As we move into our third year of operations, this post is all about reflecting on where we came from and lessons learned, that we would like to share with you. Today we would like to talk about supply chain planning software and key challenges facing the industry. Supply chain planning software got its own identity in the nineties and has been around since then. Look at the three distinct waves in this industry as shown below. The promises spanning three decades are, at best, under-delivered. If planning software truly delivered the promise then why are 93% of the users still dependent on spreadsheets?
Death by Features, Functionality and Dashboards
Early in our careers, say about two decades ago, we experienced something called "death by features and functionality". It meant that every single software feature, functionality, advanced math, personal or customer 'wish-list' should somehow be packaged into software. More features was (and still is) perceived as the better software in supply chain planning. The end result was clear - complicated software with all the bells and whistles of which 80% were never used!. Additionally, in recent times, we have seen BI solutions posing as supply chain planning solutions. Very simply put: Dashboards/Charts/Visualization ≠ Supply chain planning. It is a small part and output of planning but that's not planning.
Packaged supply chain planning software is a myth
We also observed that no two supply chain planning processes are the same. They may look similar but a close look tells us that every process and associated data has its own personality that is sculpted by its creators and users. Yes, there's demand planning, supply planning, inventory planning, S&OP in every company but naming is as far as the similarity goes. Solution providers have long tried and failed with the 'packaged software' approach i.e. let's build and customers will come. Alas, "packaged" or "plug N' play" supply chain planning software is a myth. Software providers cannot build every solution from scratch nor can they have a packaged solution. There needs to be a middle ground.
Oops...that was a demo.
As many solution providers start with packaged software approach and load it with 'wishful thinking' features, when it comes to implementation they need to customize to their client needs. It is a nightmare for their software development team but for the client, it's worse. Here is a very typical scenario: Client wanted A, and the demo had it, but it was a demo and that feature/functionality would be released after one year (or never). So let's implement B which is not want the client wants but it is a feature/functionality that is available right now however that requires changes to the client's business process. And the story goes on...
Show me the value
Most implementations models are 'time & materials'. This industry has gone far too long with this business model of consultants sitting at the client's site for months, quarters and years billing their hours trying to implement something. Where is the incentive to get anything done?. Implementations are stretched from months to quarters to years for a good reason. Also, 3rd party implementations seldom result in good outcomes. Implementation partners do not have the leverage on the technology and its future roadmap which results in finger pointing, long implementations and money down the drain.
By the time anything is implemented, the business, people, processes have changed and the cycle continues or its back to spreadsheets. Software becomes shelf-ware. The prevalent business model in the industry is not incentivized to deliver value.
Why supply chain planning software keeps under-delivering?
Here are few basic DOs and DONTs:
Supply chain planning is an old problem that requires new thinking on applying technology to solve it. For too long the industry has thought of software as a silver bullet but software is not the end, it is means to an end.
We complete two years this week. Our journey started in 2016 with a singular focus on transforming supply chain planning. In these two years, Omnics has experienced tremendous growth with total > $800M supply chains planned using our platform, 250% growth in revenues from the first year, global customers and 3 industry awards. We are thankful to our customers, partners and kudos to the entire Omnics team. It has been a fun ride so far and this is just the beginning.....
Here is a quick snapshot of where we stand two years since inception
Total Supply Chain value planned using Omnics
> $ 800M
Customer industries served
Omnics is used in
Awards and Recognition
We get this question from supply chain managers when presented with a detailed analysis of the total landed costs of a product with the inventory carrying costs calculated.
Whilst inventory carrying costs may not make up the largest part of the total landed costs they are significant, both absolutely and as an indicator of overall end-to-end supply chain management. Perspectives on inventory carrying costs vary from company to company, both in terms of how they are viewed and how they are calculated.
Here are some of the views that we have been exposed to:
“Our cost of inventory is zero. We don’t have debt and we’ll sell everything that we produce and don’t borrow money to finance the operations.”
Or “Our cost of inventory is 35%. We have a make-to-stock model in a fiercely competitive market and cannot miss a sale. But we also need to factor in obsolescence and all the risks associated with product life cycle.”
Or “It is about 8% because that is our WACC.”
0% is definitely not the answer if you sell widgets, whilst 35% implies that the supply chain strategy and operations need a real overhaul. 8% is the most common answer, however this should not be a standard answer applied to all. A real calculation needs to be done to get to the true number and to understand where the costs are accumulated from.
Inventory cost is made of two parts - capital cost and non-capital cost.
Inventory capital cost is the largest component of inventory cost. All the elements related to the investment, the interest on working capital and opportunity cost of money invested in the inventory are included in the inventory capital costs. Inventory capital cost is the expected financial return if the capital is invested in an alternative investment of equivalent risk. ‘Weighted Average Cost of Capital’ (WACC) is commonly used for calculating inventory capital cost. It is not sufficient to say we do not borrow to finance inventory. If cash is being used here, it could be deployed elsewhere, at least to earn interest, and perhaps to open up greater opportunity in the market.
Non-capital inventory costs are all the costs associated with inventory service, storage and risk. Physical handling, like inventory control and cycle counting, needs to be considered. Inventory storage costs include the cost of warehousing or building, i.e. space cost, and its maintenance appropriated to the portion of the building used for receiving and storing inventory. Risk costs cover the risk associated primarily with inventory value of the goods diminishing over time they are stored (obsolescence). This also includes shrinkage due to errors, theft, fraud etc.
Uncertainty is the Mother of Inventory
With a global outsourced manufacturing model, supply chains are stretched far and wide resulting in multiple suppliers, distribution centers, longer transit times and inventory buffers to mitigate risks. To reduce inventory costs, first optimize the supply chain and logistics network through manufacturing and postponement strategies, node consolidation and analyzing freight modes trade-offs (e.g. air vs. ocean) that simultaneously meet your total landed cost and service level goals.
Further, inventory optimization solution would help to minimize your inventory exposure while meeting or exceeding your service level requirements.
We live in a world of unprecedented data generation, business speed and innovation. Spreadsheet planning is unsustainable in this digital business era. To keep up, a new set of solutions is needed that automate non-value add tasks, unify data across the supply chain and provide smart answers
Over 90% of today’s data in the world has been created in last two years. Total data will grow 50X from 2010 to 20201. This applies to supply chains too as they are no longer vertically integrated organizations but an ecosystem of manufacturing partners, suppliers, logistics services providers and retailers. Product life cycles are shortening and speed of business is faster than ever. It took 75 years for a telephone to reach 50 million users. Television took 14 years to get there and iPod took 3 years (…while Pokemon got there in 19 days!). Innovation at all levels including product, technology and business model is giving rise to newer business that are challenging the incumbents. In 1920s, the average lifespan of a company on S&P 500 was 67 years. That dropped to 25 years in 1980s and 15 years in 2010s. In 2020s, 75% of the companies will be the ones NOT on the index today.
Every product around you has a supply chain. Companies along the supply chains of these products need to deliver their products at lowest cost, highest quality and fastest time while achieving profitable growth. Supply Chains have become a competitive advantage and companies are doubling down on this by digitizing their operations. Every action and reaction in supply chain operations generates data. As companies digitize this data it is imperative to implement tools to extract, analyze and collaborate this data to realize the full potential of a digital supply chain.
So how do you go about advancing your supply chain planning function in this digital business era?
Digitization is driving exponential increase in data size and global supply chains need faster and smarter answers. Supply chain planning with spreadsheets is simply unsustainable. Augmenting human intelligence with smart tools for supply chain planning gives you a competitive advantage in today’s digital supply chain era.
The artificial intelligence market was valued at $1.36 billion in 2016 and is expected to grow at a compound annual growth rate (CAGR) of 52% during the forecast period from 2017 to 2025, according to a recent report from Research and Markets.
Some hype, some reality, some promise. Omnics Co-Founder and CEO, Akhil Oltikar, shares his views.
AI applications for ‘automation' in the factory are already here and well known. For example, autonomous robots that have no need for any human intervention. There exists tremendous value potential to be unlocked with AI for ‘augmentation' in a smart factory. Augmenting human intelligence with good predictive and prescriptive analysis is game changing.
Today’s factories are subjected to unprecedented business speed and data deluge. Digitization is driving exponential increase in data size and global supply chains need faster and smarter answers. Manual planning and traditional tools for production, inventory and supply planning at the factories are not sustainable. Visibility and business intelligence, though important, is history and factories need to move beyond these using AI technologies.
I specifically see AI applications for smart factory planning in automated and optimized material procurement, autonomous production planning/scheduling, and inventory optimization. Application of AI in factory operational planning holds high potential for boosting top and bottom-line performance through increased human productivity and intelligent decision-making.
Over the past 17 years I have worked with numerous companies and a wide spectrum of supply chain issues. One common theme I’ve seen is that most companies have spent a significant amount of money implementing ERP and Best-of-Breed software solutions, but when it comes to tactical and operational planning (4 to 52 week horizons, demand, inventory & supply planning) there’s one software tool that stands out. Any guesses? Yes, it is Microsoft Excel. This is true primarily of small/mid-size businesses but also many large, global companies. Everyone starts planning in spreadsheets but there is a point where spreadsheets break down. This breakpoint is driven by complexity of planning, business growth, data size, domain expertise or maybe the planning team simply had enough of it.
Today's supply chain planning
Where does it all begin?
Companies implement multiple systems or one single ERP to handle fundamental functions like finance, CRM, PLM, MES etc. These functions are relatively well defined and have fairly well-defined processes and data standards. However, when it comes to planning it is not ‘one-size fits all’ solution. Either the solution is too generic or it is too complex to meet the company’s planning requirements. This results in the birth of an excel planning tool. It works well at the start because there is collaboration by a small, close knit planning team. Typically such solutions are layered with visualization software to provide graphical outputs. As the planning complexity grows the data collection, tool update, verification and reporting outputs from the tool take days rather than hours and soon it becomes a (brutal) monthly ritual. One fine day, the owner of this spreadsheet leaves the company or changes his/her role and a new owner is found...and the cycle continues.
In more than 90% of cases, planning data is discarded or lost due to constraints of spreadsheet planning. Everyone in the organization recognizes the problem but 'urgent' takes priority over 'important' and the fire fighting continues. A shift away from spreadsheet planning is important to leverage the historical planning data for subsequent planning cycles and business planning. Planning is supposed to be smart, automated, scalable, fast and objective, but reality is far from that. The Excel planning tools are not optimal and this impacts the company's top and bottom line.
Digital business era requires
So what can be done?
For this post, let's start with few basic principles that need to be followed:
One of my favorite book is "Think Big, Act Small" by Jason Jennings...applies to supply chain planning excellence journey too.
I welcome your thoughts, questions, comments.