Supply Chain Chronic Disruption

1. Supply Chain Chronic Disruption Saturday 26 February 2016 APICS Research

2. Part 1: What Is Supply Chain Chronic Disruption • Definition • Causes • How to Address Chronic Disruption

3. Defining Supply Chain Chronic Disruption • Persistent disruption that degrades, but does not halt, supply chain operation -- AND • Disruption that fails to resolve with traditional disruption solutions What is NOT Chronic Disruption? Disruption that • responds to traditional, tactical remedies • interrupts, not merely degrades, supply chain • does not persist

4. Why Should We Care? 73% of survey respondents report experiencing Chronic Disruption in their career – (2013 APICS survey) Chronic Disruption is hard to get rid of • root causes are hard to detect • visibility is poor • companies tolerate it due to lack of a solution -- this makes Chronic Disruption persistent Yet the supply chain professional is responsible to eliminate Chronic Disruption. But how?

5. Example Scenario – “Nothing Works” • You are responsible for supply chain with about 80 troublesome SKUs, on-going stock outs occur despite every effort • Mostly sourced from overseas suppliers with little interest in improvement • Your formal task: Develop appropriate inventory boundaries in the distribution center • Your current efforts are to evaluate and adjust • ordering frequency • minimum order quantities (MOQs) • lead times • safety stock levels • “What else can I do?! What haven’t I thought of?”

6. APICS Research Conclusions:Eliminating Chronic Disruption – 5 Steps Detect Supply Chain Chronic Disruption – Is and Is Not Analysis Define Chronic Disruption's Root Cause(s) – Internal and External Break the Tolerance Cycle for Chronic Disruption – Visibility for Costs, Strategy Alignment, Competitive Disadvantages Execute Your Chronic Disruption Solution –i.e. Projects and Allies Follow-up: Long-term Strategic Plans and Activity – Be Persistent!

7. I. Is It Be Chronic Disruption? • Identifying Chronic Disruption versus Routine Disruption • 58.3% Chronic disruption involves more complex causes and consequences than routine difficulties • 35.3%Length of time - routine difficulties resolve themselves in the short-term • 31.7% Routine difficulties have routine solutions - chronic disruption does not • 27.1% Routine difficulties are visible to most everyone while chronic disruption is not very visible

8. Detecting Chronic Disruption How long does it typically take to recognize chronic disruption is occurring? • 36% few days to a few weeks41.7% few weeks to a few months20.6% few months to a year • Who generally recognizes that chronic disruption is occurring? • 60.9% myself61.3% supply chain colleagues46.1% operations management colleagues21.3% customers • 17.4% senior management

9. II. Root Causes of Chronic Disruption Unstable demand + long lead times + constrained distribution • Persistent shortages, bullwhips, forecasting challenges Long Series of Acute Disruptions Create Doubt, Chronic Expectation • Disorders synchronization, failure to fully recapture synchronization Poor ‘Must-use’ Suppliers/Procurement in Supply Chain • Vertical enterprise-owned units not well suited to purpose Weak or non-existent Supply Chain Strategy • Business unit strategy and supply chain strategy and tactics not properly aligned with each other Many Internal and External Enablers Prolong These Conditions

10. Who Do We Blame First? SuppliersChronic Disruption: Supplier-Related Difficulties • 50% Our business was not substantial enough to warrant sufficiently high supplier priority – Poor strategy= 56.5% Good strategy=40.5% • 44.2% Our orders often fell outside the supplier's usual expectations of volume, delivery, or payment methods • 32.1% Our orders were for rare or difficult to produce products or services • 18.8% Our orders did not fit the supplier’s core offerings – Poor strategy=34.8% Good strategy=18.9%

11. Open Text: Supplier-Related Difficulties • “Suppliers don't deliver when promised! Period.” • “Supplier payment terms too short or up front.” • “Typical chronic disruption exceeded suppliers lead-times and capacity constraints, and smaller suppliers cannot respond” • “Highly seasonal product line plus shelf life concerns” • “In our business, with volatile demand & critical financial buoyancy, suppliers are often the first to suffer in the whip lash effect going down thru the supply chain where the impact is more and more important as you move further away from the end user.”

12. Why Do We Live With Poor Suppliers?Internal Causes of Supplier Difficulties Open Text: • “Myopic management” • “Internal barriers prevent effective action” • “Short notice to suppliers” • “Complexity of designs” • “It could be our orders are erratic” • “No visibility to supplier issues, especially tier 2-3”

13. III. Breaking the Tolerance Cycle for Chronic Disruption -- Make It Visible • Spotlight Enabling Soft Risks 67% Unexpected, unstable demand 55.1% Falling levels of supplier trust or relationship 47.1% Increasing supply chain complexity 32.6% Shifting customer preferences • Improve Risk Management: Slowly unfolding, underestimated challenge may seem invisible to others • Conflicting Perspectives: (Open text responses): “Blame games” “Lack of compliance” “Corporate issues with overseas” • Lack of leadership “But What Can I Really Do About It?”

14. Ending Tolerance -- Situational Awareness (1) Share Pre-Chronic Disruption Performance Forecasts formula that rely on recent past performance gradually begin to define a “new normal” (2) Socialize Chronic Disruption, its Causes, Enablersand Consequences Among All Stakeholders (3) Tally up and Communicate Total Losses and Costs to Stakeholders Hard costsOpportunity costs Competitive costsShare the Evidence, Find Allies, Establish Solution Strategy

15. Open Text Solution Reponses “Root cause analysis reveals issue is internal and not with suppliers and, therefore, does not change” “Purchasing is off limits to being the possible root cause; but they are the problem no discipline” “S&OP & MTRP never considers the short term strategy that damages the correct working of the supply chain” “Difficult to maintain sustainable trust when the are huge forecast inaccuracy & constant renegotiation on payment terms and supply arrangements. Time to volume and supplier time to yield make it difficult to arrive at a win-win…”

16. Comparison of Supply Chain Strategy Performance Poor internal supply chain strategy survey responders: 54% “We have not yet resolved it” 16.7% “We substantially changed supplier standards, metrics, contracts” 8.3% “We changed our logistics or distribution” Good internal supply chain strategy survey responders: 32% “We have not yet resolved it” 40% “We substantially changed supplier standards, metrics, contracts” 29.7% “We changed our logistics or distribution Supply chain strategy does matter to Chronic Disruption

17. IV. Executing Solutions 57.4% Jointly investigated with supplier structural changes such as logistics, distribution, buying processes, information sharing 54.4% Requested that my organization's senior management speak to the supplier’s senior management 36.4% Engaged risk management in both my organization and the supplier's organization 11% Investigated group purchasing organizations (GPOs)

18. Supply Chain Strategic Analysis Chronic disruption may be a sign of a less than optimal supply chain strategy, or execution. Compare an optimal supply chain to your current supply chain in terms of: Make-buy Mix of supply and suppliers Locations of facilities Information system strategy Long-term contract language What hampers improvement in these areas now? Resources? Authority? Skills? Opportunities? Priorities? Visibility? How well would an updated supply chain strategy be executed? “Default” supply chain strategy (no strategy) is not good enough

19. Finding Allies and Discovering Joint Solutions Connect your supply chain risk manager with the supplier’s – “We want to solve the supply chain risks we’re experiencing” Investigate with the supplier useful changes to logistics, distribution, finance, buying/planning – small changes across many domains can add up Investigate group purchase organizations (GPOs) Investigate taking equity in a good local supplier if vertical sourcing requirements are a challenge. Investigate sourcing of difficult components through reverse supply chains Request senior management • Clarify business unit strategy given conflicting tradeoffs in ending chronic disruption • Formally sponsor projects to eliminate chronic disruption • Engage supplier’s senior management about prioritized strategic supply issues

20. V. Follow-Up: Long-term Strategic Plans and Activity Have someone “represent” Chronic Disruption or its enablers in S&OP, Risk Management, New Product Launches, and Strategic Planning. • What will isolate and eliminate chronic disruption enablers? • What supporting soft skills are needed • Ensure a supply chain wide perspective on chronic disruption • Maintain alignment of supply chain strategy-tactics • Engage all stakeholders

21. Chronic Disruption Solutions -- Overall Survey Results 36.6% Not Yet Resolved 32.9% Found substitutes for components, products, services 28.8% Changed our supplier or partner standards, metrics, contracts 26.7% Changed or updated our supply chain strategy 23.9% Increase supply chain diversity or flexibility 20.2% Senior Management elevated resolved the issues 19.8% Substantially changed or logistics and distribution 2.1% No longer serve affected markets or customers

22. Chronic Disruption Solution Recommendation--Persistence • All supply chain risk management faces human nature’s tendency to reduce or end risk management when risk no longer seems obvious --persist anyway • Initial improvement may tempt halting remaining efforts. • Complete projects anyway • Follow-through to eliminate lurking enablers • Reset long-term expectations among all stakeholders

23. Healthy Supply Chain Ecosystems Help Banish Chronic Disruption Good alignment of supply chain strategy and business strategy Good alignment of supply chain strategy and supply chain tactics Continuous upstream and downstream improvements to safety stock strategies, substitute products, and scheduling triggers, and order points Good risk management with sensitive early warning signs for all types of disruption Proactive discovery and recovery of risk to prevent bottlenecks, service levels, and single points of failure Widespread awareness of chronic disruption and how to counter it

24. The “Why” Behind Chronic Disruption --Supply Chain Complexity Theory “Today’s problems come from yesterday’s solutions” - Peter Senge’s first law of The Fifth Discipline “No problem can be solved from the same level of consciousness that created it.” Einstein

25. Why Are So Many Unable to Solve Chronic Disruption? A supply chain is a system of relationships – people, assets, flows, outcomes A small decision between two partners can cause unintended ripples and consequences elsewhereSoft skills become essential Partner relationships Communications Soft risks End-to-end empathy and perspective Understanding the state of supply chain relationships is easy in theory but hard in practice This is the domain of Supply Chain Complexity Theory

26. What is Supply Chain Complexity Theory? What is Complexity? Complicated versus Complex – Machines versus people Many fixed relationships and dependencies between components of a system = complicated Changing relationship behaviors and dependencies between components of a system = complex a jet engine is complicatedbut not complex a supply chain is both complicated and complex

27. Trust: the 4th Supply Chain Flow Engaging or withdrawing External Partners Internal Partners Information sharing Causes trust to flow along supply chains – extending or withdrawing - like product, information, and financial flows Enduring earned trust creates strong, enduring relationships due to good will Trust is a renewable resource -- but it takes time

28. Supply Chain Complexity Theory – “Emergent Behaviors” Emergent behavior is unexpected behavior – both good and bad -- exhibited by the supply chain The cause of emergent behavior is good and bad changing relationship behaviors among supply chain partnersSmall decisions made by partners add up across the supply chain Emergent behavior is the attempt of the supply chain as a system to maintain relevancy to its owners Bullwhips, shortages, increasing risk, poor synchronizationLower cost, higher service level, lower risk, greater performance

29. Causes of Changing Relationship Behaviors • Personal Perspectives and Perceptions – cognitive bias • Normal business activity – mergers, re-alignments, new leadership • Positive and Negative Feedback Alignment – negative feedback seeks to reduce current trends. Positive feedback seeks to amplify current trends • Combination of weak relationships and strong pressure – low good will and difficult economic challenge for example • Growing opportunity – less dependency on a partner • Traditional supply chain relationship management may not reveal a “system of relationships” perspective.

30. Supply Chain as a System of Changing Relationships and Behaviors External Partners Internal Partners Professional Self Automation & information technology platforms* Together they add up to a system of relationships that operate our supply chain. * No relationships exist without people, but our trust and confidence level in technology forms part of the total relationship system

31. SC Sentiment: A Metric for Potential Relationship Change Like ‘Consumer Sentiment’ SurveysAnonymous simple survey to important supply chain partners Positive, Negative, or Neutral: Current business conditions Expected business conditions for the next six months Satisfaction with current supply chain partner relationships Flow of products-services, information, finance and feedback from supply chain partners Investment in new opportunities, markets, customers, or capital facilities and equipment

32. Technology and Supply Chain Complexity Theory Has an ERP or MRP system ever suggested surprising or unexpected outcomes – ordering, scheduling, inventory? One source of truth? Highly integrated platforms can create highly-integrated errors across people and systemsIT makes small or tactical workloads smaller -- but large or strategic workloads larger due to higher expectations among people. Our interaction with technology presumes a tactical complicated-only, routine perspective. Don’t forget about changing relationship behaviors and complexity

33. Takeaways: Solving Difficult ChallengesIdentify Complicated and Complex Causes If a difficult challenge seems to have no clear cause or solution look for a past solution that changed relationships overtime What might have changed the expectations and dependencies of past knowledge, important assumptions, or relationships among people? This creates complexity and unexpected outcomes – emergent behaviors and new problems. Are small decisions made among partners which ripple across the supply chain?Do we have sufficient trust and confidence to extend trust and confidence, or greater information as part of a solution? Is our supply chain strategy helping us Are we stuck with an old perspective on the problem, can we see a bigger picture?As we craft a new solution, what new problems might it create someday?

34. Takeaways: Managing Supply Chain Complexity Spot causes of changes to relationship behavior and dependency early on such as with regular surveysPromote causes of positive changes and strengthening relationshipsAddress cause of negative changes and work to defend relationshipsWatch for emergent behaviors, build goodwill, build reputationCapture supply chain partner sentiment

35. Questions? Comments? Thank You! Curiosity leads to good questions - and good questions lead to good research. "Curiosity is free-wheeling intelligence.” Alistair Cooke “There are years that ask questions and years that answer.”Zora Neale Hurston Jonathan Thatcher Director of Research jthatcher@apics.org