Adapt or Die –A Case for Change · failing to adapt to the growing complexity of their...

1/23/2017

1

All contents © copyright 2016 Demand Driven Institute, all rights reserved. 1

Adapt or Die – A Case for Change

Our World Today?• Global supply relative to global demand? Global oversupply• The practical life of Asset/Infrastructure? Shorter recovery life• The massive effort invested in Forecast improvement? Forecast error is still on the rise ‐ building the wrong things (FMCG = 55% accuracy)

• The effect of off‐shoring and outsourcing to lower cost? Service levels declined, inventory up and expedite costs have increased

• The effect of billions invested in ERP? Companies are doing the wrong things sooner and faster and paying a premium to attempt to recover

• The effect of billions invested in Improvement Methodologies? Gains in resource productivity have not translated to sustainable system ROI

Clearly Organizations Do Not Understand What Drives ROIDemand Driven Institute logo is a trademark of the Demand Driven Institute. All

content copyright Demand Driven Institute 2016. All rights reserved

1/23/2017

2

Topple Rates Increased 6X


“We investigated the longevity of more than 30,000 public firms in the United States over a 50‐year span. The results are stark: Businesses are disappearing faster than ever before. Public companies have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes. That’s six times the delisting rate of companies 40 years ago. And the rise in mortality applies regardless of size, age, or sector. Neither scale nor experience guards against an early demise.

We believe that companies are dying younger because they are failing to adapt to the growing complexity of their environment. Many misread the environment, select the wrong approach to strategy, or fail to support a viable approach with the right behaviors and capabilities.”

(Martin Reeves, Simon Levin, and Daichi Ueda, Harvard Business Review, January‐February 2016)

“We believe that companies are dying younger because they are failing to adapt to the growing complexity of their environment.”

Are We Doing the Wrong Things Faster?

All contents © copyright 2017 Demand Driven Institute, all rights reserved.

Deloitte University Press DUPress.com

Development and proliferation of planning systems has not enabled better ROA performance despite labor productivity doubling in the same period!

MRP MRP II ERP APS

4

What will it take to change this?

1/23/2017

3

Today’s Deep Truth

↓ Unit Cost = ↑ Return on Investment (ROI)

What if Today’s Deep Truth is Totally, Completely, Unequivocally False?

To prove this we will need to understand two key principles of supply chains

Demand Driven Institute logo is a trademark of the Demand Driven Institute. All content copyright Demand Driven Institute 2016. All rights reserved.

The Consequences of Focusing on Unit Cost

Plant feel pressure to maximize monthly profit

plan (CoGS dollar credit) KPI

People behave according to

metrics

Plants try to maximize making “high CoGs dollar”

products Setting up more increases product unit

cost and lowers resource efficiencies.

Some items have more CoGs dollars

than others.

Departments tend to produce the high

CoGs dollar items at the expense of the

low items.

Plants receive CoGS dollar credit when they ship to

DCs

Plants tend to produce to stock even when there is no demand signal (e.g. “extend the forecast”).

Plants pull ahead orders to increase the batch size for make to stock

orders.

+

Make to order and make to stock share

common capacity and material

Make to order backlogs grow – we

ship late

Some make to stock products are overstocked

Some make to stock products incur stock

outs

Demand Driven Institute logo is a trademark of the Demand Driven Institute. All content copyright Demand Driven Institute 2016. All rights reserved

1/23/2017

4

Plants feel pressure to expedite late work

Plants feel pressure to meet their on time

performance KPI.

We feel pressure to use overtime

Materials are consumed

unnecessarily

There are common raw materials and subcomponents

There is common labor and machine resources

Capacity is consumed unnecessarily

Materials are not available

Capacity is not always available

We feel pressure to add capital

We feel pressure to expedite materials

We feel pressure to add inventory

We create artificial

bottlenecks Under pressure we emphasize speed

Quality issues increase

Inventory? Lead Time? Costs?On‐Time Delivery? Revenue?

Make to order backlogs grow – we ship late

Some make to stock products incur stock outs

Some make to stock products are overstocked

The Consequences of Focusing on Unit Cost

Demand Driven Institute logo is a trademark of the Demand Driven Institute. All content copyright Demand Driven Institute 2016. All rights reserved

Material Requirements Planning

8

“As this book goes into print, there are some 700 manufacturing companies or plants that have implemented, or are committed to implementing, MRP systems. Material requirements planning has become a new way of life in production and inventory management, displacing older methods in general and statistical inventory control in particular. I, for one, have no doubt whatever that it will be the way of life in the future.” Orlicky 1975

Joe Orlicky

Features:• Time Phased Planning• Level by level BOM explosion• Dependent demand planning

Benefits:• Component synchronization• Reduction in inventory• Improved priorities


• MRP did become THE way of life for planning.• It was conceived in the 1950s with the prevalence of computers.

• It was codified in the 1960s by a small group of practitioners.

• It was commercialized in the 1970s• By 1990 most manufacturers of even modest scale had an MRP system

1/23/2017

5

Supply Chain Characteristics 1965 Today

Supply Chain Complexity Low High

Product Life Cycles Long Short

Customer Tolerance Times Long Short

Product Complexity Low High

Product Customization Low High

Product Variety Low High

Long Lead Time Parts Few Many

Forecast Accuracy High Low

Pressure for Leaner Inventories Low High

Transactional Friction High Low

Complex and Volatile is the “New Normal”


Conventional planning rules have not appreciably changed since the 1960s. MRP still plans today the way it did 50 years ago!

Today’s supply chains look VERY different from 1960’s supply chains when conventional planning rules were formulated but…

The New Normal and Inventory Implications


Supply chains have elongated and fragmented while customer tolerance times have dropped dramatically.

This disparity means holding stock at some strategic point is a must to keep and/or grow sales.

Also, there are more products with shorter life spans to manage ‐ many use common components and resources.

This means managing stock positions effectively is a must for effective capital and resource management.

This also means that planning horizons are more remote from actual demand realization (longer range forecast).

This also means that detailed item level forecasting is much more difficult.

How is the conventional approach fairing with all of this?

The three rules of forecasts:1. They start out wrong2. The longer the range, the

more wrong they are3. The more detailed, the

more wrong they are

1/23/2017

6

Conventional Inventory Management Effects


We know there are two universal points with regard to inventory.

Between these points there is an optimal range to maintain.

Too MuchToo Little

A B

0

Optimal RangeWarning Warning

Conventional Inventory Management Effects


Most companies exhibit a “bi‐modal distribution” – most of the inventory is either too low or too high

90% of companies report this issue!

Too MuchToo Little

# o

f p

art

s o

r S

KU

0

With every MRP run an oscillation effect often occurs in which inventory quickly moves from one distribution to the other.

Optimal RangeWarning Warning

A B

1/23/2017

7

Three Bottom Line Effects to Companies:

1. Chronic Shortages

2. Excessive Inventory

3. High Expedite Expenses & Waste


But the real problem is at a higher level!

• Working Capital = inventory & cash & credit

• Contribution Margin = cash generation rate

• Customer Base = market share, sales, service & quality

Contribution

Margin

Edge of Chaos

Insolvency/Collapse

Leadership’s Challenge in a Complex World


Now and in the Future!14

1/23/2017

8

Which Scenario is Healthier?


Contribution M

argin

Contribution M

argin

Contribution M

argin

Contribution

Margin

Striving for Coherence


“A complex adaptive system’s “success” depends on

coherence of all of its parts. A subsystem’s purpose has to be

in alignment with the purpose of the greater system in order

for there to be coherence. Without that alignment the

subsystem acts in a way that endangers the greater system it

depends on. Coherence must be at the forefront of

determining the signal set, triggers and action priorities. To

keep coherent, adaptive agents must ensure both their signal

sets contain the relevant information to direct their actions

and are not at cross‐purposes with the goals of the systems it

depends on.” From Demand Driven Performance – Using Smart Metrics (Smith & Smith, McGraw‐Hill, 2013, p. 197)

16

1/23/2017

9

Risks to Coherence in the New Normal


COLLAPSE RISK: Change from within or outside the industry renders the firm’s business model obsolete

CONTAGION RISK: Shocks in one part of the business spread rapidly to other parts of the business

FAT‐TAIL RISK: Rare but large shocks, such as natural disasters, terrorism, and political turmoil

DISCONTINUITY RISK: The business environment evolves abruptly in ways that are difficult to predict

OBSOLESCENCE RISK: The enterprise fails to adapt to changing consumer needs, competitive innovations, or altered circumstances

REJECTION RISK: Participants in the business’s ecosystem reject the business as a partner

(Martin Reeves, Simon Levin, and Daichi Ueda, Harvard Business Review, January‐February 2016)

Reorienting to Flow


All benefits will be directly related to the speed ofFLOW of materials and information.

Materials

Information

George W. Plossl

• Service is consistent and reliable when a system flows well.

• Revenue is maximized and protected.

• Inventories are minimized.

• Expenses ancillary and/or unnecessary are minimized.

• Cash flow follows the rate of product flow to market demand.

When flow is occurring:

Protection and Promotion Flow =

ROI Maximization

1/23/2017

10

Explaining Flow

19

∆Flow → ∆Cash Velocity → ∆Net Profit

Investment( )→ ∆ROI

Flow is the rate at which a system converts material to product required by a customer.

Cash velocity is the rate of net cash generation; sales dollars minus truly variable costs (aka contribution margin) minus period operating expense.

Net profit/investment the equation for ROI

The less time it takes products to move through the system, the less the total inventory investment

• The simple equation is Throughput * Lead Time = WIP or

• WIP/Lead Time = Throughput

• WIP/Throughput = Lead Time

Queuing Theory

It seem so obvious…


The Missing Element for Flow


∆Variability → ∆Flow → ∆Cash Velocity → ∆Net Profit

Investment( )→ ∆ROI∆Visibility →

Variability is defined as the summation of the differences between our plan and what happens.

Variability = Flow

Variability = Flow

Visibility is defined as relevant information for decision making.

Visibility = Variability

Visibility = Variability

1/23/2017

11

The Biggest Question Becomes…

How do we gain visibility to relevant information in today’s complex

environments in order to manage to flow?


Four Prerequisites for Relevant Information

1. Understanding Relevant Ranges

2. Implement a Flow‐Based Operating Model

3. Tactical Reconciliation (bi‐directional) between Relevant Ranges

4. Implement Flow‐Based Metrics


1/23/2017

12

1. Relevant Ranges

• Relevant Range = The time frame in which assumptions are valid

• The assumptions and information that are valid and relevant will differ between these ranges.

• Force fitting irrelevant assumptions into the wrong range will lead directly to distortive information.

• Different relevant ranges are typically utilized by different personnel


Forecasts are relevant in the long range, not the short range.Fixed costs are variable in the long range, not the short range.

A work order delay is relevant in the short range, not the long range.A machine breakdown is relevant in the short range, not the long range.

2. Flow‐Based Operating Model∆Flow → ∆Cash Velocity → ∆

Net ProfitInvestment( ) → ∆ROI

There are VERY specific ways to design a flow‐based operating model.

EconomicsMathematicsPhysicsManagement AccountingGeorge Plossl (MRP)Eli Goldratt (TOC)Taichi Ohno (Lean)Dr. Deming (Six‐Sigma)

A Flow‐Based Model is Supported by:


Function Primary Objective

Planning Synchronize supply and demand

Logistics Connect sources to consumption points

Purchasing Ensure material/component availability

Shop‐Floor Execute the schedule

Scheduling Sequence activity to meet commitments

Quality Meet specification

1/23/2017

13

3. Flow‐Based Metrics

• Any suite of flow‐based metrics must take into account the other three prerequisites:The metrics must fit the range

The metrics must fit the flow‐based operating model

The metrics must be reconcilable between ranges.

• Force fitting non flow‐based metrics will directly lead to conflicts and distortions throughout the organization – it will obscure what is relevant!


4. Tactical Reconciliation

• The assumptions and information between relevant ranges differ

• There is a need to reconcile the differences in a constant bi‐directional and iterative fashion in order to drive adaptation

• Strategy must be influenced by operational capability and performance as well as how the model might perform under predicted conditions.

• Operational capability must be influenced by predicted conditions and/or strategic expectations in future time periods.


1/23/2017

14

Conventional Failure


S&OP

Strategicforecast

MRP

Operational

date and quantity synchronization MPS

planned orders

Tactical

Relevant Ranges

Convention fails to manage ranges properly.

Flow‐Based Operating Model

Many flow‐based models have been proposed (e.g. Lean and TOC) but most have remained compartmentalized with only pockets of success.

Flow‐Based Metrics

Any conventional flow‐based metrics (e.g. due date performance) come into conflict with and are countered by the proliferation of cost‐based metrics.

Tactical Reconciliation

Reconciliation is not bi‐directional – it is a one‐way street. Reconciliation is also painful by introducing nervousness with every new MRP run and monthly S&OP updates.

≠

Mismanagement of Relevant Range


Using Fully Absorbed Cost Metrics Using Forecast for Supply Order Generation

Fully absorbed unit cost = direct material cost + labor cost + overhead costs.

Direct material costs are VARIABLE costs.Labor and overhead costs are FIXED costs in the short range.

Combining VARIABLE and FIXED costs creates the false impression that fixed costs vary within the short range. They do not and that is why they are called fixed costs.

There are three rules about forecasts:1. They start out wrong.2. The more remote in time the extend

the more wrong they are3. The more detailed they are the

more wrong they are.

Forecasts drive planned orders in the MPS. These planned orders generate supply orders in MRP.

Capacity, capital, materials and space are committed to signals that have significant rates of error associated with them!

1/23/2017

15

No Flow‐Based Operating Model

• Many flow‐based models have been articulated but…

• Conventional S&OP, MPS and MRP are configured to be a push based model.

• This means that flow‐based operating models like Lean and TOC typically remain compartmentalized and limited and most often conflict with the conventional system

• Is there a flow‐based model that can be implemented at the system level?


Conflicting Metrics

• Convention has some flow‐based metrics in use.

• Their effectiveness is limited by conflicting cost‐based metrics.

• These conflicting metrics obscure what is relevant and introduce self‐imposed variability within organizations as personnel oscillate between protecting flow and protecting cost performance.

• When flow is promoted and protected, costs are under control. The inverse, however, is not true.


∆Flow → ∆Cash Velocity → ∆Net Profit

Investment( )→ ∆ROIDue Date PerformanceFill RatesInventory Turns

∆Cost → ∆Cash Velocity → ∆Net ProfitInvestment( )→ ∆ROI OEE

Fully Absorbed Unit Cost

1/23/2017

16

System Nervousness and Bullwhip

Painful “Reconciliation”


Monthly S&OP Update

Monthly S&OP updates create massive shifts at the beginning of every month.

New MRP RunsMRP run results in massive cascading schedule changes as date and quantity changes at higher levels effect all connected lower level components.

Tactical reconciliation is not bi‐directional – it is a one way street.

Tactical Demolition and Reconstruction

Thoughtware

These four prerequisites allow an organization to think, communicate and behave systemically for flow.

When these prerequisites are in place an organization has the proper “thoughtware” installed for flow.

Now we need a framework to utilize this thoughtware.


1/23/2017

17

Thank You

Carol Ptak

Demand Driven Institute

[email protected]

(253) 279‐3291


Adapt or Die –A Case for Change · failing to adapt to the growing complexity of their...

Documents

Transcript of Adapt or Die –A Case for Change · failing to adapt to the growing complexity of their...