Peak Performance

Dec. 21, 2004
Although some progress has been made, manufacturers are just getting started on the quest for the perfect value chain.

If you're not managing your value chain, you're not managing your business. That is the warning of industry leaders who predict that tomorrow's top companies will succeed based on the strength of the relationships they establish, from their raw-material suppliers, through manufacturing and distribution, and ultimately to their customers. In this value chain of the future, all participants will know and focus on the value they add for the customer, information will replace inventory, and built-to-order, defect-free products with cutting-edge features will be delivered 100% on time at a very competitive cost. Information, products, and cash will flow in a synchronized fashion that optimizes the productivity and profitability of the entire value chain. Most manufacturing companies fall far short of this ideal. They remain focused on one-to-one relationships, with little integration of internal processes let alone cross-organizational ones, at a time when a convergence of Web-enabled information technology offers unprecedented opportunities for collaboration and sharing of information. Yet for the anticipated cost savings to be realized -- analysts throw out figures in the billions of dollars -- manufacturers must successfully implement these software applications, and business partners must be able and willing to trust one another. Twenty years ago purchased materials and components accounted for only a quarter of the cost of finished products. Today purchased materials represent three-quarters of that cost, so it's only logical that companies would be trying to collaborate more, with their suppliers certainly, but also with their customers. For these relationships to be effective, corporate managers first must do some hard work internally, clearing away legacy management practices and barriers between business functions. Product development, procurement, marketing, sales, manufacturing, human resources, and accounting all need to talk to one another. People have to change how they work and, equally important, how they measure success. In effect, this is what has been happening within leading manufacturers over the last 20-plus years with the ongoing adoption of lean manufacturing. People on the plant floor have finely honed their ability to recognize waste, in the form of excess handling, queue time, rework, and inventory, and to eliminate what doesn't add value. It's time, say industry observers, to direct a similar amount of attention beyond the factory walls. "Lean at its purest is about increasing speed, removing waste, and serving the customer better," says Jeffrey C. Sinclair, a director in the Cleveland office of McKinsey & Co. and coleader of McKinsey's North American Manufacturing Practice. "In a value chain this translates into reducing leadtimes by 50% or more, slashing expensive LTL [less-than-truckload] and emergency air freight, and maximizing distribution-center productivity. This enables retailers, distributors, and manufacturers collectively to drive up customer service with much lower levels of inventory and cost throughout the chain." Lean techniques have been so effective at transforming Deere & Co.'s internal operations that over the last three years the company has hired 94 supplier-development engineers whose full-time jobs are to work with the supply base to help them implement lean techniques. In the spirit of mutual cooperation, most cost benefits generated through the program are shared equally between Deere and its suppliers. "Last year we spent $7 million on the program; the return in hard dollars was $22 million to Deere. That means it was roughly $22 million to the supply base as well," reports Dave Nelson, vice president, worldwide supply management, for the Moline, Ill. equipment maker and coauthor of The Purchasing Machine (2001, Free Press). "There's probably as much or more in soft dollars that we don't measure, in reduced inventory, reduced floor space, improved safety." Toyota Motor Corp. and Honda Motor Co. Ltd. have similar histories of helping their suppliers improve their operations. Such win-win programs go a long way toward changing what is most often an adversarial relationship. Nevertheless, today buyers in most procurement departments remain focused on squeezing their suppliers. "The problem with [such tactics] is, all you're looking at is the price of a particular component. I'm convinced that if you could really look at the systems cost of that decision you would probably realize that it is not going to get you savings. It may even end up costing you money," observes P. Jeffrey Trimmer, chairman of the National Initiative for Supply Chain Integration Ltd., who recently retired as director, operations and strategy for procurement and supply, for DaimlerChrysler AG's Chrysler Group. "Supply chains are not about buying something a nickel or so cheaper," Trimmer continues. "These are strategic decisions. We need to be able to communicate to the CEOs, CFOs, and COOs that this is a strategic thing you need to think about." The trendsetter of the manufacturing-outsourcing movement, the electronics industry, leads the way in taking a high-level, strategic view of value-chain management. Yet in recent months that didn't prevent overly optimistic forecasts from bloating inventory levels and straining relationships when the market turned sour. "Leadtimes were being pushed out because of the amount of supply. Companies had to make long, three-month commitments. Ordering product three months out tended to let a lot of inventory build up," recalls Jim Sacherman, senior vice president, Flextronics International Ltd., San Jose. At this time a year ago, everyone in the sector was doing their best to manage component shortages. "In general our push is to not have product sitting on the water. That's a dangerous part of the supply chain -- three or four weeks of stuff that there's nothing you can do about," Sacherman adds. Where possible, Flextronics has bulky items such as enclosures made near its manufacturing operations. The company invites suppliers to sit with them in the same industrial park, giving them space so material and components can be delivered on demand. "Excess inventory is a direct result of poor communication, so you have to focus on improving communication. That means speed and accuracy," adds Dave Otterness, Flextronics' vice president, supplier management. Otterness says his job requires a lot more interface with customers than it did before. The primary reason is the amount of coordination and engineering support all of the electronics-manufacturing-service firms are providing their customers today. "We're as much a facilitator as a product builder," he observes. "We have to facilitate our customer's forecasts, sales orders, and requirements. We have to facilitate our supplier's processes and leadtimes and cycle times back up into that." The Tools Aiding in the quest for the ideal value chain is a growing cadre of software and service providers. But no matter what mixture of software applications a manufacturer attempts to implement, it still comes down to the ability to get the right product to customers when they want it. The faster value-chain partners know what the customer wants, and the faster they are able to respond to that demand, the less waste in the system and the more competitive and profitable the chain. "We talk a lot about collaboration and how important it is and everybody is talking about doing it, but in fact companies are run very inefficiently with sometimes grossly inaccurate data," says Karen Peterson, a research director with Gartner Inc., Stamford, Conn. "Start spreading that around and you're just spreading around bad stuff a lot faster." Peterson says vendors have a long way to go toward providing scalable solutions that don't die when stretched beyond a few companies. Integration remains a big headache, both for sharing information between companies and for connecting various point solutions within an organization. Security and intellectual property are other issues that have to be addressed when establishing cross-organizational business systems. "The vendors have visions of collaboration that are much harder to attain than just licensing the software and deploying it. Early adopters are struggling with the trust issue as well as the overall expense," says Peterson. As their products continue to evolve, software vendors will help manufacturers overcome some of these obstacles. On the trust front, many companies are undertaking several pilot projects with key trading partners in an effort to establish the boundaries of these new relationships. As these partnerships between companies and their customers and suppliers grow and mature, and the legal intricacies are hammered out, business processes once managed internally will increasingly be shared within virtual organizations that are created and dissolved on a project-by-project basis. The result will be reduced cycle times, decreased inventory at all levels -- retailers, distributors, manufacturers, and material suppliers -- better customer service, more outsourcing as participants focus on where they add value, and more customized, feature-laden products. These value chains, led by large chain leaders primarily in manufacturing or retail, then will compete against one another. Over the last two years at Johnson Controls Inc., when many companies were struggling to implement various software applications, the supplier of seats and other interior automotive components focused on refining and institutionalizing its business practices. For example, the company's product-launch system consists of a well-documented series of concurrent and sequential steps, from initial ideas through proposal, product development, validation, and launch. Having identified such core processes and ingrained them into the way people work around the world, Johnson Controls has since automated it through eMatrix, a module within MatrixOne Inc.'s Web-based product-data-management application. "We're not changing our processes. We're adding Internet speed, taking us closer to real-time decision making and communication," says Plymouth, Mich.-based John Waraniak, Johnson Controls' Automotive Systems Group director, e-business speed. Now, if a customer puts in a request for a seat frame, engineers in Japan, Germany, or Michigan can search the eMatrix design encyclopedia to determine if the company has already developed a similar product that meets the new requirements. If so, Johnson Controls can save the customer up to 30% of the target cost, roughly $20 million, because the company already has tooled for it, it knows where the tools are, and the product already has been validated against safety requirements. The existing design then can be customized to meet the particular automaker's preferences, and the OEM customer can invest more of the cost of the seat into value-added features that a customer would be willing to pay for. In the past, such information couldn't be communicated quickly enough worldwide. Such enhanced customer responsiveness and supply-chain and demand-chain visibility move Johnson Controls one step closer to build on demand or build to order, and the ultimate goal of the next-day or five-day car. This fits into Johnson Controls' larger e-collaboration strategy, which is designed to position the company for a future in which, Waraniak says, "competition is not just between products and services, it's between business models and value chains."

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