quantity breaks. When you think outside the box, you’re more likely to reach a positive outcome for all.

Be ready to walk away. There are some instances when a deal is simply impossible. At these times, just turn and go. As part of your planning process, you should deter-mine the minimum or maximum prices you are willing to accept. If, after you start to negotiate, it is obvious that a deal is never going to come together, walk away.

Don’t burn bridges. In the best possible world, negotiations should be fun. Make sure you treat the other party with respect, and don’t approach negotiating as a contest whose goal is to crush the other side. On the contrary: The key is establishing a relationship of trust. The pawn stars always take the time to get to know the customers. One shop owner will even flip a coin to determine the final deal if the haggling ever reaches an impasse. And everyone always shakes hands when a deal is done. In your own negotiations, keep in mind that build-ing a strong relationship could yield more successful deals down the road.

Have you learned a lesson at work that you would like to share with APICS magazine readers? Submit an article of approximately 750 words that teaches, enlightens or amuses to [email protected].

Mark S. Miller, CIRM, CPM, is associate professor at Carthage College. He may be contacted at [email protected].


Illustration by Terry Colon

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