Politics aside, sustainable practices make good sense

Most companies today are taking steps to improve the sustainability of their products and processes in response to both consumer and public pressure and impending regulatory requirements. No matter where you stand on the issue of global climate change, there are good business reasons to reduce energy usage, cut down on waste and look for sustainable components and materials as substitutes for their non-sustainable counterparts. Operations management and supply chain professionals are increasingly involved in leading their respective organizations on the path to more earth-friendly operations.

Sustainability is defined as the capacity to endure. For humans, it is the potential for long-term maintenance of well being, which in turn depends on the well being of the natural world and the responsible use of natural resources (per Wikipedia). For businesses, this means two things: Reduce usage of any and all resources to the minimum necessary, and wherever possible, use resources that are renewable.

On the first point, the hierarchy of waste reduction is as follows: reduce, reuse, recycle or reprocess, and finally responsible disposal. The ultimate waste reduction is to not use the resource in the first place. Operations management has long been focused on waste reduction, so this is nothing new. Modern management programs like Lean Manufacturing represent today's best practices in this area.

Second on the waste reduction scale is reuse. This effort is most evident in a move toward reusable packaging and containers. Many companies now use more durable packaging materials (crates, cartons, pallets) that can be used a number of times instead of just once. Recycling is familiar to everyone today. Companies now consider recycling and reprocessing possibilities in product design, making sure that the products can be conveniently disassembled at end of life so valuable materials can be affordably recovered for use in new products and to prevent toxic materials from entering the waste stream.

The economics of waste reduction can be impressive. Using fewer resources inherently lowers costs. And most recyclable materials can be sold, generating revenue while reducing waste collection and landfill costs. In addition, some consumers are very concerned about environmental issues and actively seek out products from "green" producers and are even willing to pay a premium for products that are documented as sustainable or "earth friendly." Being "green" is good for your company's image even if you don't offer these kinds of premium priced products.

The other side of sustainability is the use of renewable materials wherever and whenever possible. Renewable materials (forest products and recycled materials as replacements for petroleum-based materials, for example, such as recycled paper burger boxes instead of foam plastic) often cost more and/or don't perform as well as the non-renewable counterparts, but companies are becoming more willing to pay the price for three reasons — regulatory pressure, consumer demand, and because it's the right thing to do.

Don't forget in all of this that energy usage is a prime concern for environmental sustainability. Electricity generation accounts for half of the carbon dioxide produced, and carbon dioxide is the definitive "greenhouse gas" that is the focus of so much attention among the environmental community. Other large sources of greenhouse gases are heating and transportation. Energy conservation must be high on the list of any company seeking to become more "green." In addition to energy conservation efforts in the plant, office and store, transportation management and optimization can significantly reduce the miles driven and fuel used in getting products through the supply chain. One such effort is the intelligent planning of "reverse logistics" for returning recyclables and bringing raw materials back to the plant in the same trucks that delivered the product.

Manufacturing: Coming to America

A recent headline in the daily SME Executive e-newsletter proclaims “Some Companies Moving Manufacturing Jobs Back To America”. The story lead continues: “A small but growing band of US manufacturers - including giants such as General Electric, NCR and Caterpillar- are turning the seemingly inexorable off-shoring movement on its head, bringing some production to the US from far-flung locations such as China.”

This development is a good illustration of several key points of supply chain management. Above all else, supply chains must be flexible and agile. As conditions change, the supply chain must adapt ... and conditions certainly have changed. Labor costs in China as rising rapidly. Quality issues have come to the forefront recently. Shipping costs change rapidly and dramatically, and companies are ever more aware of the importance of lead time and inventory buffers required to accommodate longer lead times. That also points to another key supply chain consideration – risk.

Supply chain risk is the recognition that all elements of the supply chain are subject to disruption from any number of causes – natural disasters, labor unrest, political upheaval, pricing changes, and many more. The well-designed supply chain is built around certain assumptions that reflect current conditions. Savvy supply chain managers will anticipate all the ways those conditions might change and prepare contingency plans in case they do (change). Then, when the worst case presents itself, the company already knows what to do and can quickly execute on the contingency plans to keep the supply chain moving.

The reversal of the off-shoring trend is indeed good news for America and American manufacturing. So far, the manufacturing sector has been leading the country out of this recession and this trend promises to help continue that happy development.

Up, Down, Turn Around

When the economy is in a down cycle, business professionals basically know what to do: Reduce production, thin out inventories, cut back on expenses, and so on. If they are slow to react to the downward trend, it will take longer to consume existing inventories, and costs will be higher than people would like until employees can get them back in balance with sales.

Returning production and inventory to an up cycle often is the more difficult process. Once caught with extra inventories and expenses on the way down, people naturally are reluctant to ramp up costs during recovery. The impacts of this slow reaction time are shortages and lengthening lead times, which can lead to lost business. As existing customers become frustrated and seek better service elsewhere, more agile competitors can end up increasing market share.

The purpose of forecasting is to provide a view of demand against which team members can build an operating plan during the sales and operations planning process. If the demand projection is wrong -- in either direction -- the operating plan will not provide the right products, in the right quantities, at the right times. The business will be unable to deliver adequate customer service.   Consider these suggestions:

-- Weigh the risk of too much inventory and higher costs against the risk of losing sales and customers due to shortages and delays.  Measure or estimate the forecast error via a straightforward formula that calculates the proper amount of safety stock based on desired service levels and lead time (a factor of forecast accuracy).

-- Lead time is a critical element of forecast flexibility and having extra finished-goods inventory is not always effective. If an organization can make products on demand in a very short time, then the inventory buffer should be at the major assembly, module, or critical-component level.

-- Take into account your supply chain partners since their flexibility and responsiveness in the distribution network will have a direct bearing on your ability to respond to changing demand and forecast inaccuracies.

-- Finally, understand the risks associated with responding to an expected change in the business level and manage those risks appropriately. Keep a close eye on inventory, but don't ignore the impact of lead time on your ability to be flexible and responsive.

Read more about fostering flexibility and responsiveness during unpredictable times at www.daveturbide.com

Past Articles

For those of you who may not know, there's lots of additional editorial that I've written for APICS magazine located at "Past Articles" on http://daveturbide.com/consulting-services/past-articles/

Most recently I wrote a two-part article on reverse logistics entitled Round and Round and a second one called Gold-Medal Reverse Logistics on achieving a winning supply chain program. Let me know what you think ... 

Is it Supply Chain or Value Chain?

In this week’s AMR Research First Thing Monday email (February 8, 2010) Kevin O’Mara discussed the term “Supply Chain” versus “Value Chain” and whether the latter may be more appropriate these days. Specific terminology like this is intended to enhance communication and define specific ideas, processes, or programs. This kind of hair-splitting, however, might have the opposite effect. I’m reminded of the transition from MRP to ERP as the suppliers tried to position their products as newer and more modern than traditional MRP which, at the time, was already decades old.

After the release of elaborate definitions by analysts and the expenditure of lots of marketing dollars by suppliers, the new term came into common use. The truth, however, is that ERP was just a new term for what already existed – an evolutionary descendent of the technology approach of combining business applications to include more of the enterprise in a synergistic, collaborative whole. It appeared for a time that “Supply Chain” might replace ERP as the standard term for this kind of system but it doesn’t seem to have gotten the attention and backing of a critical mass of marketers.

In any case, the APICS Dictionary (11th edition, available online for members at www.apics.org) defines the two terms this way:

SUPPLY CHAIN: The global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash.

VALUE CHAIN: The functions within a company that add value to the goods or services that the organization sells to customers and for which it receives payment.

Given these definitions, I believe that supply chain is a more appropriate term to describe the systems and processes. I don’t even object to using Supply Chain or Supply Chain Management (SCM) as a replacement for ERP to describe the systems we use to keep all this together and functioning effectively. Personally, I have been using the term “Enterprise Systems” to try to side-step the whole acronym debate.

Nevertheless, Supply Chain professionals are focused on enhancing the value-adding activities within the chain and eliminating those that do not add value.  Most people view that as a “Lean” focus because the term Just-In-Time is considered hopelessly passé.   Read more articles by Dave Turbide at www.daveturbide.com

The Lean Supply Chain

We are used to talking about Lean in the context of Lean Manufacturing and the techniques that are used to achieve Lean within our own plant – things like 5-S, Poka-Yoke and Kaizen. But how does Lean extend beyond the plant?

Extending Lean makes logical sense. Once we trim our own operations, reduce lead time and improve responsiveness, the path to further improvement leads outside of our own doors to the suppliers, customers, warehouses, transportation providers, and other supporting entities. Those entities can help get materials to us sooner and more in line with our needs and they can help speed products through the distribution chain to the end customer.

Some aspects of Lean naturally extend beyond our own four walls. Kanban replenishment, for example, works best when the suppliers are linked in to receive and respond to replenishment triggers directly. In most cases, this involves a blanket purchase agreement and a mechanism to signal releases (electronic kanban) directly to the supplier. However, other techniques that support Lean within the plant are not easily moved out into the broader world.

It's important not to confuse the techniques with the philosophy. Lean is a focus on adding value and eliminating those activities that don't add value (waste). Lean principles can be applied far beyond the plant floor – throughout the enterprise in such areas as customer service, administration and engineering – and throughout the supply chain. But the specific techniques used within the plant may or may not apply, or may need major rethinking to generate the kinds of improvements that we might expect and demand.

Applying Lean principles to the supply chain means enlisting trading partners in our efforts to drive out waste – it's not something we do by ourselves. The path to Lean in the supply chain can be summed up as CO-CO-CO-Collaboration

CO-operate: Establish the kind of close relationship with trading partners that will foster real cooperation to drive waste out of all activities both internal to the partner's operation and ‘in the seams' where product and information move between organizations. There has to be a certain level of trust between partners to enable such cooperation

CO-mmunicate: Open communication is the key to close cooperation. Electronic kanban is one example of communication on an operational level, but there also must be communication on a management and process improvement level to open new doors to waste elimination.

CO-ordinate: Collaboration is most visible in coordinated activities – smooth hand-offs of data and materials supported by joint efforts to link information and activities to eliminate delays, errors, miscommunication, or surprises.

All this adds up to collaboration, which the dictionary defines as working together, especially in a joint effort. Lean transformation within the plant can pay big dividends but the benefits of extending Lean thinking through the supply chain can be huge. To find out more about Lean Manufacturing visit www.daveturbide.com

Getting Green

The heart of the ‘green’ movement is reducing waste and doing what you can to save resources. Sound familiar? It should; that’s what resource management professionals have been focused on for many years. And that’s what ERP and related systems are focused on as well. So, if you are using ERP to reduce waste and make your operations more efficient, you’re already going green.

In addition to being fashionable and increasingly required by regulatory agencies and customers, green makes good business sense. For example, you are all aware of what has happened to energy prices over the last couple years – anything you can do to reduce energy use is both green and a money saver as well. The same logic applies to other resource preserving activities.

There’s another dimension to green – emphasis toward ‘renewable’ resources. There’s good news here, too, although it may not come right away. Renewable, in many cases, means not petroleum-based. While paper, soy bean, corn and other substitutes might be more expensive in the short term, it’s likely that they will be less volatile and there is a distinct marketing advantage to being able to say that you have eliminated or greatly reduced non-renewable content. It’s likely you’ll be forced in that direction eventually – either through shortages, regulatory pressures or customer demands.

One other aspect of the green movement that you should start thinking about is the content and origin labeling requirements that retailers, customers and regulatory agencies are becoming more interested in. New and evolving labeling requirements mandate that content and origin are traceable through the entire supply chain, so even if you are a second or third tier (or lower) supplier, your customers will be asking you for this information so they can pass it up the line. Compliance will certainly put additional strain on your procurement department and your database. To read more articles for manufacturing professionals go to www.daveturbide.com