The worst Supply Chain practices must be confessed and not only by constraint

Hand turns a dice and changes the word

Responding to the ever-changing expectations of consumers in a highly competitive digital economic environment involves having a solid, agile, and cost-effective Supply Chain. After all, companies need to minimize and monitor the most harmful supply chain management practices. This can only be achieved by addressing the elimination of the worst practices in the organization, processes, and digital resources of the company.

The importance of a robust supply chain

Diagram 1

Some examples of worst practices

1/ Managing the quality of information

Non-updated product sheets in ERP (purchase price, MOQ, Incoterm,…) resulting in non-compliant supplier orders 

In the absence of good product data quality, non-compliant supplier orders systematically result in poor product availability, one solution to this problem is to set up an efficient communication system with the purchasing and supply divisions that can reduce data update times up to 90 %.

Stocks of raw materials, semi-finished products and/or unsuitable finished products that destroy exposure

The inability to provide daily updated data on inventories of raw materials, semi-finished products, and finished products presents two major concerns:

  • The decrease of the WCR for companies, the deployment of a dashboard tailored and user-friendly is essential in order to take charge of the management of a share of its WCR.
  • The improvement of CBN reliability and automation, resulting in the consolidation of production and scheduling plans, elements that can be disruptive to the supply chain.

Exhaust-data analyses (OTD, pallet volume, transport, suppliers, returns, etc.) that use unreliable data to misrepresent supply chain decisions

Uncertain data consistently generate biased analyses and therefore lead to actions that are not suited to the real issues.

2/ Order processing

Fixed orders placed with the supplier at the very early stage of the need, which generates overstocks

This approach impairs flexibility to cope with the hazards of the various downstream systems (production tool, customer demand, etc.). However, it is essential to react quickly in order to prevent harmful effects due to the overload of the operational system (Véronneau and Cimon, 2007) and also to preserve a certain agility in for the Supply Chain.

Diagram 2

Changing orders in the closed period (lead time supplier) affecting the supply chain and the supplier’s planning

A frequent worst practice that makes the supply process more difficult. In addition to the consequent extension of delays caused by these amendments, the supplier-customer relationship does not come out with less damage. The definition of clear and effective management rules contributes greatly to limiting this situation.

Diagram 3

Non-shared requirements with the supplier reducing exposure on future orders

A range of bad practices are observed on the visibility provided to suppliers:

  • Failure to share forecasts with the supplier: this bad practice causes suppliers to secure their lead time by prolonging it, which has a negative effect on the customer’s sourcing flexibility. The establishment of systemic sharing makes it possible to negotiate shorter lead times, up to 50%. Some studies (Cachon and Fischer (2000); Lee et al. (2000); Cachon and Larivière (2001); and Zhao (2002)) show that when demand and stock information is shared, this results in a significant reduction in stocks and costs
  • Absence of systematic summary sharing of fixed supplier orders: just like the previous one, the implementation of this communication makes it possible to comfort the supplier about their production and supply plan.

3/ Workflow Management

The failure to review the distribution plan in the light of logistical and commercial constaints in the stores leads to the blind disposal of warehouse stocks

The reduction of stock inventory is one of the major challenges of a sustainable Supply Chain, as long as the reduction is made under rules that take into account the logistical and commercial constraints of the company, its customers and the market, hence the need for a method to optimize this process of stock reduction that makes it possible to increase the sell-through rate.

Non-optimized storage options with the high national and low local turnover references placed in local storage

The process of choosing product storage streams must be the result of an in-depth analysis of the market, turnover, type of products, geographical locations of suppliers and customers, etc… This will make it possible to save storage space on warehouses, reduce operating costs and inventory valuation and thus optimize working capital requirements.

The lack of reliable in-line consumption preventing flow regulation

A failure to control IT consumption in production will hinder the delivery of components along the line, the waste management through the forcing of manufacturing orders and, ultimately, the calculation of the PRI.

4/ Performance Management: QCD element animation

The non-existence of KPIs and activity animation which impedes the attainment of the desired performance targets

A relevant dashboard and the ABC of a successful Supply Chain management and performance control. This allows to measure the discrepancies and therefore solve the problems related to these discrepancies within the concerned department and, if necessary, to report them to other decision-making authorities within the organization.     

Distribution between the different Supply Chain divisions is an obstacle to communication

Failure to communicate and establish roles is a major setback to supply chain performance. An in-depth integration of the Supply Chain through the exchange and coordination of information flows between all members of the supply chain, therefore makes it possible to better define their RACI (R: Director; A: Approver; C: Consulted; I: Informed) (Kempainen and Ari, 2003).

Cumbersome processes with no added value

One of the most common bottlenecks in supply chain management and burdensome processes (purchasing, procurement, preparation, etc.) with a large number of non-value-added tasks that are essential for the proper functioning of the process. One of the most efficient methods is the combination of VSM (Value Stream Mapping) to streamline the process with RPA (Robotic Process Automation) in order to automate it, which makes the error rate negligible and saves uptime. Two examples among others are the manual sourcing process or asset management to be applied on future orders from the supplier.

Sources

  • Cachon G.P. et Fischer M., “Supply chain inventory management and the value of shared information”, Management science, vol. 46,2000, p. 1032-1048.
  • Cachon G.P. et Lariviere M.A., “Contracting to assure supply : How to share demand forecasts in a supply chain”, Management science, vol. 47,2001, p. 629-646.
  • Garnier A. – 10 key trends to understand Supply Chain Management
  • Garnier A. – Supply Chain Management: is Blockchain the new RFID?
  • Lee H., So K.C. et Tang C., “The value of information sharing in a two-level supply chain”, Management science, vol. 46,2000, p. 626-43.
  • Zhao Y., The impact of information sharing on supply chain performance, Ph. D. Thesis, Northwestern University, 2002.
  • Kempainen K. et Ari P.J.V., “Trends in industrial supply chains and networks”, International journal of physical distribution & logistics management, vol. 33,2003, p. 701-719.
  • Véronneau S. et Cimon Y., “Maintaining robust decision capabilities : An integrative humansystems approach”, Decision support systems, vol. 43, p. 127-140,2007.

The decrease of air freight, an opportunity for commercial airlines?

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Air freight : situation and players

It is a bad time for air freight. In June 2019, the world traffic fell by 4.8% in tonne-kilometer (TKM) compared to the same period in 2018 (1). The International Air Transport Association (IATA) attributes this decline to rising kerosene prices, Sino-American trade tensions and protests in Hong Kong – forcing world’s first cargo airport to shut down temporarily.

Contrary to public opinion, the decline in traffic affects both commercial airlines and all-cargo airlines.

Indeed, close to 70% of world air freight (in TKM) is transported in cargo decks of commercial aircrafts. Moreover, the top 10 freight carriers are occupied by 7 commercial airlines against 3 cargo specialists only.

Freight constitutes 10 to 20% of commercial airlines revenues. To compensate the freight deceleration, the latter will have to capitalize more on passenger revenues in order to ensure their growth.

Cargo decks of commercial planes are becoming an additional source of revenue to leverage.

Sans titre-ENG

(2)

The innovation offered by Airbus and Safran

In March 2018, Airbus and Zodiac Aerospace (now Safran Cabin) announced a partnership for the development and launch of passenger units located on the lower decks of A330s – space previously reserved for passenger luggage and cargo.

The partnership glimpses sleeper units, lounge, areas for children and meeting rooms. Safran Cabin which already produces rest units for on-board staff, would like to extend its services to passengers until 2020. This additional comfort feature arises with the return of ultra long-haul flights, made possible with planes capable of covering previously unattainable distances (A350-900 ULR and 777-8X).

CCA-Lower-Deck-Module.jpg
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© Airbus SAS 2017 – All rights reserved.

The passenger units will be easily interchangeable with the regular freight containers and will constitute an alternative to compensate the vacant lower cargo deck led by the decrease of cargo freight. These new services, sold as a paid option, are very timely for airlines which want to optimize each square meter on their planes.

© Airbus SAS 2017 – All rights reserved.

In addition to being a source of alternative revenues when cargo demand is low or not profitable enough on some routes, the pods allow airline companies to differentiate their offers and “upgrade” their service level at lower costs, without structural modification of the seats and the cockpit.

The concept raises a clear business interest – AirFrance-KLM is interested in equipping its A330s – however it must be validated by the European Aviation Safety Agency and the American FAA. Therefore, the units will become an additional profitability lever in an industry where average profit per passenger per year (6.12$) doesn’t exceed the price of a Big Mac in Switzerland. (3)  

Unleashing your potential: outsourcing strategic processes

Businessman in blue suit working with digital vurtual screen

Outsourcing strategic processes can bring more added value to secure performance and enable internal resources to focus on the big picture.  When it comes to new supplier identification, negotiation or strategic sourcing process, many of our clients need to increase the level of expertise and empowerment without adding headcount. By outsourcing these processes to a dedicated team, the client can also focus on what is most important to its business – whether it’s innovation, restructuring, or reassessing the market to meet their customer’s needs.

Supplier Scouting

Many procurement departments do not dedicate enough expertise and time to scope for new, qualified suppliers and insure comprehensiveness and robustness of supplier market screening. Moreover, supplier scouting could be extremely time consuming if the focus on the most promising areas is not enough defined and documented. When procurement is challenged to meet production demands, finding new suppliers as plug and play as possible is a long and painful task.

KEPLER's best practice

Utilizing a macro study methodology like KEPLER’s, regional supplier identification can be limited to the countries most likely to commercially produce the needed product or category. Through this data driven approach, an exhaustive search can be conducted and result in a shortlist of screened suppliers to conduct RFI, RFQ/RFP, or on-site qualification. By outsourcing this process to a global team, with resources where the suppliers are located, the client can focus on keeping the lines running.​

Supplier Negotiation

When it comes to managing suppliers, our clients often have too many of them to consistently maintain contact with. As a result, some negotiation opportunities are not addressed at all, such as remote suppliers, non-critical technologies, tail spend. Utilizing a third party to analyze spend, build clear vision and negotiation strategy and directly negotiate with suppliers is a great way to quickly capture untouched savings opportunities.

Figure 1

Through refined processes and tools for negotiation, it becomes possible to provide an outside perspective and identify new savings.

KEPLER's business case

For one of its clients, KEPLER reviewed over $135M spend and 154 suppliers to prepare for negotiations. Over the course of 3 months, the team prepared toolkits and engaged in negotiation with 87 suppliers, enabling the client to capture 3% in previously unidentified savings.

Procurement Outsourcing

Client initiatives are always constrained by a lack of resources but adding internal people is often not possible or non-relevant. Whether the work is time limited and there is not a need to sustain resources, or there are not available resources to staff a project, outsourcing the process at an optimized cost is a reliable and flexible solution for short or long-term staffing. 

KEPLER's best practice

KEPLER organizes mixed operational teams with local consultants and offshore / low cost consultants (India), to manage and execute on our BPO offerings. Through its deep knowledge in procurement and supply chain, KEPLER is able to effectively manage processes and adapt to the needs of its clients, regardless of the maturity of the process.

KEPLER's business case

For one of KEPLER’s clients launching a new product, the ability to outsource the end-to-end sourcing process enabled them to meet tight production deadlines without carrying additional long-term resources. Over the course of 10 months, KEPLER negotiated and placed orders for 1200+ parts and $11M spend. By outsourcing the sourcing of high mix, low complexity parts, the client team was able to focus on highly complex, system level sourcing initiatives. By utilizing flexible resources, the client was able to increase their sourcing throughput by 20% and focus their industry knowledge on strategic initiatives.

Outsourcing is not only a question of bringing additive resources, it is also and mainly a question of efficiency. Bring more value added with experienced team and robust methodologies, deploy flexible team fully aligned with the workload and planning of each initiative, optimize cost through remote low-cost professionals allow KEPLER to go further, deeper and quicker compared to internal teams.

Outsourcing is also a great method to refocus on the core business strategy and elevate above the day-to-day challenges that can block change.  

5 digital solutions serving production and maintenance at Airbus

Airliner in motion on abstract background of highrise and binary code

The world air traffic, catalyzed by the expansion of economies, in particular in India, China and Middle East, meets an unprecedented growth. Airbus plans a demand close to 37,400 aircrafts until 2037. This represents a yearly average evolution of +4.4%.

In 2018, Airbus demonstrated record throughputs on assembly chains, with an average of 66.6 A320 models produced each month. Coupled to an order book of 7,525 aircrafts or 9.38 years to the current production rate, the manufacturer aims at intensifying furthermore its cadences thanks to digital tools.

Graphe

Solution 1

Each player on the aerospace market only detains a fraction of the data of his environment. Partnered with Palantir, Airbus rolled out in 2017 its new data platform called Skywise. This platform aims at increasing the value chain via crucial data sharing among players of the aerospace industry.

  • Suppliers: details and availability of components
  • Manufacturers: design, production and MRO
  • Airline companies: flight data and passenger behaviors
  • Airports: plane, passenger and luggage movements

Skywise gathers all the data of 22 airline companies, 2,500 planes, 12 million flights and 25 million maintenance files.  With digital, Airbus divided its problem resolution time by 3 for the assembly of the A350 and it respected the increase of production cadences of this program. In the future, Airbus plans to incorporate supplier data (currently hosted on a separate platform) as well as partner airport data.

Solution 2

In cooperation with a major consulting firm, Airbus developed smart glasses improving precision and reducing the complexity of cabin planning processes. The seat marking is a long process because the specificities between plane categories and planning according to airline company requirements makes standardization impossible. This “wearable” technology divides by 6 the required time for seat marking.

Solution 3

A key element of 4.0 aerospace production is the creation of IoT “digital twins”. These virtual copies replicate the characteristics of a product or a physical process. The coupling of virtual and physical worlds allows to analyze data and monitoring systems in order to prevent issues before they even occur, avoid down times and plan the future by using simulations. The Safran-GE joint venture called CFM International pairs each LEAP engine provided to Airbus with a digital avatar, providing a real-time diagnosis of engines in circulation and idle ones.

 

Solution 4

Airbus equips each of its aircrafts with an average of 20,000 embedded MRO sensors in order to identify defective equipment and structural parts that need to be changed. This way, this process helps to optimize the exploitation and lifespan of the plane.

The anomalies identified by the Flight Data Monitoring (FDM) lead to anticipating a change of parts or equipment rather than a repair – the Turn Around Time (TAT) of an equipment renewal being usually shorter than the repair – and limits duration of AOGs (Aircraft On Ground).

In parallel, the parts aimed at the spare part fleet are produced in an anticipated way, reducing stocks and production times. The demand for “spare parts” is then satisfied without jeopardizing the production of parts targeted to the initial aircraft assembly.

Solution 5

Partnering with Dassault Systems, Airbus announced the roll-out of the 3DEXPERIENCE platform to support its digital transformation. 3DEXPERIENCE lays the foundation of a numerical consistency, from conception to operations, in a single data model for a unified user experience throughout all product divisions and categories. With this implementation, Airbus hopes a robust production configuration coupled to an increase of its prototype development lead times.

Avec ces outils, Airbus entend booster sa capacité à produire vite et bien. De la conception, avec 3DEXPERIENCE, en passant par la production, avec les lunettes intelligentes, jusqu’à la maintenance, à l’aide de capteurs et répliques virtuelles, les solutions digitales représentent un gisement de valeur déterminant pour Airbus, dont Skywise devient progressivement la colonne vertébrale. 

Network Design: the 5 good questions to ask

A lot of our clients reflect upon the relevance of their network design and wish to challenge their flow organization in order to address the stakes of reactivity and efficiency imposed by the market. This reflection is even more necessary that most retailers (more than 80% according to recent polls) and an increasing number of industrials tackle the omnichannel battle. Being closest to the consumer, providing quick and customized service at the lowest cost… many challenges that put high pressure on logistics networks and force players to rethink their organization. How many warehouses and where to place them? What storage strategy to associate? What delivery method to choose?

Oftentimes, the evolutions of logistics networks are done under constraint, for instance to compensate deficits of storage surface. In France, more than 8 million square meters of additional storage surface have been put out on the market in 2018 by 40 logistics players. This approach is pushed by a global trend of regionalization of just-in-time production.

Yet, to be efficient, the flow master plan cannot be apprehended opportunistically, link by link, but rather in a holistic way. The network design is part of a mid/long term logic and aims at supporting the company’s business plan implementation. This requires the top management’s implication in order to have a transversal reading of the challenges and opportunities faced by the company. The evolution of supply and demand will have to be integrated upstream in the different scenario modeling, implying a reflection in the break.

In the most mature organizations, the network design will even be used to draw change management in other corporate functions because it moves the set of corporate functions.

benchmark 2018In a recent benchmark among players of the retail sector (brand with a network of at least 100 stores in France), the declared costs of their Supply Chain fluctuate between 8 and 15%. These cost gaps are partly due to specific services offered by the different brands. For instance, the fact of offering to customers and/or stores, a per unit preparation requiring an unpacking operation, increases structurally the picking costs by 2 to 3%. Without mentioning the costs implied by a customer promise to D+1, allowing a craftsman to place his/her orders at 5pm in order to be delivered the day after on his site before 7am…This creates additional costs that need to be precisely estimated on the field to let the decision maker pick the right choices in terms of service offerings.

Mind the popular misconception that outsourcing logistics is THE solution to optimize the couple cost/service. Indeed, it will increase the business expertise and bring flexibility but it can also be disappointing. The markup operated by providers represents on average between 5 to 15% of increase compared to an internal production. Furthermore, if the handled products present strong specificities for instance in terms of congestion or fragility, it is more than likely that your current logistics team have an expertise that will be very difficult or expensive to find amongst the market players.

 

Once you’ve had this operational understanding of your costs, you will have all elements in hand to define the right level of service that you want to offer. For instance, the linear improvement of delivery times can be very expensive and sometimes completely unnecessary compared to your customers’ or prospects’ real expectations.

In addition to an interpretation per product type, the reflection should also relate to the customer segmentation according to their attractiveness. This attractiveness can be assessed according to the margin or market growth level or to the customer’s turnover potential increase.

Example of Matrix

Product types-costing

The definition of customer promise requires a very good knowledge of the market. For example, we have been recently asked by a cosmetics subcontractor to reduce its lead time from 14 to 10 weeks on the market. Collaborative workshops allowed us to find out that the current lead time was perfectly acceptable by the contractors. However, the latter is completely uncompromising on the respect of this commitment. We have reworked the flow organization in order to secure this lead time, without applying additional constraints on the flow scheme.

In the various modelized scenarios, a robust sensitivity analysis must be realized in order to check the impact of hypotheses on the cost, quality and lead time results. A wrong anticipation of risks leads to important additional costs, whether they are indirect through dispute processing in 60% of cases or direct with the application of penalties in more than half cases. They can even result in customer loss in 30% of cases. Some risks are relatively well apprehended by industrials, like supplier risk which appears now almost systematically in the model’s evaluation grids, or country risks which lead to a world known and shared ranking, created by FM Global, an American damage insurance company.

However, other parameters are much more difficult to model because they’re often unknown.

In the first place, there is the regulatory risk. For example, the customs charge evolutions represent a confusing factor for Supply Chains in our global economic paradigm. Closer and more concrete, the taxation threat which constrains refrigerated freight is like a sword of Damocles above logistics flow schemes with per kilometer costs which could triple. The multicriteria analyses and the workshops conducted within the network design study allow to choose the scenario that will optimize benefits while limiting risks. The most resilient organizations use “what if” scenarios in order to build a continuous activity plan and secure quick backup plans’ implementation.

The transition plan generally falls within a period of 2 to 3 years to let all players of the value chain adjust their job to this new scheme. It is essential that the identified projects involve the entire organization, as the project’s success isn’t only the Supply Chain’s responsibility. The crucial role of IS in these projects is obvious and requires the right level of technical competencies (internal or external). One of the key success factors through the network design evolution lies on the good evaluation of necessary resources and an agile driving of potential threatening bottlenecks. The savings and benefits planning will systematically be linked to a resource plan in order to have a realistic understanding of P&L impacts on a short and mid-term.

The entire organization and its partners must be aligned on the target flow scheme which will let either the organization follow new dynamics, or accelerate its decline, in case of failure. Priorities and projects phasing are an integral part of the network design. All industrials agree on the fact that one of the key success factors of such a large project is to make all the impacted employees share responsibility, be it operational people in Supply Chain, marketing, procurement or finance positions. All must be convinced by the approach in order to support the project both internally and among clients. Indeed, with the digitization of the purchasing act, there is no doubt that the network design, is more than ever, a differentiating strategic element for the company.

 

In a nutshell…

All of these questions are necessary if one wants to define an optimal flow scheme. Numerous network design solutions exist to support this strategic reflection but beware of the shortcut that implies that the tool will answer the questions. Its utilization is, on one hand, often limited by the level and the size distribution of the available data and will not be able to replace collaborative workshops among jobs. Once defined, the network design should then be regularly challenged, as many internal and external parameters influence this equilibrium.

Quick repricing or how to generate significant savings with tail suppliers (video)

Companies have increasingly large supply bases for various reasons: acquisitions, decentralized procurement, uncontrolled supplier portfolios, or process weakness. Due to the high number of suppliers, supply processes, and resource constraints, significant productivity goes unrealized. Strategic sourcing teams focus on high-value-add suppliers and strategic projects while plant buyers address tactical suppliers when issuing orders. At a time of increased cost pressures and complex supply chains, a significant amount of spend goes unaddressed year over year. With sourcing managers pushing their supply base to drive new innovations, achieve greater productivity, and keep the plants running, companies are continuing to ignore the tail spend and leave savings unrealized. That’s why Kepler has developed a Quick Repricing offering to generate savings with…

Industry 3.X and TPM deciphered

Following our last article “Industry 4.0… well let’s talk about 3.X!, we propose to continue with a brief description of the TPM supplemented by the different types of technologies in Industry 4.0.

What is the TPM?

Machines’ defects or failures during production have negative effects on the production schedule as well as on employee morale. Total Productive Maintenance (TPM) is at the origin of the equipment reliability. It is essentially machine-centric and its productivity measured by the OEE (Overall Equipment Efficiency, also called TRS for Synthetic Efficiency Ratio). *

The focus is on reducing the 16 OEE generalized losses, classified into three groups: equipment losses, labor-related losses, and material-, tool- and energy-related losses.

The JIPM (Japan Institute for Plant Maintenance) has defined in 1989 the eight pillars of the TPM management approach :

Autonomous management and maintenance of equipment

Waste elimination / Improvements on a case-by-case basis

Scheduled maintenance

Improvement of knowledge and know-how:

Safety, working conditions and environment

Quality control or maintenance

Mastering product design and associated equipment

Efficiency of related services or “TPM at the office”

These eight pillars will remain the industry fundamental. The question is simple: “How will the 3.X consolidate and ensure ever more efficient maintenance? “.

What does Industry 3.X bring us?

The analysis of Big Data, the Internet of Things, artificial intelligence, virtual and augmented reality, and cyber-physical systems are considered the main levers of the next digital upgrade.

  • Big Data analysis

The term “big data” refers to large, technically complex data sets for typical data analysis and processing applications. Big Data analysis allows companies to “predict”. Companies can predict events using in-depth analysis of large data sets that will be actively monitored. The amount of information stored is growing four times faster than the global economy, while computing speeds are growing nine times faster. This remains very important because from the beginning of the digital data creation until 2003, there were 5 exabytes of information created and now the same amount of information is created every two days. A study with over 2,000 business participants from 9 major industry sectors and 26 countries, shows that 80% of global CEOs have recognized the importance of data mining and analytics for their organizations. Large data can extract new data from existing data, providing important technical and business information that helps make clearer and more efficient decisions.

Cloud computing and machine learning are also leading technologies in Big Data analytics, cloud computing is a scalable platform that helps to use IT resources more efficiently, helping automate and reducing system costs. isolated. Cloud manufacturing is the concept that reflects the idea of a smart factory, that is, the collaboration of advanced production models with cloud computing technology to achieve computer-based and service-oriented production. (Givehchi, Tresk and Jasperneite, 2013).

  • Internet of Things (IoT)

The idea of the Internet of Things appeared for the first time in the 1980s to meet the needs of automated teller machines (Shon, 1996). Many of these devices have been networked. The Internet of Things (IoT) is the terminology used for physical devices or components that can be connected via the network and have the ability to communicate with each other via Radio Frequency Identification (RIFD) or intelligent sensors (Gilchrist, 2016b ). According to ISO / IEC JTC1 (2015), IoT is an infrastructure of interconnected objects, people, systems and information resources as well as intelligent services to enable them to process information from the physical and virtual world and react. However, it is a concept similar to physical cyber systems (CPS). According to an estimate, around 25 billion devices / objects will be interconnected and will communicate with each other, and this will be used by 2020. The Internet of Things allows businesses to add transparency to processes and make it analytically measurable. These sensors can be worn by the operators, placed on the production lines, on the machines directly, in the warehouses …

Similarly, the new RFID type solutions make it possible to guarantee a perfect products traceability on the value chain and also to measure everyday performance through the collection of relevant data. IoT’s ability to offer enhanced intelligence helps organizations optimize decision-making capabilities, ensure efficient data collection, and generate the right reports for their specific environment. IoT helps the company gain “intelligence” by giving them the ability to analyze their physical processes that were not measurable before. All of this contributes to better strategic and operational capacity and, in some cases, to a competitive advantage (Kopetz, 2011).

  • Artificial Intelligence

AI was introduced as a field of research in the late 1950s. Artificial intelligence is a sub-domain of computer science, whose sole purpose is to give machines or robots a human intelligence as they become independent platforms and able to make intelligent decisions autonomously (McCarthy, 2007). There are two types of AI: Artificial Narrow Intelligence (ANI) which is related to single-task applications in a very specific area that we are witnessing today (ie Go game), then there is Artificial General Intelligence (AGI) which is still developing. The concept of AGI is broad, deep and contains features that surpass human intelligence in many dimensions such as analytic speed, memory, multitasking, pattern recognition and adaptability with new auto information. Learned (Muehlhauser, 2013). According to Hawking et al. (2014), the success in creating the AGI would be the biggest event in human history, but they are not sure whether it is also the last, unless one learns to avoid risk, hence the experts’ hesitant vision in relation to AI.

How many jobs will be replaced by robots and AI in the coming years? And how many new jobs and positions will there be created? The answer is not given but, as an example, Japan’s largest bank, Mitsubishi UFJ Finance, has recently installed robots for its customer service operations and IPsoft, a call center, is using an AI robot called “Amelia” able to self-learn outside preprogrammed knowledge. “Amelia” can now process more than 60% of all incoming requests.

  • Virtual and Augmented Reality

The Smart Factory will be supported by advanced human resources programs in “Virtual Reality and Augmented Reality”. Virtual Reality (VR) is a computer-simulated environment. It is presented to the user as a real environment. It can support employee training programs and business process support with compatible digital devices. On the other hand, Augmented Reality (AR) has a head start and allows the user to interfere with a simulated environment (Boud et al., 1999). According to Jason Ganz, CEO of Agora VR, “Internet has allowed us to learn anything – VR and AR will allow us to experiment everything”. Experts suggest that some of the management tasks will be held virtually as, for example, meetings and strategic conferences. In addition, the RV and RA will assist the Human Resources Department in training and the continuous coaching system for transition in a digital environment.

  • Cyber-physical systems

In order to make the smart factory operational or functional, we will need “Cyber Physical Systems (CPS)”. CPS’s are intelligent systems that bridge virtual and physical components used in production, logistics and products. It is the concept that combines with the Internet of Services (IoS) to make 3.X industry possible, opening up new possibilities for innovative applications and processes. CPS’s will facilitate the paradigm shift from business models and market models to all stakeholders in the value chain including suppliers. All these technologies combined to other technologies such as additive manufacturing, for example 3D printing, selective laser sintering, cobotic, AGV, etc., are the basis for the future factory, which brings together virtual and physical systems via physical cyber systems. Such a fusion of technical processes and business processes will be a gateway to the concept known as the “Smart Factory” (MacDougall, 2014).

All these technologies already known, how will they contribute to production sites? And especially as part of a TPM approach? In the next article, we will present the contributions of the digitized environment to the TPM and more broadly, practical solutions that we put in place within our customers’ companies.

Sources :

Boud, A. C., Haniff, D. J., Baber, C., & Steiner, S. J. (1999). Virtual reality and augmented reality as a training tool for assembly tasks. In Information Visualization, 1999. Proceedings. 1999 IEEE International Conference on (pp. 32-36). IEEE.

Gilchrist, A. (2016b). Middleware Industrial Internet of Things Platforms. In Industry 4.0 (pp. 153-160). Apress.

Givehchi, O., Trsek, H., & Jasperneite, J. (2013). Cloud computing for industrial automation systems—A comprehensive overview. In Emerging Technologies & Factory Automation (ETFA), 2013 IEEE 18th Conference on (pp. 1-4). IEEE.

Hawking, S., Russell, S., Tegmark, M., & Wilczek, F. (2014). Stephen Hawking: \’Transcendence looks at the implications of artificial intelligence-but are we taking AI seriously enough?’. The Independent, 2014(05-01), 9313474

Kopetz, H. (2011). Internet of things. In Real-time systems (pp. 307-323). Springer US.

Shon, S. W. (1996). U.S. Patent No. 5,499,238. Washington, DC: U.S. Patent and Trademark Office.

MacDougall, W. (2014). Industrie 4.0: Smart manufacturing for the future. Germany Trade & Invest.

McCarthy, J. (2007). WHAT IS ARTIFICIAL INTELLIGENCE? Retrieved March 15, 2017, from http://www-formal.stanford.edu/jmc/whatisai/

Muehlhauser, L. (2013, September 15). What is AGI? Retrieved March 26, 2018, from https://intelligence.org/2013/08/11/what-is-agi/

Industry 4.0… well let’s talk about 3.X!

Industry 4.0 has become obvious for everyone… but we must keep a sense of proportion!

The term Industry 4.0 was introduced for the first time during the 2011 Hanover Fair (Wahlster, 2012). It comes from an initiative launched by the German Federal Government as part of its overall High-Tech strategy. An introduction to the Industry 4.0 concepts can be found in Lasi et al. (2014).

For the record, the first industrial revolution reflects the automation of production through steam and water (Industry 1.0); for the second one, the electrification (2.0) has arrived, and finally, more recently, the third one saw the digital computer advent (3.0). All these revolutions were related to inventions based on breakthrough scientific discoveries (Watt, Tesla, von Neuman) opening up new industries.

Bear in mind that even other revolutionary inventions, such as Marconi’s (1909 Nobel Prize) wireless telecommunication, which is the basis of today’s global communication, as well as varied possibilities for supply chain control in the modern production are not considered “revolutions” for the industry.

Thus, the Industry 4.0 concept is not linked to a technical revolution following a breakthrough scientific discovery!

Indeed, main tools required for the Industry 4.0 implementation have already existed for a long time: sensors, robots, big data, Internet of Things, cloud computing, 3D printer. More than a technological revolution, Industry 4.0 represents rather a complete reorganization of the mode of production with the modern tools, giving a bigger weight to the network. 

This new generation of factories aims to boost the dynamism of European industry through several actions: modernization of production, increase of competitiveness, flexibility in demand, positioning in front of the challenges of globalization…

If it’s not a revolution, then why is it THE subject today? 

Every company today has to communicate on digital. According to recent studies, several hundreds of billions of 4.0 investments are launched each year in the world. Companies expect returns on investment in less than two years by generating several additional revenue points while reducing costs – 2 to 4% according studies. In this context, the main players are banking on this high-potential market and are making war on platforms for the factory of the future: Siemens with MindSphere, GE with Predix, Bosch with IoT Bosch Suite, ABB with ABB Ability, etc.

Today, global players such as Siemens, Bosch, SAP and Deutsche Telekom have positioned themselves, have entered into alliances and are offering Industry 4.0 offerings while developing demonstrators (Kohler C & C, 2015).

Countries do not hesitate to follow this movement because they see it as an opportunity to inspire new life into their countries, their regions, their cities. In addition, technological fertility with a large computational capacity and new generations increasingly “trendy”, are the key ingredients to promote this digital transition since the Internet bubble.

From our point of view, Industry 4.0 will initially be a catch-up factory: the “pick and place” allows Japanese machines for several decades to load and unload cycle machines automatically. The same goes for robotic handling trucks transporting semi-products, from station to station, on less and less predefined routes. Until now, they had never convinced the French manufacturers while they have been working to the satisfaction of everyone in Japan for more than 20 years. This catch-up achieved, the factory will already have a more current “look” As for what will be in the future, probably an extension of the current breakthroughs in more industrial fields and more opportunities.

Therefore, calling Industry 4.0 a “revolution” represents an inconsistency with the first three revolutions, as it is simply a natural evolution of computer-integrated manufacturing (CIM). rather it is materialized by small steps that one could possibly call V.3.1, V.3.2, etc.

The industry evolution (adapted from Schrauf and Berttram, 2016)

Industry V.3.x or “Advanced Digitization”, will target businesses moving towards the customer through e-commerce, digital marketing, social media and the customer experience. Ultimately, virtually every aspect of the business will be transformed by the vertical integration of R & D, production, marketing and sales and other internal operations, as well as new business models based on these advances. Indeed, we are moving towards the complete digital ecosystem.

But the reality is a bit more complicated

A study of the DZ Bank (sample of 1000 companies with a turnover between € 0.5 M and € 125 M) published in 2014, showed that 35% of Mittelstand companies thought that digitization was not very relevant compared to their value chain and another 14%, that it played a weak role.

How is this situation explained?


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    Cultural and Psychological Barriers: below, the many sources of uncertainty for business leaders that are hindering the introduction of Industry 4.0:

Obstacles perceived by business leaders in the deployment of Industry 4.0 (Kagermann et al., 2013)


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    Financial resources may be lacking for businesses to implement the digitized industry;


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    From a management stand point, there is a lack of global digital vision. Leaders struggle to perceive the potential of digitized industry and the associated ROI;


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    Today, the majority of companies are overwhelmed by the complexity of the “digital” theme and all the implications in the business;


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    Cybersecurity: for the German Academy of Technology (Acatech), there is no security solution efficiency, only those that exist are not used systematically. Although the threats are real in the application: infection of equipment with malware via office networks, insertion of malware by USB key or external hardware, illegal access by a remote maintenance network, deliberate sabotage or misbehavior , incitement to reveal personal data including passwords by phishing (fraudulent emails, phishing) and by “social engineering” (criminals take a false identity, for example in an email where they can present themselves as tax authorities or a human resources interlocutor).

Although clean techniques of Lean production systems are not yet in place in all the workshops of production sites, the “Smart Factory” with the very promising German label “Industry 4.0” is already making the show.



3.X
Industry

While the Toyota Production System (TPS) has been shown to be the most efficient production system, Industry 4.0 is still in a framing phase with the ambitious goal of becoming a cyber-production system. Partial and sometimes limited knowledge about Lean production systems leads to distorted ideas that both approaches are incompatible.

The implementation of a ferocious digitization without a management of the “just necessary” in a logic of change management would lead to waste in today’s industry, where the machine-man continues to cohabit and will in the next decade. Certainly, the digitized industry will make the production system more flexible, but it is not certain that it will be faster, smoother, more stable and more accurate. Industry 3.X itself will materialize anyway, with or without this politico-economic initiative. In fact, digitization in the industry has been going on for a long time and is still going on.

Of course, it is the connection, the availability and the processing of the data that will make the difference in the future. Critical minds might even say that the 3.X industry is a self-fulfilling prophecy to a certain extent and will not meet the high expectations it raises.

We will see in a future publication the different types of technologies proposed by, let us be indulgent, the “4.0” and a brief definition of the TPM.

Sources :

Kagermann, H., Wahlster, W., & Helbig, J. (2013) Recommendations for implementing the strategic initiative Industrie 4.0 – Final report of the Industrie 4.0 Working Group. Frankfurt am Main: Communication Promoters Group of the Industry-Science Research Alliance, acatech.

Kohler C&C (2015). Industrie 4.0 : quelles stratégies numériques ? 1–67.

Lasi, H., Fettke, P., Kemper, H.-G., Feld, T., and Hoffman, M. n, “Industry 4.0,” Business & Information Systems Engineering, vol. 6, no. 4, p.239, 2014.

Nelles, J., Kuz, S., Mertens, A., and Schlick, C. M., “Human-centered design of assistance systems for production planning and control: The role of the human in industry 4.0,” in Industrial Technology (ICIT), 2016 IEEE International Conference on, pp. 2099–2104, IEEE, 2016.

Schrauf, S., Berttram, P. (2016). How digitization makes the supply chain more efficient, agile, and customer-focused.

Wahlster, W., “From industry 1.0 to industry 4.0: Towards the 4th industrial revolution,” in Forum Business meets Research, 2012.

The use of machine learning to generate quick savings and gain in price consistency

The purpose of this article is to share our experience in the use of machine learning to generate quick saving opportunities and homogenize purchased pricing across business units / regions in large groups.

  Context and challenges within a multi-BU group

It could rapidly become cumbersome for a large group and its supply management team to ensure consistency of prices on a specific category.


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    Why pay $5.6 dollars for an extruded tube of 10cm long and 2mm diameter and $20 for 20cm and 2.5mm diameter tube?


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    Or a certain price for a red product and double for its blue version?

Those gaps can be normal but need to be controlled and understood so that suppliers or R&D can be challenged.

Even with a corporate organization and systems, Business Units are often independent or even worse, siloed. They could implicitly refuse to play it global because they need to go fast and stay independent. But, beyond organization & cultural behaviors, main barriers are technical & IT related:


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    Products have different specifications & characteristics making the price comparison and alignment difficult


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    There is no common repository combining technical & economical information


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    History of pricing is rarely reviewed


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    ERP system not alerting on pricing gaps


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    Tail pricing is not properly controlled


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    Pricing revision routines can be different across the group


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    Multi contract with similar suppliers


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    Suppliers apply a different cost of doing business per BU / Region

For sure, the traditional should cost approach and solutions can help solve these issues.

However, they are often complex to implement on a large scale, because they require a lot of manufacturing process related information, strong technical expertise and deep & time-consuming cooperation with suppliers (open book policy is mandatory).

 Refer to our article “Supply Chain optimization: a total cost approach

  Value proposition

Many firms have developed an innovative & effective approach combining advanced analytics and predictive algorithms (derived from Artificial Intelligence) to generate quick savings opportunities, only by processing your existing data.

The methodology is based on 5 pillars:


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    Create a cost model based on shared cost drivers considering BU/Region specifics


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    Utilize benchmarking to identify gaps across BU/Regions and optimized sourcing strategies


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    Identify overpriced products and quantify savings opportunities


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    Utilize data mining to determine optimization levers and prepare arguments for supplier negotiations


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    Specify the management systems & required needs to sustain the process 

The following benefits have been observed:


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    Identify savings opportunities (negotiation, VAVE, resourcing)


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    Generate quick wins through “analytics based” negotiations with suppliers


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    Control supplier quotes on new projects


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    Improve Sourcing Strategies through optimized supplier allocation per cluster


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    Drive continuous improvement through a robust cost model, increased skills, and improved cross-functional collaboration

  Machine learning based costing solutions

Machine learning based costing solution which estimates the price of a new product or service by processing current/historical data through a sophisticated algorithm, such as “Random Forrest”. Random Forrest is a nonparametric statistical method that performs learning on multiple decision trees driven on slightly different subsets of data generated by Bootstrap techniques (Ref. Breiman, L., Random Forests. Machine Learning. 45, 5-32 (2001)).

This type of methods allows to estimate the price of a product/service based on pre-identified parameters called “cost-drivers”. The estimation is very quick and accurate (30% of increased accuracy in comparison to traditional statistical methods).

The main advantages of machine learning based costing compared to traditional methods are:


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    The user does not need to be an expert of the manufacturing process of the product. The estimate is based exclusively on the product characteristics (“cost drivers”) which are information you have access to internally (vs. asking to your supplier)


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    It can mix an infinite number of cost drivers, those cost drivers can be continuous or discrete, technical (weight, function, color, raw material type, …) or commercial (country, volumes, supplier…)


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    Ability to process databases for which the number of variables largely exceeds the number of observations


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    Ability to identify and weight automatically the most important parameters, and therefore the cost drivers that impact the most


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    Ability to interpret results


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    Ability to manage missing values / incomplete database

For all these reasons machine learning based software helps create a very robust and ready-to-use costing model.

Beyond the above, machine learning based costing solution is processing all current purchasing prices and identifying inconsistencies / gaps versus estimates, which makes it easy to identify savings opportunities, including negotiations with suppliers.

Finally, some solutions have integrated benchmark functionalities which allow to compare each BU/Region for a specific category (even through products that have different design & characteristics).

They are increasingly utilized in industry and therefore is, every day, adding external benchmark knowledge for each commodity (IP and confidentialities being respected).

This allows to create benchmarking communities and share further (life sciences, automotive…)..

  Examples

Advantages

Limitations

Examples of software

Analytical Model

  • Explanatory and operations- centered model
  • “Best Landed Cost” Estimation and Target Price Definition
  • Allows to optimize the prices in production and to control the plans of progresses suppliers
  • Difficulty accessing process references and maintaining them over time
  • Intrusive approach towards suppliers
  • Expert model with little diffuse
  • Timeout for setting and performing encryption
  • Precision ?
  • Siemens PLM
  • A Priori
  • Facton
  • Statistical Parametric Model

    • Easy and quick to use
    • Estimated price coherence, and accuracy (conditional)
    • Non-intrusive approach to suppliers
    • Product and service applications
    • Very relevant in the upstream phases of the life cycle and for the analyses of coherence
    • Requires minimal data and quality history
    • Model that is not very “explanatory” to moderate supplier progress plans
    • Less relevant model for setting target prices and “Best Landed Cost”
    • Difficulty in modeling qualitative parameters
  • Seer
  • EstimFEC
  • Non-Parametric Statistical Model

    « Random Forests »

    • Easy and quick to use
    • Consistency of the estimated price, and precision increased by 30% compared to parametric models (conditional)
    • Non-intrusive approach to suppliers
    • Product and service applications
    • Very relevant in the upstream phases of the life cycle
    • Relevant also in the downstream phases for the analysis of price coherences and the identification of opportunities thanks to the explanatory properties of the forests
    • Integrates a lot of cost drivers, including qualitative ones
    • Detects technological breakthroughs
    • Prioritizes cost drivers
    • Manages missing values and can work with a limited sample
  • Model less relevant for setting target prices and “Best Landed Cost”
  • easyKost
  • 10 key trends to understand Supply Chain Management

    In few years only, Supply Chain Management became one of the trendiest topics for organizations facing globalized markets. But in parallel, it also remained one of the foggiest topics for managers at every level. Sticking to logistics origins, we could stand our ground on initial Supply Chain Management definition (a system reaching all processes, flows and resources needed to deliver the right product/service at the right place, in the right timing, with the right quality, quantity and cost). But I think the best way for Managers to keep an up to date vision is to have a clear understanding of the main trends shaping business environment. Through this exercise, we clearly see how the essence of Supply Chain Management (systemic approach, vision sharing, animation principles…) is essential to face all challenges emerging.

    STATEMENTS

    #1 Value chain schemes involve a growing complexity for business Management

    #2 Needs for Flexibility, Reactivity and Coordination make older models obsolete

    #3 Technological revolution acts as a trend amplifier

    TRANSFORMATION AXIS

    #4 Operational Excellence forms a powerful approach for transformation plan set up

    #5 Fully aligned business models are on top of best practices

    #6 Refocus on green supply chain should/ may occur soon

    KEY ENABLERS

    #7 Control of information/ data is vital

    #8 Manager behaviors drive team understanding and involvement

    #9 Misalignment of skill market and business needs is impacting organization design

    #10 Today’s Supply Chain truth will not be applicable tomorrow

    Supply Chain: Logistics Masterplans

    The industrial footprint of major international companies has continued to grow over the last thirty years without however leading to a streamlined logistical organization. The topics currently dominating the Supply Chain represent as much a takeover of the logistics organizations as a very strong expected potential in terms of expected gains.

    ​By developing industrial sites around the world to meet the strategic imperatives, companies are obliged to implement a consistent set of processes to shape their value stream… If an applied implementation of the value stream is essential for meeting performance targets, it is indeed a significant position due to the implied needs (transportation, storage, support functions …).

    This is the price of increasing complexity. The internationalization of major organizations and the dispersion of industrial assets must now be combined with the growing need for flexibility and responsiveness required in the whole value stream without however restraining competitiveness.

    What about flexibility? How to adapt one’s organization to be able to respond to shifts in demand (shifts in volumes, shifts in the nature of the requested products, modulation of the demand frequency)?

    And about responsiveness? How to position yourself to make these adjustments in the least possible space-time? 

    Industrial groups are not less demanding than the end-customer regarding flexibility and responsiveness: series’ sizes are reduced, effective time optimized and buffer stocks are reduced to the lowest possible level. In turn, they all require, from the logistics sector, a very high level of performance and regardless of the degree of internationalization of the latter.

    ​What are the levers currently being used?

    • Towards upstream logistics

    After working on the downstream perimeter and leaving the upstream optimization to the purchasing (optimization of the purchase price) and supply (securing service levels) teams, supply chain managers ask us more and more about existing potential for reducing upstream logistic costs.

    For a multinational, such costs can represent, over a year, up to 15% of the purchasing budget. They relate to the “door-to-door” transportation operations, including some players focused on warehousing operations and handling.



    15%
    of the purchasing budget

    The levers are not fundamentally different from what we know about the downstream:

    • General optimization of the Logistics framework

    • Generalization of the pick-up routing principles and sharing of resources used (trucks or containers) 

    • Tightened management of resources utilization (e.g. containers fill rate)

    • Alignment of internal schedules on standard logistics times (e.g. orders distributions)

    • Streamlining the panel of third parties, competitive bidding and optimization of contract terms (advanced price negotiations by route and channel, securing the provider’s quality of service, backup solutions …).

    Using these levers on the upstream supply chain, large industrial groups such as Fiat or Valeo succeeded for example to generate in 2012 savings equal to € 7,8m and € 20m respectively. These initiatives are widely promoted in corporate communications as they contribute directly to the improvement in operating margin.

    • Regaining control of the flow

    This approach was also at the heart of the study we conducted in early 2013 for one of the major market players in consumer goods, with a large presence in Asia Pacific emerging countries (5 local plants). The analysis of upstream logistics flows and costs incurred helped to highlight existing opportunities especially in terms of rationalization of domestic transportation from local suppliers.

    The challenge in this case was first to question the relevance of the incoterms used in contracts. By delegating the organization of transportation to the suppliers, our client did not put himself in a position to control the cost and launch supply chain optimization initiatives. By taking over the organization of logistics flows, all levers mentioned above could therefore be activated. 



    50%
    total transportation cost

    On a domestic scope, regarding road transportation, switching to a touring system and using if necessary consolidation/deconsolidation nodes in the upstream flow enabled a 50% reduction in the total transportation cost. 

    • Adapting the organization

    In addition to streamlining the process it is also good to question the Supply Chain organization to ensure that it is in line with the needs of flexibility and responsiveness mentioned above.

    When a large industrial group sets up operations in a new country, it initially needs to manage the new plants centrally to ensure continuity in regard of the internal performance standards. According to the culture of the company, the progressive relocation of support activities follows with varying responsibilities, giving varying degrees of autonomy as appropriate.

    A major English automotive supplier recently asked us to streamline its Supply Chain & Purchasing process in China and review the division of roles and responsibilities between central and local teams. We could then measure how the resurgence of historically centralized organizations could cripple the team’s daily life. The complexity of the decision making process (creates constant communication and various validation requirements) can lead to a severe lack of responsiveness and penalizes customer satisfaction.

    Supply Chain is, in this sense, often trapped between two worlds; particularly regarding the issues of the upstream portion mentioned above, who could offer supplies on time touring transports without having the operational view of the factory? With the same reasoning, who can achieve economies of scale in purchasing or in service providers’ costs without having the data on the aggregated demand of the group?

    We always recommend our clients to clearly separate strategic processes and business processes and then assign the former to global functions (which have a general vision of the group needs) and the latter to local or regional functions (which are directly aware of the field requirements). Timing is therefore essential between the local and the global, but the company makes sure that each one addresses the appropriate level of issue. 

    If large international groups sometimes struggle to accelerate the transition to an efficient supply chain management in terms of process organization, confronting emerging market players make them directly face the need to change their way of thinking. Established in China and India and working with Western companies on issues concerning operational efficiency, we are regularly witnessing the extreme mobility and adaptability of local players. Supply chain managers will be more than ever in the forefront to support the strategic goals of the company: international development, “end-to-end” competitiveness, securing flexibility.

    Supply Chain optimization: a total cost approach

    Industrial Europe is currently going through a period marked both by strong competitive pressure from low-cost countries and a narrowing, a direct consequence of a consumption crisis in local markets. On the front line since 2008, the automotive sector was quickly forced to adapt and work on the flexibility of its model in order to maintain a robust economic performance

    To reduce Supply Chain costs, once the traditional levers have been activated (supplier negotiations, transport schemes optimization, inventory reduction, etc.), manufacturers have decided to go further by progressing on the notion of total cost. 

    The following summarizes some best practices for deploying such an approach that extends beyond the automotive industry.

    The primary purpose of the total cost approach is to direct decision-making processes towards solutions that achieve a global optimum in the supply chain. Because of this systemic nature (opposed to function-based approaches), total cost is a fundamental concept of Supply Chain Management.

    It is calculated by realizing the sum of assumed costs directly or indirectly by each function and this, until the service of the final customer:

    SCHEMA 1: Simplified representation of the Supply Chain + cost/ function source

    The objective is to have the most exhaustive possible cost vision during its construction in order to measure the impacts (including those usually hidden) of a decision on all the functions of the chain.

    In sectors where the value chain is shaped by large, long-term programs (vehicle programs in the case of the automobile), this approach is used in particular to optimize the current models during the serial lifespan. The total cost must be able to overcome breakthrough ideas by neglecting impacts on a function cost if the overall result is beneficial.

    In the shorter cycle sectors (Consumer Product Goods, various industries), the approach is mainly used to: (i) build the right model at the start of production by supporting Make or Buy trade-offs, (ii) facilitate and optimize allocation decisions between logistics flow schema for each new product launch.

    Recurring examples

    By constructing the cost structure of the automotive supply chain, it quickly becomes clear that the weight of the upstream part, which consists mainly of transport from suppliers to factories, is substantial (around 40% of total logistics costs). The main driver of cost reduction, the improvement of the trucks/containers filling rate requires the implementation of transverse reflections such as total cost, in order to achieve solutions that are disruptive compared to the current models:

    Supply-Transport arbitration:

    Car manufacturers have all gone very far in terms of batch size in their various applications of Toyota’s precepts (see the concept of One Piece flow). However small lots have a double negative effect. On the one hand they no longer allow to optimize loadings (cost/m³ penalized accordingly).

    On the other hand, they contribute to the frequencies increase and thus to the multiplication of journeys. The positive impact on the stock levels of the production units is, in this case, erased by the additional costs assumed by the transport function.

    In this case, the use of the total cost makes it possible to dissociate (i) the high-value parts that have to be delivered on a daily basis in order to minimize their weight in the inventory (this gain covers the additional cost of transport induced) (ii).
    The others parts that will be massified in transport at reduced frequencies (weekly if possible) to optimize loading rates (the gains largely covering here the differential on the storage cost).

    Piece – transport manufacturing arbitration (design to logistics):

    Still too little measured concretely in the industrial world but clearly identified at the operational level, the impact of the design phase on the logistics processes is an important subject to sift through total cost. Steering columns or exhaust lines are striking automotive examples. For pieces combining size and design complexity, the question of sub-component cutting (inducing an internal pre-assembly) must be systematically laid down on the basis of the different costs to be assumed.

    It enables to dissociate (i) Pieces that make a relatively short journey in terms of km and / or that require a very complex assembly process or not mastered internally, these parts to be supplied by finished sets (ii) Pieces costly in transport (according to kms traveled and packaged volumes) and whose cost of internal pre-assembly is competitive, these pieces needed to be conversely decomposed into sub-assemblies during the design.

    The idea of such a division is to be able to densify items within the same packaging and therefore to improve the cost/m³ ratio of transported goods; up to 30% in the case of steering columns or exhaust systems.

    In other sectors, the exercise can be done around trade-offs between Marketing and Logistics functions, for example. In distribution, the total cost analysis of the ready-to-sell packaging on low cost ranges is not yet widespread while it poses interesting conclusions. These packaging, originally designed to reduce racking time, are very unstable to handle during all upstream stages and suffer from a markdown rate 4 to 5 times higher than warehouses level, thus penalizing the final cost customer rendering. On the other hand, on premium ranges for which the packaging is designed to be resistant, the loans to be sold can generate real savings and improve the customer experience.

    Implementation keys

    The transversality of the approach and the need to decide on a global optimum in break with the established scheme necessarily induces friction between trades still operating too much in a silos logic.

    Here are main principles adopted by the builders to complete the process:

    #1 Make the dashboards consistent

    Creating a total cost global objective that is common to the different functions and aligning each one’s objectives limit the blockages associated to diverging indicators and reduces the tension subjects.

    #2 Adapt the organization 

    The establishment of a steering unit of the topic of total cost at the general management level and the appointment of referents in each profession is a prerequisite to ensure effective project management. This one must promote the identification and implementation of concrete opportunities in the supply chain.

    #3 Define an arbitration body 

    The appointment of a top manager with the final decision-making power in case of blockage avoids having to recourse to the management committee continuously to decide. This decision-making power can even be given to the factory manager who is not only in charge of his productivity but also of the complete value chain of his vehicle.

    #4 Develop the actors supply chain maturity

    The work basis, the training and the communication allow the operational ones to understand the direction that one gives to the use of the total cost tool.

    Good reflexes

    Moving forward with the total cost issues requires the ability to compile a large amount of data in a structured way and then use it to trigger arbitration.

    For this, it is necessary to:

    #1 Structure cost models

    If a good knowledge of all the applicable costs for each process is a good starting point, the goal must be to structure quickly generic cost models reproducing the different existing options and the total cost associated.

    This point has already been developed by manufacturers but is also found in sectors such as large retailers under the name of rating grids. These ones enable to make a choice of logistic diagrams by comparing different possible scenarios. The first step in this case is to frame the potential channels (import, domestic stored, domestic cross dock, domestic direct for example) and the processes that they involve. The Supply Chain function saves the costs of each stage in parallel in the grid, with a particular focus on the processes known in advance for criticality and/or recurrence (typical example: what is the real cost of non-palletising the goods on import flows?).

    The purpose of such a grid is to be able to automate and optimize the allocation of each new product in this or that sector according to the cost of the customer.

    #2 Facilitate Arbitration

    Extracting key data and presenting it in a synthetic form is the best way to create buy-in around a change scenario. On the batch size issues in the automotive sector, a summary vision of the stocks by supplier and the delivery frequencies used is a good example of an inventory comparing the production and transport trades:

    SCHEMA 2 : Inventory vs frequency graph

    ​Behind the arbitration process, the use of decision matrices makes it possible to clearly share and validate main rules to be used to revise the management methods:

    SCHEMA 3 : Volume delivery matrix vs pieces value

    ​In the automotive sector, the introduction of this approach has already been proven to significantly reduce upstream logistics costs and thus improve the operating margin. It makes it possible to put on the table innovative scenarios of cost reduction by basing the final arbitration on the gain generated globally for the manufacturer.

    This approach is starting to be deployed in other industrial and distribution sectors with real opportunities into the bargain. It requires setting up robust tools, adopting new management systems, and finally driving change within the company through targeted training and communication actions. For this, it must be the subject of a business project conducted by a dedicated team supported by the General Management.

    Sourcing Offices: a shift of paradigm

    Over last decade, sourcing offices became a major piece within globalized footprint of western retailers. Asian countries and China in particular have been privileged destinations for those entities due to cost attractiveness of the area.

    After a first era of development and opportunity catch up particularly positive and characterized by consistent purchasing gains, most of these Sourcing Offices are now searching for their second breath.

    Being caught between suppliers raising progressively their prices to follow cost pace (labor, utilities, quality costs…) and internal counterparts expecting more value (purchasing gains, flexibility, services…) they need to redefine and strengthen their model.

    A growing demand for added value

    Back to the origins, the Sourcing Offices have been developed by retailers for two main reasons:

    #1 Gather demands coming from various entities within a same group

    Retail groups are by nature associations of small entities (stores / country grouping / store brands) that in isolation are facing difficulties to reach economies of scale in purchasing task. Once pooled through a Sourcing Office, they can get a higher power of negotiation.

    #2 Set up localized resources

    Dealing on a daily basis with distant and unknown sourcing markets is a real challenge from supplier identification and qualification to order processing and shipment arrangement. A localized Sourcing Office helps tackle the cultural differences and handle process with knowledge of local constraints.

    Consequence of this position, Sourcing Offices have always been at the crossroad of two worlds presenting different expectations, timelines and constraints. They need to match the need of volume / visibility / stability of suppliers with the need of pricing / flexibility / reactivity of internal counterparts. And current trend shows that each of these needs even tends to be reinforced.

    In parallel, Sourcing Offices progressively became a center of services and they integrate functions not directly related to sourcing operations such as Supply Chain, Design or Packaging. Buyer’s product selection is going toward less item picking (what supplier already has in his catalog) and more product development allowing to better customize products in function of the destination markets. It makes Sourcing Office job a more complex job within a more complex environment.

    Process set up: streamline tasks

    Three kinds of actions are necessary to rework processes

    #1 Streamline the processes

    A quick process mapping exercise shows that support functions can carry until one third of Non Value Added Operation and one other third of “Waste” operations. Sourcing offices are not an exception and existing waitings, overlaps, reworks are damaging the performance. It artificially grows workload of teams that tend to sacrifice the Value Added tasks as Supplier and Product sourcing.

    On this axis everything starts with Value Added definition by teams, what do the clients expect? What are they ready to pay for? Once this defined, the streamlining exercise will aim to map and progressively improve / eliminate all tasks not contributing to create value added for clients. It’s the occasion to redefine for each process the operating standards and expected outputs.

    #2 Structure advanced toolsets

    As demand for high value added service raised, Sourcing Offices frequently demonstrate a cruel lack of methodologies for key structuring activities. Job Description as defined today in Sourcing Offices are limited to daily commercial execution (supplier integration, product development and qualification, order processing…). Strategic actions like Purchasing Strategy definition or Negotiation preparation are not correctly documented.

    It requires, while working on operating standards, to create standard approaches and templates for strategic processes.

    As an exemple on Purchasing Strategy axis, it means provide an analysis structure / template that will be used by each category to set up a mid term vision and an action plan aiming to reach this vision. On Negotiation preparation, best practices show that having a standard blusheet per supplier centralizing key figures (turnover, rebates, item price evolution vs cost index evolution…) helps buyers to be better prepared for negotiation rounds.

    #3 Link processes & tools to organization

    Last point in the inventory, the tools are most of the time not adapted to the needs of teams and are not giving the right vision for people to monitor their activity. Information Sytems are not covering the entire value chain, standard KPIs and dashboards are missing, and sometimes several Information Systems co exist without being connected to share information.

    No mystery on that point, solution is coming from Information System itself, several solutions are already proposing a End to End Management of information and physical flow. On top of a transversal cover, capacity of the system to deliver tailored and visual dashboards is also part of ideal solution.

    Organization set up: develop the 360° vision

    Organization is a key component of sourcing office performance, it requires to put the right level of skill and experience in front of each task and each interlocutor.

    A lack of maturity in organization will end in a general disorder where Commercial team (merchandiser, product manager, department manager…) tend to monopolize conversations with each side of the business for each topic assessed (Quality, Supply Chain…). It’s also frequent to see overlaps between commercial team members.

    There are three kinds of actions to carry in order to work on this axis

    #1 Refine the Commercial team Roles & Responsibilities

    Commercial team (merchandiser, product managers…) is central for a sourcing office, it’s the team in charge of settling and rolling out the sourcing strategy (suppliers / products) by matching internal client expectations with market offer.

    Within the commercial hierarchy itself, it’s important to separate strategic tasks and operational tasks to ensure that higher level of hierarchy will dedicate time to strategic topics and stop overlapping other levels on operational topics.

    #2 Position operational functions as key actors of performance

    Operational teams (Quality and Supply Chain firstly) are essential to carry on the business and deliver value added services to internal clients.

    Position them as key interlocutors on each of their topic will secure the output per topic (product qualified, delivery on time…) and avoid overlaps with commercial team.

    #3 Structure transversal relationships

    To guarantee the good execution
    of processes and secure the delivery of expected performance, communication within organization is vital. To give a framework and force teams with various objectives to work together toward a common goal, matrix management can be relevant.

    One referent is nominated per function in order to monitor on daily/weekly basis with referents of other teams the achievement of key milestones (product selected, product qualified, order validated, production launched…).

    Working on organization through these 3 axis will push the need for standardized R&R. This is where RACI definition exercise (Responsible, Accountable, Contributor, Informed) becomes important, it will clarify Roles and Responsibilities newly define through waste hunting workshops.

    In terms of management, we can’t let rooms for interpretation. Management routines, animation principles are often viewed as well-known topics but there execution suffers from a lack of definition and of discipline from Managers. They need to be part of new standard definition, with pre defined owners, frequency and expected outputs.

    Upstream set up: Educate the suppliers

    Process streamlining and organizational alignment is not only reserved for inner Supply Chains. The development of counterparts’ maturity is a natural and essential step along retailer’s Supply Chain reinforcement. Tier one suppliers are one of first focus to have in this approach.

    Maintain an accurate knowledge on supplier’s strengths and capacities, align his processes with internal requirements, face the right interlocutors for each function (Commercial / Quality / Supply chain), here are the basics to put under control upstream channel.

    Obviously it also involves having regular check points around pre-defined dashboards and KPIs in order to get a live vision of execution advancement.

    To secure sustainable purchasing gains and sustainable quality level with the biggest and most strategic suppliers it also becomes common to launch supplier development programs. It involves for Sourcing offices the nomination of dedicated resources specialized in Operational Excellence that spend time on supplier‘s site and help him to improve its overall productivity through Lean workshops.

    Downstream set up: Educate the internal customers

    Today, there is no standard sourcing organization, each retailer has developed his own approach with various level of centralization leading to various degrees of penetration of Sourcing Offices within everyday business (penetration represents the ratio of business handled by Sourcing Office among total purchasing amount for a group).

    Fully aligned organizations position Sourcing Offices at the heart of their strategic plan, working on product development and costing, being responsible of quality delivered, acting as an unavoidable service center to deal with upstream actors. They are not necessarily covering the entire portfolio but on a set of pre-defined strategic categories (best sellers, non-food categories, commodities…) they have the prerogative.

     Examples

       In Europe Ikea, Decathlon or Zara are well known examples of fully aligned organization. Business Model is reflected in       the entire value chain that is oriented toward cost optimization and ability to focus on value expected by clients. We talk    about bridging operation cost constraints and client experience through design approach for Ikea, developing a strong         internal alignment around development and merchandising of own brands for Decathlon, working on time to market           reduction with each function to propose faster collections for Zara.

    Aside of these word class organizations, other retailers are mixing approaches allowing entities (or grouping of entities) to deal directly with suppliers while developing their own resources in a structured Sourcing Office.

    The more aligned you are at group level, the less bias you open for daily execution of sourcing tasks by the internal customers. It leads to a systematic volume pooling and the more volume you give to your Sourcing Office, the more value they will be able to bring back to you. It’s Key Success Factor to strengthen Sourcing Offices and give them the best condition to develop their potential.

    In few bullets points we saw the preconized focuses for Sourcing Offices in 2017, if industrial purchasing is still fare considering the BtoC market constraints, it’s still a good ideal to chase, several best practices are easily reachable. The existing gaps in management mindset, in organization maturity and in tools & processes alignment can be closed and need to be closed in order to keep positioning Sourcing Offices as performance contributors.