How systems thinking transformed a chemicals supply chain

Systems thinking

19 November 2009 18:31  [Source: ICB]

Taking on a supply chain improvement project can be a daunting task. But one company has made significant improvements by taking a systems approach

Consultant's corner:
Richard Verity/Booz & Company

WHEN ROY WEST* was offered the role of European supply chain manager for the lacquers division of a company we'll call X Chemicals, he did not know whether to say yes or no.

Supply chain costs had risen at a compound annual growth rate of 12% between 2005 and 2007 and inventory days had climbed by more than 50%. However, delivery-to-promise remained stubbornly flat. Customers complained of poor service, and industry benchmarks indicated that they might have a case.

When he arrived in Germany in autumn 2007, West grappled with the dimensions of his new job. The lacquers supply chain consisted of three chains serving industrial, consumer and automotive businesses. They depended on two main manufacturing plants, both in northern Europe. However, there were at least half a dozen smaller facilities in Europe.

The supply chain served 10,000 customers. These included the automotive plants of Germany's Ruhr area at one end of the scale and family-run consumer outlets at the other. The businesses had 70 points of distribution. Add to this a product portfolio of mesmerizing complexity and it was no wonder that the lacquers supply chain needed 700 people to work.

When West interviewed his managers he became aware that he was not the first person to be given the task of transforming the supply chain. The previous five years had featured many such initiatives.

Some had delivered improvements in particular functional silos. But they had not created the kind of impact that altered the supply chain's performance as a whole. So on January 15, 2008, a selection of X Chemicals' most senior vice presidents decided to take action.

A recent benchmarking study had again shown a significant gap between what the firm was doing and best practice. And business unit leaders in the three segments had begun to use service deficiencies as a reason for low growth forecasts. So the vice presidents made quick decisions. They appointed a project manager, Angelika Garstein, to help impose rigor and direction on the existing initiatives. They also hired a consultancy to create a strategic vision for the supply chain and back it up with a robust business case.

Nearly 20 people gathered in a conference room at the Dutch site. There were representatives of operations, of sourcing and logistics and commercial leaders. Simply by turning up, these X Chemicals managers fulfilled the first condition for the transformation's success. They showed both senior commitment and the unity of purpose required for cross-functional change.

Though the project may have met the first condition for success, much hard work remained to be done. In the first four weeks, the consultancy team, under the leadership of a partner and a principal, interviewed more than 50 people and collected countless megabytes of data.

At the first steering committee they were able to talk about the supply chain in terms of costs, working capital, service levels, assets, product flows, major processes, IT landscape and organization. More importantly, they showcased emerging hypotheses for improvement.

Opportunities arose between businesses or functions. The three parts of lacquers had pursued distinct commercial strategies. Small surprise that they should each have developed a warehouse network to support these strategies independently from each other.

SHARED RESOURCE
The combined X Chemicals/consultancy project team calculated that more than one-third of the warehouses could be eliminated if the network were run as a shared resource.

As a second example, logistics sourcing had negotiated eye-catching savings for full truckloads on many North European lanes. However, at times of product shortage, the consumer business was often obliged to deliver in part shipments. Neither logistics nor perhaps the business itself had adequately forecast these requirements, so X Chemicals paid a premium.

These and similar initiatives gave the project a licence to continue. With the analysts in attendance, every "improvement charter" was supplied with a robust business case. The vice presidents on the steering committee knew that they were spending their money wisely because they could point to areas of short-term payback.

Nonetheless, in the second steering committee, some executives were uneasy. The team had clearly not found one initiative that would resolve all problems. Was the project simply a machine to multiply initiatives? Each might have its own local effect, but collectively they would not add up to a transformation.

In support of the doubters, the overall supply chain measures barely budged. But West had a revelation. In a workshop with the consultants, he described the project in a way that carried great explanatory power. He perceived the supply chain as an interconnected set of systems.

Each system was a vicious or virtuous circle in the making. Thus, in planning, poor forecasting combines with long lead times that are in turn exacerbated by the absence of analytical stock targets leading too much or too little stock (usually both). Failings in one area cause or reinforce deficiencies in another.

But the circles do not just turn in one area. They connect like cogs creating extended self-reinforcing feedback loops. Thus a lack of customer segmentation at the front end led to customer service representatives (CSRs) waving through rush orders and part-shipments. These rush orders broke into planning schedules and required manufacturing to make short production runs.

The orders that had been delayed as a result of these planning changes then became "rush" themselves, thus perpetuating planning instability and suboptimal manufacturing. In these circumstances service levels decline, costs - in logistics and manufacturing - increase.

West had recognized the challenge of supply chain transformations. A single initiative, successfully concluded, may not be enough to halt a vicious circle and make it spin in the other direction. A series of concerted initiatives, however, working along the supply chain, may have that effect.

And so it proved. The project began to prioritize improvements that appeared to reinforce each other along the supply chain. Customer segmentation not merely reduced rush deliveries, it also gave CSRs a framework for prioritizing orders. This prioritization led quickly to more realistic statements of product availability with customers.

Other initiatives were required before service levels began to rise. The consultants identified that the sales organization in one country had developed an alternative stock replenishment process for their warehouses. Their transfer requests came in over the top of the APO-administered product requests, creating additional planning volatility but also invalidating CSRs' promises of product availability.

Against this background, the schedulers felt the futility of trying to balance supply and demand - except at the last possible moment. Another charter redesigned the master production scheduling. Supply constraints would be included in the SAP system and both short and medium-term demand would be adjusted to assure realistic planning.

These plans, visible to the CSR, led to still more accurate availability promises to the customer. The combination of customer segmentation, a consistent stock replenishment process and redesigned master production scheduling gradually began to make the supply chain more predictable.

The project identified many such sequences. Product segmentation, a new product introduction process, make-to-order/make-to-stock policies and lean manufacturing constituted another set of mutually reinforcing improvements.

But much work was required for good theory to become sustained practice. Furthermore, the people that had made the first phase so successful were not necessarily well adapted to implementation.

West scaled down the consulting support and brought in a new project manager, Bruce Gray. Gray had served inside one of lacquers' commercial functions. He was known and respected from the production plant all the way to farthest-flung East European warehouse. His creed was simplicity: better to do something obvious but imperfect than wait months for a more sophisticated solution.

FUTURE PROBLEMS
Pragmatism, allied with an ability to persuade, kept the project moving towards its goal, but Gray was also called upon to exercise judgment. Sometimes the short cut simply stored up problems for the future. Take shipment consolidations. Grouping different orders on single truck was critical to reducing logistics costs.

The team offered two solutions: requesting the CSRs to manage consolidations using spreadsheets or reconfiguring SAP. Gray chose to solve this vexatious problem once and for all. He lodged an IT change request, lobbied the steering committee for support, and received authorization to add functionality to SAP.

In December, West, Gray, Garstein and the consultants gathered to celebrate the project's first birthday. It was hard to be definitive about the extent of the project's success. Stock out data indicated a dramatic improvement in service. Inventory was down to its lowest level in three years.

X Chemicals is a remarkable company. Its endurance through good times and bad stems in part from an ability to focus on, mobilize against and ultimately solve problems. The lacquer supply chain transformation required a powerful steering committee, insightful managers, competent consultants and committed employees - yet another virtuous circle.

*All names have been changed

Richard Verity is a vice president at Booz & Company, based in its London, UK, office. He works in the consultancy's chemicals and energy practice. He can be contacted at richard.verity@booz.com.

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