In today’s markets, leading CEOs are viewing increasingly their supply chains as a critical source of growth and a means to improve profitability. Boeing and Airbus are engaging in similar tactics to improve profitability. The first is to ramp-up production rates. A second is seeking cost savings from their supply chain. A third is to improve productivity through the introduction of new technologies and best practices. A fourth is to decentralise engineering activities. A fifth is to grow their service revenue. Therefore, this period of unprecedented change will continue to push aerospace executives to formulate tactical action plans that will leverage key resources along the entire supply chain to take advantage of the opportunities and to mitigate the dangers thrown up by the primes’ actions.
Failure of a supply chain: The wrong horseshoe
Napoleon's defeat in Russia 200 years ago was attributed to the harsh Russian winter. One specific problem was that his horses were wearing summer horseshoe. When winter came, these horse died because they slipped on icy roads as they pulled the supply wagons.The failure of Napoleon's supply chain reduced his 400,000 strong army to just 10,000. A small slip; a disastrous result!
Linking competitive performance and action plan
To explain how we should formulate tactical action plans, let us first establish the ‘Links’ between strategic competitive performance and operational tactical actions. The investment community traditionally uses the following bottom line financial measures to measure a company’s performance:
- Net Profit, an absolute measure,
- Return On Investment, a relative measure, and
- Free Cashflow.
The aim is to take actions that increase these three measures simultaneously. However these bottom-line measures are woefully inadequate to judge whether the actions, being taken, is moving an organisation in the right directions.
Fortunately, there are widely used operational measures that can serve as a bridge between tactical actions plans and the three bottom-line measures. These operational measures are Throughput, Inventory and Operating Expenses. When throughput is increased without adversely effecting inventory and operating expenses, then net profit, return on investment, and cashflow are simultaneously increased. We achieve the same result when operating expenses is decreased without an adverse effect on throughput or inventory. But, inventory has both an indirect link to all three bottom line measurements through throughput and operating expenses, and a direct link to return on investment and cashflow. Therefore, there is a clearly multi-link relationship between these operational measures and the three bottom-line measures.
Given this and the opportunities and corresponding dangers thrown up by this period of unprecedented change, the necessary Sales and Operations Plan (S&OP) becomes critical. The challenge is synchronising our supply to maximise throughput and to optimise inventory and operating expenses in way that delivers continuous productivity improvement. However to do this, businesses are tending to focus solely on one of the following three key levers:
- Inventory – where the focus is tactical, short-term gain, to improve efficiency at the expense of effectiveness.
- Capacity – where the focus is strategic, long-term value, to improve effectiveness at the expense of efficiency.
- Time – where the focus is on constant rescheduling, resulting in plenty of waiting time throughout the manufacturing system.
Companies need to optimise their material flows, as poor material flows result in bottlenecks across the supply chain, which lead to lower margins. It could also cause you to spend typically 5% of sales to correct the aftereffects or could cause your shareholder value to be reduced by 7%.
Turning a supply chain into productivity improvement force multiplier
Alternatively, companies can look at synchronising these levers from customers to suppliers in such a way that attempts to move material quickly, smoothly and cost effectively throughout their supply network in concert with demand. One method of doing this is considering forming a hybrid structure that is lean, agile and prompt. The first step is to optimise material flow that will serve as a baseline. The next step is to create an accountability/performance process based on Six Sigma. Then the next is to mature processes and technologies. Then there is a need to integrate supply teams throughout the supply network. Next is the need to synchronise supply to demand through the use of supply chain hub regulators. The result should be a hybrid structure that would have turned your supply chain into force multipliers and that has laid a foundation for continuous increase in net profit, return on investment and cash flow. Plus, it achieves a win-win relationship throughout a company’s supply chain.